SandaireNovember 19 2020

Investment Update: Asian Trade Agreement

2 mins read

Written by StJohn Gardner, Chief Investment Officer

At the conclusion of the Association of Southeast Asian Nations (Asean) summit earlier this week, 15 Asian nations, led by China, signed a free trade agreement, known as the “Regional Comprehensive Economic Partnership” (RCEP). The deal reduces tariffs and inefficiencies of the current medley of different agreements, in a staged process over the coming years between member countries which represent a third of the world’s population and $26.2 trillion of gross domestic product. It is thought the deal will add an average of 0.2% to participant countries respective GDP. The RCEP covers all the usual elements of a free trade deal — tariffs, customs administration, sanitary measures, services, investment and others — but of most significance is that goods produced in one of the 15 countries can be sold in the other countries without adaptation (even though there are no universally agreed minimum common standards).

The RCEP comes less than four years after US President Donald Trump pulled the US out of Trans Pacific Partnership which had been put together by President Obama to cajole China to play by international rules in 2016 but which President Trump did not sign in January 2017 such that it never came into force. The deal gives China an important voice in setting standards for regional trade and means neither the EU nor the US, the world’s traditional trade superpowers, will have any voice when Asia sets its trading rules. If Beijing uses that power collaboratively, its influential power will grow.

Whilst, in the main, it is a cementation of existing tariff-free trade in goods with a few additions, it is perhaps more interesting that China was able to co-ordinate such a large group of countries together over 10 years to get a deal signed. This independence of rulemaking without western influence marks a major step forward for economic integration in the region and may empower further coordinated responses to other issues such as Covid-19, financial market liberalisation and the push for technological advancement. It brings the pact countries closer to a single coherent economic trading zone like the EU or North America.

This first trade agreement bringing together China, Japan and South Korea, is said potentially to be capable of adding almost $200 billion annually to the global economy by 2030. The RCEP takes most of the existing agreements signed by the 10 Asean members (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam), and combines them into a single multilateral pact with Australia, China, Japan, New Zealand and South Korea. Whilst the RCEP notably excludes India, which pulled out last year due to fears its manufacturers would be swamped by cheap Chinese competition, it is believed the door is open for it to join at a later date.

The announcement, helped Asian stocks higher, (albeit trumped by the bigger news of more vaccines coming towards production and at storage temperatures and shelf lives that allow more effective distribution.) Japan and South Korea are expected to be among the biggest winners from the deal, but the benefit of cheaper goods will spread as far as Europe and the US. It also comes at a time when globalisation has been under threat from Trump’s administration and demonstrates a renewed drive towards open and connected supply chains through reduced tariff interference.