RCEP benefits ASEAN, China, Japan, Korea relative to India, Taiwan, US
- RCEP trade bloc signed as expected; short-term, net exporters (China, ASEAN) gain more than importers (India opted out)
- Trade reinforces geopolitical influence; a "rules-based" win for China versus US (with rules not written by the "West")
- Globalisation may be on the wane but regionalisation (eg on trade - USMCA, EU, RCEP - and tech rules) is on the rise
The Regional Comprehensive Economic Partnership (RCEP) was signed as expected on 15 November. The trade bloc covers 15 countries (the ten of ASEAN plus China, Japan, S Korea, Australia, and New Zealand) which account for 31% of the global economy. The implementation of the agreement depends on ratification by each signatory. Below we lay out the implications of RCEP.
Regionalisation, China's rules, membership benefits, door left open for India
We point to the following implications of RCEP.
Regionalisation – Globalisation, as we know it from the end of the post US-USSR Cold War and the accession of China to the WTO, may be on the wane but taking its place is regionalisation, rather than universal protectionism. RCEP is a good example of this, similar to the endurance of the EU, despite the challenges of the southern European debt crisis and Brexit, and recrafting of much of NAFTA as USMCA, despite the best efforts of Trump. The regulation of Technology (the "Splinternet") and the rebalancing of historic territorial conflicts according to limits set by regional powers (the "changing art and risk of war in EM") are other examples.
China's rules-based order – The end of the "international liberal order" or the onset of "Westlessness" does not mean a free-for-all. RCEP, unlike the Belt and Road Initiative, demonstrates China can make geopolitical gains within a "rules-based" framework (but where the rules are no longer drafted by the "West"). The progress of negotiations is also influenced by geopolitics; the Trump US administration's tariff hikes likely accelerated urgency from China and its tariff hikes and warning shots on trade to its traditionally aligned countries (ranging from the EU to Vietnam) likely accelerated urgency from the likes of Japan and S Korea.
Membership benefits – The direct trade and investment beneficiaries of the RCEP deal are clearly defined by those included (all the signatories) and those excluded (India and Taiwan, as well as Bangladesh, Pakistan, and Sri Lanka in smaller South Asia). The purpose of multi-country trade deals like RCEP is to reduce tariffs and non-tariff barriers to trade in as many sectors as possible. They are usually driven by countries which are either already net exporters (eg China, Japan, S Korea) or those countries with low-cost bases that wish to attract foreign direct investment and become a part of the larger exporter supply chain (eg Cambodia, Laos, Myanmar).
Door left open for India – Usually, multi-country and multi-sector trade blocs face resistance from countries with politically powerful, domestic vested interests in uncompetitive industries. This explains why India opted out of the RCEP negotiation process in November 2019. About 26% of China's free trade agreements are with multi-country blocs, compared to 16% for India. However, the RCEP group have left the door open for India to re-open negotiations. The large domestic consumer population of India gives it bargaining power in this external negotiation, but that may irrelevant if it cannot make sufficient concessions to political constituencies, eg in farming, which might lose out from RCEP accession.
Still, more than low tariffs needed for manufacturing exports
Free trade agreements that lower tariffs are helpful but not sufficient for success in growing manufacturing exports. For example, Pakistan has more than double the FTAs of Bangladesh but a far inferior trade balance (at least, historically).
There are a range of factors (eg scale, wage costs, FX rate competitiveness, skills, infrastructure, governance) which matter – see our analysis of manufacturing potential in both Asia and Sub Sahara Africa.
- 1 Weekend Reading/Global Vaccine colonialism revisited: World’s most comprehensive data on pre-purchases
- 2 Global Themes/Global Global Investment Themes for 2021
- 3 Strategy Note/Global Emerging-Frontier Equity Monthly – November: Our top picks after the rally
- 4 Sovereign Analysis/Kenya Kenya seeks IMF funding and possible debt relief
- 5 Flash Report/Nigeria Nigeria: A recession, deepening FX woes and expectations for MPC
This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...