Forget the Trade War, Asia’s Latest RCEP Pact Is Far More Interesting

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I’ll admit it, up until recently I hadn’t heard of the RCEP.

Known in full as the Regional Comprehensive Economic Partnership, this pact has been in the works since 2011. A scheme designed to unite Asia-Pacific nations into a new trading agreement.

Covering close to a third of the world economy, this deal is massive. It will unite the ASEAN bloc with several major Asian nations. Including the likes of China and Japan.

As of this week, it is now looking like a done deal too. With negotiations finalised, all that’s left is to sign the dotted line sometime next year.

In other words, the RCEP is basically set in stone and yet many people are only just learning about it for the first time. It has been quite the stealthy operation.

The reason for this is because unlike the disastrous Trans-Pacific Partnership, this deal was discussed and hashed out mainly behind closed doors. Ensuring most of the discussion has remained secret.

On top of that, the US won’t have any hand in the RCEP. Along with India who has walked away from the deal as of this week. Though they are welcome to come back to the table at any time according to other members.

So, we know who is involved, but not necessarily what is involved.

At its core, RCEP is a multilateral trade deal. Its aim is to remove tariffs and promote trade between all members.

For the most part, this seems pretty superfluous. Most of the nations involved already have pretty robust agreements in place.

Nevertheless, having one, unified deal should still add some value. At the very least I’d expect it to reduce some red tape or bureaucratic barriers.

The key details, though, are yet to be made public. We’ll have to wait until next year — when the signing is expected to happen — for that.

I can tell you right now though, the ultimate winner will be China…

US–China trade tensions have actually created some incredible opportunities for Aussie investors. Click here to discover three unique plays on the US–China trade war.

Architects of power

For the mainstream media, it feels as though the only narrative of 2019 has been the trade war. The stoush between China and the US is all they seemingly talk about. With a few tidbits of Brexit along the way.

I’m not going to deny that the trade war isn’t important, but it’s cheap fodder. While everyone obsesses over it, the rest of the world keeps on ticking.

For China in particular this is a key detail. Long term they don’t really need or care about the US. They’re too busy trying to overtake them.

Claiming the top spot won’t be easy though. And they’re smart enough to recognise that they can’t do it on their own.

That’s why China has plans to spread their influence right around the globe. Just look at their centerpiece strategy: the One Belt, One Road initiative. With it, China could become the architect of a new Eurasian bloc.

This RCEP — first proposed jointly by China and Japan — I suspect, will be a key part of that plan. It is just a part of the greater whole.

After all, Southeast Asia is a major up and coming hub. A region that will account for incredible economic growth and development over the coming years and decades.

That’s why, as the Washington Post reports:

For the past three days, China’s delegation has tirelessly been working to position itself as the player in Asia, a region that is sure to become the geopolitical battleground for global dominance between the United States and China for the rest of the century.

Xi Jinping whatever he may be, is no fool. He doesn’t need to worry about popularity, opinions or elections. He has the freedom to pursue a long-term goal and make it happen.

Which is why in five or even 10 years’ time we’ll probably still be talking about him. Long after the likes of Trump, ScoMo or Boris Johnson have departed.

But, for Australia in particular, we’ll certainly still be along for the ride.

Capital injection

See, it’s not trade that I’m particularly interested in when it comes to the RCEP. I’m more interested in what it will mean for foreign investment.

Again, a key part of the Belt and Road initiative is Chinese investment. They’re going to devote billions to new infrastructure projects. And that will certainly include industries or regions of Australia.

Here’s how the Department of Foreign Affairs and Trade has surmised it:

RCEP will remove tariff and non-tariff barriers in a way that creates significant new trade and investment opportunities for Australia in the region, and will establish rules that provide greater certainty for businesses seeking to trade and invest in other Indo-Pacific countries.

In other words, opening up Australia for more foreign investment.

Now, some people may think that as our largest trading partner, China probably already invests a lot Down Under. And they do, but not as much as you may have thought.

Take a look at the figures for 2018:

Money Morning

Source: DFAT

[Click to open in a new window]

As you can see, China was behind both Japan and Singapore in terms of investment. Likewise, our investment in China was behind Japan and New Zealand. That puts China in fourth place for overall two-way investments.

Plus, this data is only for RCEP members. It doesn’t include the Americas, Europe or regions beyond Asia.

I have an inkling that China’s ranking won’t be that low for long though. Ratifying this deal could very well kick-start the flow of cash to our shores. And that might just be the start…

No one knows for sure what ‘removing these barriers’ will lead to. But you can bet your bottom dollar it won’t mean less trade or investment.

I’d be keeping an eye on how this RCEP deal shapes up. Because once it comes into effect, it just might kick our China boom into a whole new gear.


Ryan Clarkson-Ledward,
Editor, Money Morning

PS: Want to know some of the biggest winners from the US China trade war? Download our latest investor report: ‘The US–China Trade War And The Opportunities Behind It’.

About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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