Implications of the Pan-Asia Trade Pact

On November 15th, 2020, fifteen Asia-Pacific nations signed arguably the largest free trade agreement in history — the Regional Comprehensive Economic Partnership (RCEP). This deal, which has been a long-time coming, represents a major economic development for the Asia-Pacific region.

Included in the agreement are the 10 members of the Association of Southeast Asian Nations (ASEAN) along with China, Japan, South Korea, Australia, and New Zealand. This new trade deal will combine existing agreements amongst ASEAN nations into a multilateral pact to include all 15 countries. A milestone agreement that further illustrates Asia’s emergence as a powerhouse trading bloc, putting them on the same footing as the Canada-United States-Mexico Agreement (CUSMA) and the European Union.

ECONOMIC SIGNIFICANCE

The new trade deal aims to strengthen the relationships between trading members by progressively lowering tariffs, boosting investments, and incentivizing stronger supply chains to allow for the frictionless movement of goods. For perspective, in terms of sheer size, the RCEP members represent almost one-third of the world’s population and account for roughly 30% of global GDP.

Picture1-1

GEOPOLITICAL SIGNIFICANCE

Looking back in history, relations between the second and third largest economies in the world, China and Japan, have been riddled with longstanding political conflict and tension. Not only does the RCEP bring these two nations together, but it connects China, Japan, and South Korea in a major free trade agreement for the very first time. It is worth noting that, while India was involved in early RCEP negotiations, the country withdrew itself in late 2019. That being said, the trade bloc has left the door open for India to join at a future date.

BOTTOM LINE

At a time when the world is experiencing a massive dislocation of globalization, the new Pan-Asia trade pact marks a victory for multilateralism. While ironing out the finer details of the agreement will not occur overnight, one cannot argue the vast positive implications for the region. The integration of an Asian-wide free trade structure will further weaken America’s influence in Asia-Pacific.

The Asia-Pacific region continues to be the largest contributor to the worldwide build-up of preferential trade agreements (PTAs), accounting for about half of PTAs worldwide. They are becoming bigger, deeper, more digital, and increasingly supportive of sustainable development, which bodes well for the energy sector, mining, and infrastructure.

Disclaimer

SANDSTONE Asset Management Inc. (SANDSTONE) provides independent research and advice to its clients on a fee-for-service basis. The company is not engaged in any investment banking, underwriting, consulting, or financial services activities on behalf of any companies. The views and opinions expressed may not apply to every situation. The information contained in this article is provided for general informational purposes only and should not be construed as investment advice. The information is obtained from sources believed to be reliable; however, the company cannot represent that it is accurate or complete. All investing involves risk. Past performance is not indicative of future performance. SANDSTONE accepts no liability whatsoever for any direct or consequential loss arising from the use of this information. SANDSTONE is a member of the Canadian Investor Protection Fund, Canadian Investment Regulatory Organization, and Investment Industry Association of Canada, and is an Imagine Canada Caring Company and a Certified B Corporation.