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RECP Deal May Support Risk Assets in Near Term

Fullerton Markets

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Asia markets bounced on Monday morning as 15 economies in the region signed a deal that formed the world’s largest trade alliance.

China and 14 other Asia-Pacific countries signed the world’s largest trade agreement on Sunday — a move that will further elevate China’s political and economic influence in the region.

The signing cemented the Regional Comprehensive Economic Partnership (RCEP) as the largest trading bloc globally, covering a market of 2.2 billion people and USD26.2 trillion of global output. That accounts for about 30% of the population worldwide, as well as the global economy. It is also larger than what’s covered under the United States-Mexico-Canada Agreement (USMCA) and the European Union.

The economic benefits of RCEP are modest and would take years to materialise. But the deal is a geopolitical victory for China at a time when the U.S. appears to be retreating from Asia-Pacific. Until now, it’s also not clear whether the U.S. will negotiate any mega trade deals with economies in the region under President-elect Joe Biden.

The diplomatic messaging of RCEP may be just as important as the economics. The 10-member Association of Southeast Asian Nations signed the mega deal with the region’s top trading partners China, Japan, South Korea, Australia and New Zealand. ASEAN is made up of Indonesia, Thailand, Singapore, Malaysia, the Philippines, Vietnam, Brunei, Cambodia, Myanmar — formerly Burma, and Laos.

It shows that East Asia is very much open for business and recognises the economic benefits of deeper trade integration.

This strategy reduces the perception that China is turning more inward with its “dual circulation strategy,” which emphasises its domestic market.

This announcement also signals that when it comes to economic policy, Asia-Pacific economies don’t want to choose between the U.S. and China. That’s true even for countries with strong security alliances with the U.S., such as Japan and South Korea.

RCEP was launched in November 2012 at a time when talks for another major trade pact, the Trans-Pacific Partnership (TPP) led by the Obama administration, were underway.

Given China’s absence in the TPP, many observers considered RCEP as Beijing’s counter to American influence in the Asia-Pacific — even though RCEP negotiations were led by ASEAN.

But Trump pulled the U.S. out of the TPP in 2017 and proceeded to slap punitive tariffs on several American trading partners for what he said were unfair trade practices. The remaining 11 countries in the TPP went on to renegotiate the pact and signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2018.

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