Regional Comprehensive Economic Partnership or RCEP is the biggest trade deal in history and marks another step in the economic shift towards the East, investors need to factor RCEP into their plans.
Investors must take note of RCEP, it is another example of the shift east
The biggest trade deal in history has been signed. The deal is known as RCEP, which stands for Regional Comprehensive Economic Partnership. The agreement is between all ten ASEAN countries, along with Australia, New Zealand, Japan, South Korea and China. The countries involved constitute 30 per cent of the world’s population and 29 per cent of global GDP.
But many of the countries that make up the trading block are seeing rapid economic growth — I would hazard a guess and say that in ten years, those same nations will constitute a lot more than 29 per cent of global GDP.
Contrast with TPP/CPTPP
As you may know, most of the countries, with a handful of exceptions and one glaring exception, that surround the Paciific have already been creating a trading block.
The CPTPP - Comprehensive and Progressive Agreement for Trans-Pacific Partnership — is the successor to TPP - Trans-Pacific Partnership.
The countries that are in CPTPP but not RCEP are Mexico, Chile, Peru and Canada. Countries that are in RCEP but not CPTPP are Cambodia, Indonesia, Laos, Myanmar, Philippines, Thailand, South Korea and China.
Countries that are in both are Australia, New Zealand, Japan, Vietnam. Singapore, and Brunei.
CPTPP is a deeper trade agreement than RCEP, but RCEP constitutes a higher proportion of global GDP.
What RCEP doesn’t do
The former Prime Minister of Australia Malcolm Turnbull said: “There'll be some hoopla about the signing and the entry into force of RCEP. I mean RCEP is a really low ambition trade deal. We shouldn't kid ourselves.”
RCEP eliminates 90 per cent of tariffs in the region, whereas CPTPP eliminates 100 per cent. RCEP entails limited free trade with agriculture and services have “limited coverage,” or so says the FT.
RCEP doesn’t include regulations on cross-border data flows or on data transmission. And it does not set a common standard for products.
But what it does do is transform the rules of origin. At the moment many countries in the region have trade agreements with each other. But these agreements are less effective when they entail a product that is partially manufactured in a country not covered by the agreement. Providing all the components of a product are made in countries falling within the RCEP area, and the product is covered by the agreement, then it will be subject to free trade.
China versus US
Some see RCEP as China’s response to CPTPP, which China saw as a threat to its influence in the area.
Others regret India’s decision not to be part of RCEP, which would have gone some way to reduce China’s influence within the group.
I think India’s decision is rather sad, and illustrates why India’s economy has not grown to the extent many expected 20-years ago.
But of course, this is also seen as a big victory for China over the US.
President Trump’s decision to pull out of TPP was a massive mistake. It created a vacuum in the region which China is filling.
RCEP represents another step in the shift of economic power towards the East.
In so many ways, China and its neighbours are leaving the West behind, especially in how they adopt digital technology.
Work in progress
As it currently stands, RCEP is not especially far reaching. I read that the deal could eventually increase global GDP by $200bn a year by 2030. That’s a lot of money, but in percentage terms quite small. CPTPP could have a much bigger impact, except that it is limited by the exclusion of China.
But in both trade agreements, this is work in progress. It is expected to take 20-years to eliminate the tariffs the RCEP agreement relates to.
But the CPTPP has a long way to go yet, too.
Oddly there is talk that the UK might join CPTPP. There is one geographical limitation of course, the last time I looked, the UK wasn’t on the Pacific coast. But maybe in the era of the internet and then virtual and augmented reality, such geographical issues are less important.
While the UK’s economy is a lot smaller than China, its inclusion in CPTPP would give the agreement extra weight, not to mention, potentially benefit the UK enormously.
And for investors
I would say that RCEP, as well as CPTPP, provide more reasons to look carefully at the dynamic economies of South East Asia.
The key to investing in the area, is probably via funds.
Alternatively, consider ETFs such as iShares MSCI Emerging Markets.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.