RCEP– What a trade agreement

Teaser: Investors have a new free trade zone to become familiar with. It is currently the world's largest, and the financial world has just been presented with version 1.0, which will develop further and offer new opportunities for investors.

On the last day of the ASEAN countries' annual conference, it finally happened- one of the world's largest free trade agreements ever was signed. The full name of the agreement is the Regional Comprehensive Economic Partnership, so RCEP is fine in everyday speech. It has taken almost 10 years to negotiate the agreement which covers the 10 ASEAN countries, as well as China, Japan, South Korea, Australia and New Zealand. If one looks at the constellation of countries, it is in itself close to being a landmark achievement, as both Japan and China are in the same agreement- a political dimension. The economic dimension is even bigger; however, this does not mean that investors must sell everything out only to be invested in RCEP countries, but the RCEP agreement will have a growing importance over time.

The possibility of having Japan and China accede to the same free trade agreement may be because that the RCEP agreement is built on the ASEAN countries' existing trade agreement. The impracticality of the original ASEAN agreement was that the individual member states had independent bilateral agreements within certain areas.

In this new agreement, these bilateral special agreements have been removed and the regulations therefore apply to all countries under the RCEP agreement. If I should give my brief understanding of the new free trade agreement, it primarily covers goods and trade across borders. Approximately 90 pct. of all tariffs on trade in goods between the 15 countries will disappear, which may sound like a lot. Other free trade agreements have removed almost 100 pct. of all tariffs, so in that respect, the RCEP agreement is not ambitious.

Where the RCEP agreement will resonate over time is, of course, linked to the geographical area it covers. As graphic one shows, the new free trade zone agreement currently represents the largest grouping measured on total GDP, however, the USMCA (former NAFTA) is almost the same size as the new free trade zone in Asia/Oceania.

One fact is the economic size that RCEP represents by today's standards. It is precisely in the RCEP countries where the high GDP growth will be found for the rest of this decade, thus comprising a very large share of total global GDP growth. In other words, it is the zone to be in for investors and companies if long-term macroeconomic growth is given any importance.

For centuries, economic history has shown that few or no tariff and trade barriers support economic growth, which is also going to happen in this case. I have seen some GDP calculations from various economists, all of which point to a further positive economic effect due to the new trade agreement. It will be more beneficial for some of the RCEP countries than for others, where some economists point to Japan and South Korea as winners, as their products become even cheaper on the Chinese market.

Obviously, China has accepted that this agreement will weigh on the trade balance, but even if tariffs are lowered on, for example Japanese car parts, the sales of these car parts are unlikely to increase significantly. The export of some consumer goods to China will undoubtedly be helped, but I expect the largest percentage growth to occur among the companies in China's neighbouring countries that are suppliers to Chinese companies. I expect the suppliers in Cambodia, Laos, Malaysia, the Philippines and Vietnam to have an easier life with better export conditions, and also offer an interesting segment for investors.

The service sector is only to a lesser extent covered in the new trade agreement, agriculture is almost omitted, and the trade agreement does not work with common standards. For the same reason, I do not consider the RCEP-area to be a new single market, but it is a free trade zone agreement version 1.0.

It must now be ratified in each country, though a minimum of six ASEAN countries and at least three of the other countries are required to approve the agreement. As graphic two shows, China is the absolute economic superpower in the new RCEP family, which will result in discussions at a national level in certain countries, where some are aware of China's size and endless growth.

It is a possibility that the major economic and political differences within the RCEP group could lead to frictions and changes in the composition of the RCEP grouping, but despite all these possible hurdles ahead, my best bet is that the development of the RCEP has just begun and the free trade zone will simply cement the Far Eastern economic growth machine.

Despite the process of national ratifications, my expectation is that the agreement will contribute to further optimism among many manufacturing companies when the whole world begins to move forward again after the global Covid-19 crisis.

For RCEP countries that already have an agreement in place, the new agreement can be implemented faster than in other countries. Though some countries like Cambodia and Laos have been given three to five years to implement the new rules, I expect the bigger countries to move much faster forward. At the same time, I expect the free trade zone to develop by including agriculture, the service sector, etc., in next the coming versions, and once more emphasize the growth potential of the Far Eastern economies.

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