Who is stronger USA or Thailand
Free trade agreement gives impetus to Asia as a growth engine
The RCEP free trade agreement will shift the center of gravity of the global economy further east. For China, the agreement means further expanding its economic influence. However, it is unlikely that the real economic effects of the agreement will be felt before 2022, says Sven Schubert from Vontobel Asset Management.
In the midst of the trade conflict between the USA and China, the largest free trade area in the world to date has emerged in the Asia-Pacific region. In mid-November, the heads of state and government of China, Japan, South Korea, Australia and New Zealand agreed on a corresponding agreement with the Southeast Asian community of states, Asean, which includes emerging countries such as Laos, Thailand, Vietnam and Indonesia. The free trade zone, which comprises a total of 15 countries and around 30% of global economic output, affects around 2.2 billion people. The RCEP free trade agreement that has now been signed will shift the center of gravity of the global economy further east. For China, the agreement represents an opportunity to further expand its economic influence. For companies from the USA and Europe, on the other hand, the competitive conditions in the region are likely to become more difficult. In an interview, Sven Schubert, Senior Investment Strategist at Vontobel Asset Management, explains what effects the agreement could have on the global economic order.
Does the recently signed RCEP free trade agreement serve the strategic endeavor of China to create a stronger basis for its "One-Belt-One-Road" initiative and to break away from the US-dependent global trade landscape?
Sven Schubert: Yes and no. China recently presented its strategic priorities for the next five years at its 19th session of the Communist Party Central Committee. The parallel circulation (domestic and foreign policy) has become the top priority. Domestic circulation means that China wants to strengthen the domestic market by becoming self-sufficient and less dependent on imports of goods, which are vital to the Chinese economy. The trade conflict between the US and China has shown that the Chinese economy is still dependent on goods such as semiconductor technology - here China only produces 30% of what it consumes - from abroad. This is just one of the addictions the Trump administration has used as a lever against China.
But external circulation is also part of the strategy. China will remain open to foreign investors and producers and will likely liberalize its capital markets even further. In the second quarter - after strong outflows in the first half - Asian capital inflows (stocks and bonds) reached a seven-year high. This is in large part due to the opening of the Chinese financial markets to foreigners. This trend should continue in the future, as China will need capital from foreign investors in the future in order to move up the value chain. Therefore, China has a great interest in maintaining good trade relations, but will want to reduce its dependence on goods that are critical for the economy.
Could the RCEP help Asian economies, especially emerging market members, recover from the COVID-19 pandemic?
From an economic point of view, this is clearly a positive development as there is a lot of trade within the region. About 40% of Asian exports stay in Asia. However, it is unlikely that the real economic effects of RCEP will be felt in the near future, as implementation is set to start in 2021, but the tariff cuts will probably not take effect until 2022. The region's economic recovery is coming anyway, as many Asian countries have weathered the pandemic better than the states of Europe or the USA.
The impact is likely to be significant not only because of the significant intra-regional trade, but also because the living standards vary significantly between countries. So we have low (Myanmar, Cambodia, Laos, Vietnam and Philippines), middle (Indonesia, Thailand, China and Malaysia) and high income (Brunei, South Korea, Japan and Singapore) countries in the Union. The restructuring of supply chains should also get a new boost, which could move some production facilities from China to other Southeast Asian countries. All in all, the agreement should therefore have a stimulating effect on investor sentiment and strengthen Asia as the world's growth engine.
Large economies such as India and the USA are not involved in the RCEP. Does that mean China will have a lot more power in setting the terms?
India did not participate, although it would have been the country with the second highest tariffs in the world (9.5% average of the WTO and World Bank index) and the highest tariffs in the trade bloc. It would therefore have been forced to lower these tariffs. However, tensions between China and India increased in 2020. The border conflict claimed human lives on both sides and India banned TikTok from its domestic market. Given these tensions and higher Indian tariffs, Indian involvement would likely have slowed down tariff cuts.
The US's non-participation clearly strengthens China's bargaining power. From an economic point of view, however, a US participation would have been a clear signal for an easing of the trade conflict between China and the USA, which is why a US participation would have been economically advantageous for China.
What does the RCEP mean for US-China trade tensions - could it be part of China's strategy to gain greater influence in world trade?
Rather not. For a decade, China's strategy has been to reduce its export dependency and strengthen the domestic market. Indeed, China has become less dependent on exports as a whole and to the US in recent years. Between 2006 and today, Chinese exports, as measured by GDP, fell from 36% to 19% of GDP. During the same period, exports to the US fell from 7% of GDP to 3%.
On the other hand, the Chinese policy of "double circulation" means that China wants to open up more to attract foreign investors ("external circulation"). By giving foreign investors access to the Chinese market, China is better protected from foreign sanctions. The technology industry is a good example. Since China is one of the most important export markets for US technology companies, any restriction by US authorities on US technology exports to China will also damage the US corporate sector. Therefore, China has a great interest in opening up its economy further to foreign investors and producers in the next few years.
There is speculation that the US could rejoin the Trans-Pacific Partnership (TPP) after Joe Biden took office. Could such a step change the balance of power between the US and China in the region again?
That's right. Joe Biden could try to renegotiate the TPP. And China would probably be happy to negotiate with the US in general. However, the trade war has changed China's attitude to trade relations with the United States. China still wants good trade relations with the US, but not at any price. Therefore, China will want to further reduce its dependence on the USA in the future. Trade tensions may ease under Joe Biden, but the trend of shifting the economic center of gravity towards Asia is unlikely to change. However, this does not mean that China can break US economic and financial supremacy this decade. The depth of the US financial markets, the US military dominance and the importance of the US dollar are key factors in the battle for supremacy. In addition, global investors' confidence in US institutions is likely still much higher than in Chinese institutions. Even Donald Trump's presidency could not detract from that.
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