AXA IM Talk on Asia & China Market: Winners and Losers of RCEP

AXA IM’s Senior Emerging Asia Economist, Aidan Yao, shares his latest macro views on China and Asian Market every month.

In this month’s video he is joined by Shirley Shen, Emerging Asia Economist. They talk about the significance of the lately signed Regional Comprehensive Economic Partnership, or RCEP, and the biggest winners and losers of it.

Please find the full script below:

AY: Hello, happy new year! Welcome to our monthly video series. I’m Aidan Yao, the senior emerging Asia economist at AXA-IM.

Today I’m delighted to be joined by colleague Shirley Shen. And we will discuss the recently signed Regional Comprehensive Economic Partnership, or RCEP.

Shirley, welcome!

SS: Thank you very much for having me, Aidan.

AY: So Shirley, could you first tell us a little bit about what RCEP is and its significance.

SS: Sure. So RCEP is a regional trade deal signed in Nov-last year after 9 years of negotiation among 15 members, including the 10 ASEAN countries plus China, Japan, Korea, Australia and New Zealand. The significance of this deal is that it helps to create the world’s largest free trade zone accounting for one third of the world’s economy and population. At the time of rising global protectionism, we see the creation of RCEP represents Asia’s determination to continue pursuing free trade and regional economic integration.

AY: Thank you Shirley. So how do you think RCEP will influence regional trade flows? 

SS: Now it is important to point out that the immediate trade gains from lowering tariffs may be less than meets the eye. This is due to two things. First, RCEP allows a long grace period for incremental tariff reduction, for some sectors, this could be up to 20 years. But more importantly, bilateral free trade agreements have already proliferated between most of the RCEP members. So the only incremental gains will be concentrated in trade between China and Japan, and Japan and Korea, where currently there are no existing free trade agreements. Once the barriers are fully removed, the direct trade gains will add, by our estimate, around 0.3% of GDP to the region, but these gains will be concentrated in China, Japan and Korea.

SS: So, Aidan, given the modest trade increases, do you see other benefits from RCEP and who stands to gain the most?

AY: Indeed, we actually see the bigger gains coming from the strengthening and refining of regional supply-chains. We know that RCEP helps to consolidate the rules of origin, the these new arrangements will really help to simplify regulation, streamline documentation, and lower transaction costs, all of which should help to facilitate an acceleration of regional supply chain formation, which was already underway due to the US/China trade tensions, and the rising production costs in China. In terms of who will gain the most from this process, our competitive analysis in the report, as well as actual observations of export market share changes have all point to one clear winner, and that’s Vietnam. The country has managed to pick up a lot of “low-margin” production capacities that have migrated out of China in recent years. Therefore, it’s not surprising to see that Vietnam equity market has been a star performer in Asia and wider Emerging markets over the last few years.

SS: Finally, do we see any implications of RCEP outside macroeconomics?

AY: Sure, we think the geopolitical significance of RCEP certainly shouldn’t be downplayed. If we look at the various players, as the originator of the deal, ASEAN could potentially gain more of a voice on the global stage and really become a pivotal force in Asia Pacific region where the US and China are competing for influence.

China, as the avid supporter of the deal, could use RCEP as well as the recently signed Sino-EU investment agreement to demonstrate its continued intention to reform and opening up. Also, by securing its economic ties with neighbour countries, RCEP can also help China to manage the costs of US/China geopolitical conflicts.

Finally, we see two potential losers. The US could potentially suffer a waning of influence in the Asia Pacific region because of its reduced economic connections. And India could also lose both economically and geopolitically, for not being on the RCEP train for the time being.

AY: This is the summary of the key findings of our latest report on RCEP. You can find the report on AXA-IM’s website. We hope you find the material interesting and useful.

Thank you very much and stay safe.