An Asian trade agreement set to bear fruit in years to come
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An Asian trade agreement set to bear fruit in years to come

The Regional Comprehensive Economic Partnership should support economic growth over the long term
Recent years have been characterised by nationalism, geopolitical brinksmanship and borders locked shut by a global pandemic. So there is something encouraging about the fact that in November 2020, amid a host of divisive forces, a landmark trade agreement was signed.
This is the Regional Comprehensive Economic Partnership (RCEP), a gathering of 15 Asian nations which between them cover 30% of the world’s GDP and 27% of global trade.1 It marks the first time China, Japan and South Korea have ever participated in the same trade deal.

The symbolism of RCEP is important, standing as a counterpoint to former President Trump’s decision to pull the US out of the Trans-Pacific
Partnership in 2016, in almost his first act in power. It shows that the Asia-Pacific region can still see the importance in regional blocs even if the US is standing aside.

But how about the practical side? The big-picture numbers are alluring: as much as US$209 billion added to world incomes and US$500 billion to world trade by 2030, according to simulations conducted by Brookings Institute.2 About 90% of goods traded in the region will eventually reach zero tariffs, according to a DBS report on 16 November 2020.3

Towards growth in regional trade

The hope is that ease of cross-border trade aids productivity and stimulates growth, which in turn ought to create a positive medium-term outlook for equity markets. There should also be a greater capacity for Asia-Pacific borrowers to raise debt, deepening regional bond markets.

Getting into the minutiae, the picture is mixed. In terms of intellectual property protection, for example, not much changes, and in many cases the avenues for tariff reduction are in places where there weren’t many tariffs anyway, particularly among the Association of Southeast Asian Nations (ASEAN) which were already bound by free trade agreements (FTAs).

But the partnership does create incentives to develop supply chains across the region, and gives a considerable boost to intra-regional trade. Also, it’s a starting point: RCEP creates a foundation for deeper agreements, such as those relating to labour and the environment, to be built. Financial market integration, already underway in ASEAN, should be spurred more widely across the region by RCEP.

A typical analyst response is that the signing of RCEP does not radically change short-term growth forecasts, but will pay off over the longer term as economic and political integration in Asia lead to greater trade flows and harmonization.4 HSBC says that intra-regional trade already accounts for 60% of Asia’s overall trade, and expects the figure to grow under RCEP, not only strengthening Asia’s role in the global trading system but enabling the next round of economic growth.5 That, in turn, should eventually be reflected in the outlook for investable assets, particularly equities.

Who benefits most?

Market participants are trying to work out who benefits most from RCEP, and position themselves accordingly. In terms of tariff savings, South Korea will be the most positively impacted, since it has no bilateral FTA with Japan, its third largest trade partner. There has been no China-South Korea FTA previously either, so that again creates an obvious benefit.

In terms of supply chains, Vietnam is the most frequently mentioned nation to benefit from regional trade, and in particular China-Vietnam or South Korea-Vietnam trade corridors. With this in mind, Singapore’s UOB Bank announced a memorandum of understanding with Vietnam’s Foreign Investment Agency in November in order to facilitate foreign direct investment (FDI) into Vietnam. UOB says that 40% of ASEAN FDI comes from fellow RCEP members and expects there to be a sharp increase in intra-regional capital flows.6

Beyond that, there is the potential of the demonstration effect. India, initially part of the discussions for RCEP, eventually opted not to be involved, fearing the impact of cheap Chinese imports on its manufacturing sector. But if the trade deal appears to be delivering benefits elsewhere, the door is open to it.

And a Biden presidency is likely to be less volatile and confrontational than a Trump one: even if there seems little political support for the US joining trade networks today, there is the potential for closer engagement, if only because of suspicion of China leading the bloc.

It will take time for RCEP to bear fruit. But in years ahead it should move beyond symbolism into practical support for economic growth in Asia.

2 June 2021
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An Asian trade agreement set to bear fruit in years to come

1 Asean https://asean.org/storage/2020/11/Summary-of-the-RCEP-Agreement.pdf
2 Brookings Institute, https://www.brookings.edu/blog/order-from-chaos/2020/11/16/rcep-anew-
trade-agreement-that-will-shape-globaleconomics-and-politics/
3 DBS, 16/11/2020.
4 Goldman Sachs, 2020.
5 HSBC, Stuart Tate, Navigator Survey, 2020.
6 UOB, November 2020.

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Important Information: For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

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In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further
distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other
Person should act upon it. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information

Important Information: For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the the Companies Ordinance (Chapter 622), No. 1173058.

In EEA: Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

In UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further
distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other
Person should act upon it. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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