The largest trading block

Article about The largest trading block

Nov 18, 2020

Last weekend the 15 countries of the Asean together with Australia, China, Japan, New Zealand and South Korea signed the Regional Comprehensive Economic Partnership (RCEP), resulting in the largest trading block in the world. After almost ten years of negotiations, this is a further step in the further economic integration of the Asia-Pacific region. This further increases the importance of this region for investors. The consequences will be higher economic growth, more regional stability and converging interest rates. This will result in an increased inflow of foreign capital and a higher valuation.

The RCEP is similar to the start of the European Economic Community in 1958, the beginning of the common market in Europe. There is also a clear political dimension to this agreement. After all, the Committee on Economic and Monetary Affairs came into being without any help from either the United States or Europe. After Trump withdrew from the Trans-Pacific Partnership, this is China’s response. This trade agreement fits in perfectly with the Chinese Belt & Road Initiative: an extensive programme that is larger in scope than the Marshall Plan and which will soon lead all roads to Beijing. Whereas the Marshall Plan, NATO and the EEC all aimed to increase American influence in Europe, the RCEP is part of China’s strategy to gain more influence on the world stage. India and the United States will not be part of the RCEP. Economically much more relevant is that there will be more cooperation between the triangle of China, Japan and South Korea.

The RCAP creates a single market for 30% of the world’s population and the global economy. According to Johns Hopkins University, only this agreement will increase world income by USD 200 billion and add USD 500 billion to world trade by 2030, enough to compensate for all the losses of the US-Chinese trade war. The various economies in the region will become much more efficient by specialising in what they are good at, particularly in technology, production, the agricultural sector and the use of natural resources. Especially for relatively closed markets such as Japan, the positive influence of the RCEP is significant. The biggest winner, however, is China, which has also taken a big step politically and strategically. Just like China’s accession to the World Trade Organisation, this could ensure that the equity markets of Asia (and especially North-East Asia) will outperform the rest of the world in the coming years. The same also applies to Asian bond markets. With the Marshall Plan, NATO and the EEC, the Americans exported their low-interest rates to large parts of Europe. The same political and economic stability in Asia will ensure that interest rates in many countries will converge with those in China.

In a speech earlier this month, Xi Jinping said that after the RCEP, it is time to negotiate a new investment and trade agreement between China and the European Union. Furthermore, China would also like to see further economic integration between China, Japan and South Korea, if only because of the technological knowledge in this triangle. With the RCEP, the American container policy is also falling by the wayside. The United States’ Indo-Pacific strategy has ensured that the Asean countries have made a flight forwards via the RCEP. It is only by reviving the Trans-Pacific Partnership that the Americans may be able to limit the damage. Following the outcome of the US presidential election and the surprisingly well-functioning Corona vaccines, this trade agreement is yet another good news for investors this month and we are only halfway there. Many uncertainties are disappearing in a short period of time. Next year, the global economy will grow by 6%, helped by the catch-up demand due to the opening up of large parts of the services sector and, of course, fiscal and monetary support. Asia again has the best cards for further outperformance.

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Articles authored by Robert Jan Teuwissen

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