Investors in Asia largely approve of the Regional Comprehensive Economic Partnership (RCEP), the world’s largest trade bloc involving 15 Asia Pacific countries, welcoming the reduced tariffs and standardised regulations the agreement will bring the economies involved.
The trade pact was first proposed at the 19th Asean summit in November 2011. Nearly a decade later, 15 Asia Pacific countries signed up to RCEP on November 15, namely Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Thailand and Vietnam.
The agreement creates the world’s biggest trade bloc, with member countries accounting for about 30% of the world's population (2.2 billion people) and almost 30% of global GDP ($26.2 trillion).
The mega trade deal is expected to accelerate a shift in global trade towards Asia and away from the western countries. Asset managers told AsianInvestor that RCEP signals Asia’s continued push ahead with trade liberalisation amid growing nationalism in other parts of the world, a dynamic that should spur investor interest in this region.
Economically, the agreement is predicted to help raise global national incomes by $186 billion in 2030. It may particularly benefit the economies of China, Japan, and South Korea, while potentially disadvantaging the US and India, according to a Peterson Institute for International Economics report published in June this year.
Investors noted that while India and Taiwan could well lose out, the agreement is designed in a fashion that allows other economies to join later.
One common criticism against the RCEP is that it is overwhelming China-dominated. Singapore-headquartered UOB highlighted in a note on November 16 that RCEP fits into China’s dual circulation strategy, which capitalises on its large domestic market at the core of the strategy, and encourages interaction between the domestic market and the external market through trade, investment and capital flows and its manufacturing capability.
Another complaint is that the trade deal is not ambitious enough; the Asia head of one asset manager told AsianInvestor that the RECP as it stands appears to be "more ceremonial than anything else ... I think it's more about sentiment at this point in time."
AsianInvestor asked experts how the first-ever trade group would benefit member countries, and more importantly, what it would bring to global investors.
The following comments have been edited for clarity and brevity.
Christiaan Tuntono, senior economist, Asia Pacific
Allianz Global Investors
From a global perspective, the RCEP signals that Asia keeps pushing ahead with trade liberalisation even as other regions have become more sceptical. Already, the majority of RCEP economies send more than half of their exports to other members, and the proportion is likely to rise given the region's growing share of global GDP over time and the effect of deeper liberalization.
On asset allocation, I think RCEP can benefit the equities and bonds of companies that thrive on a greater development of the regional supply chain. Multinational manufacturing companies, which tend to source parts and components from various locations, would benefit from the cost reduction and production specialisation brought about by greater market integration of the 15 signatories. Cross-border service companies can also better establish their footprint within the region under the non-tariff related articles stipulated in the deal.
On a geographic basis, we think certain economies such as China, Japan, Korea and Malaysia are likely to benefit more from the deal given the lack of a prior bilateral trade deal covering them (e.g. China-Japan, Korea-Japan) and the high weighting of tech products in their export mix (China, Japan, Korea, Malaysia) which are going to be most benefited from greater integration of the regional supply-chain.
India was expected to join but pulled out last year. But that said, the deal provides for other economies to potentially join in the future, keeping the door open for India to join later.
Daniel Brett, head of research
RCEP cleans up a trading regime that had become overly complex with the accumulation of FTAs, such as the many Asean Plus One FTAs, which had created different rules for different markets. The deal will boost trade within the regional manufacturing sector, which will enhance supply chains and bolster the trend towards relocating operations outside China.
In turn, the RCEP will enhance China Plus One strategies - adopted by many investors to avoid concentrating their interests in China and taking advantage of lower labour costs elsewhere – by streamlining and standardising regulations, laws and tariffs.
As such, we anticipate increasing investment in Vietnam, the Philippines and Indonesia, particularly in electronics, and the development of a more integrated manufacturing chain, greater technical co-operation and improved competitiveness. The change could be quite rapid as the global economy accelerates out of the pandemic crisis and as a maturing Chinese economy develops its consumer base.
India's rejection of RCEP is principally related to protecting nascent domestic industries from competition and fear of enabling Chinese strategic leverage over the domestic economy at a time when both are engaged in a low-intensity border conflict in Ladakh and Sikkim. India will be banking on continuing friction between Washington and Beijing to position itself as a geopolitical counter-balance to China that could undermine the Belt and Road Initiative, which is seen as an assertion of Chinese hegemony.
Rob Mumford, investment manager
The RCEP is a boost to the already premium growth rates of the region with tariff cuts encouraging the flow of goods, technology, services and capital.
There are very investable themes relating to the positive impact of this agreement in the form of increased production (automation, technology), distribution (smart logistics, ports, new infrastructure) and ultimately consumption (value added goods & services). Positive sentiment and execution in this new environment will likely continue to spur investor interest in the region which to date is largely underrepresented in global indices and portfolios in general.
The focus over recent years has been in Asian sovereign and credit debt markets there is likely to be increased interest in the equity market which in our view should appeal to value, growth and yield investors. When the stars align for Asian equities the moves can be quite violent.
With improving growth, a better credit backdrop and possibly a weaker US dollar over the near term we see a positive trend in Asian equities from here. While surveys differ, most seem to suggest there have been between $30 billion to $60 billion of outflows from emerging equities (including Asia) this year. A reversal of this flow into a more positive risk backdrop supported by hopefully ongoing positive vaccine news would present significant upside risk to Asian equities.
Joshua Crabb, portfolio manager, Asia Pacific & Chinese equities
Korea and Japan are the two countries that will stand to benefit the most with autos and chemical supply chains seeing a reduction in import duties of between 10 and 30%. Some research forecasts suggest this could improve real income by up to 1% by 2030 for both countries.The RCEP will cut tariffs, codify e-commerce, and set rules of origin. This will increase China’s influence in setting the trade agenda and provides a leadership role in Asian trade.
On the other hand, Taiwan and India who are not part of the agreement stand to lose competitiveness as they will not benefit from the tariff reductions. For Taiwan, which is a significant exporter, some estimates forecast the RCEP may impact real income by -0.4%, while India which exports less would be impacted by only -0.1% by 2030. Over time, it is likely that India would look to enter a trade agreement like this.
We may also see this reinvigorate the TPP (Trans Pacific Partnership, an alternate trade group) under the Biden administration, which could have additional impacts and would be particularly beneficial to emerging exporters such as Vietnam.