Opinion: The evolving trade landscape in Asia: perspectives from Australia

10 December 2020

 

In this article, BeefLedger Chairman, Warwick Powell, takes a look at the global trading environment and recent developments. It focuses on the Regional Comprehensive Economic Partnership (RCEP) Agreement forged amongst Asian nations, and signed in November 2020. The piece was written before China and the European Union agreed a comprehensive investment agreement on 31 December 2020.

Introduction

The pandemic of 2020 will have both short and longer-term implications. The coronavirus has, at the time of writing, infected over 62.5 million people worldwide according to data kept by Johns Hopkins University. The virus has claimed almost 1.5 million lives.

The economic impact globally has also been devastating. The International Monetary Funds October World Outlook estimates that 2020 global economic growth will be -4.4%. At the same time, there has been concerted efforts by many nation states to sustain the global trading environment against the rising tide of economic nationalism and mercantilism. We are witnessing this, in the Asian context, in two very distinct but intertwined ways:

1. First, despite the pandemic’s impact on short-term global trade numbers, and the associated destabilisation of the Asia region geo-politically, the core nations of Asia have managed to work their way through to signing the Regional Comprehensive Economic Partnership (RCEP) Agreement in October 2020; and
   
2. Second, we have seen – from China – the rapid development of its digitalisation capabilities focusing on the infrastructure necessary for domestic and international business namely, the Digital Currency / Electronic Payments (DC/EP project) and the ongoing march of blockchain technologies.
   

RCEP and Implications for Australia

The RCEP is the world’s largest ever multilateral free trade agreement. RCEP is a comprehensive agreement. The summary of the agreement is linked here. The agreement aims to drive streamlined trade-based growth through regulatory harmonisation and tariff reductions. The agreement – an initiative of the Association of South East Asian Nations (ASEAN) stemming back 8 years – involves 15 key national economics of Asia:

• The ten independent Nation States that comprise ASEAN; 
  
• China;
  
• Japan;
  
• Republic of Korea;
  
• New Zealand; and
  
• Australia.
  

Combined these nations’ combined GDP (2018 dollars) was in the order of US$24.72 trillion. Of these nations, China, Japan and ROK combined make up about 81.7% of total GDP (US$20.2 trillion).

India, a party to the negotiations during the period, elected to withdraw for the time being. The market liberalisation and opening up – cornerstone features of RCEP – did not sit comfortably with India’s more protectionist sensibilities. However, the door has not been closed on India’s future participation.

Combined, the economies of RCEP make up about 30% of global GDP and the nations about 30% of global population. In terms of sheer economic and population scale, RCEP is institution building on a grand scale. According to estimates recently published by Brookings Institute RCEP could add US$209 billion annually to world incomes, and US$500 billion to world trade by 2030.

Intra-RCEP trade is already significant. ASEAN became China’s largest combined trading partner in the March Quarter 2020, superseding the EU for the first time. China is Japan’s largest single trading partner, which is also the case for ROK.

Already, about 70% of Australia’s trade is with the nations of Asia broadly speaking. Australia’s most significant trading partner has been over the course of the last two decades is China. During the height of the coronavirus pandemic, China took almost 50% of Australia’s exports by value (June Quarter 2020). Typically, China absorbs about 35% of Australia’s exports. 

RCEP sets up a piece of multilateral architecture that places digital modernisation as the backbone for 21st century economic cooperation at the heart of the region’s future. Provisions for e-commerce and digitalised trade and investment flows are key features of the RCEP. The e-commerce chapter is available here. 

The provisions around economic digitalisation will be critical to how Australia can effectively navigate the opportunities of RCEP. Nation States – including Australia – will be mindful to ensure that they adopt national legal regimes that are conducive to the proliferation of e-commerce. This is one of the ‘in principle’ requirements of this chapter. 

The agreements to move towards paperless trade represents a significant opportunity to increase efficiency (reduced costs) and streamline the flow of products and services across borders. Paper-based documentation and the administration of paper-based systems has been central to the governance of cross-border transfers for centuries. This system is costly, cumbersome and open to error and fraud. The opportunity to intensify digitalisation of trade-related documentation is one that must be grasped to optimise the opportunities of RCEP.

I would expect that this process of digitalisation will be anchored by the development and rollout of blockchain technologies. This is where China is leading the world in many respects, though to be fair, Singapore has also developed substantial legal and technical know-how in this space. China’s Blockchain-enabled Services Network (BSN) initiative is one of the key pieces of digital infrastructure that can support the popularisation of the technology across the RCEP landscape.

Blockchain technologies create the basis of information sharing and securing where no single party can exert a controlling force on the data itself. This is the essence of decentralisation.

In this sense, blockchain information systems can be seen as multilateral in nature. There remains a lot of work to do to mature the underlying technologies, improve usability and cross-network interoperability not to mention improve user interfaces and user experiences when it comes to blockchain-backed systems. Decentralised data systems also provide the technical means to address other key provisions of the e-commerce chapter, namely digital identities and verification of them, and the need to protect data sovereignty.

The development of commonly acceptable standards and transparent infrastructure, coupled with multilateral governance architecture, is how blockchain technologies are likely to contribute to the realisation of RCEP’s e-commerce vision. 

China’s digital currency initiative (DCEP) is also going to impact the way RCEP emerges in practical terms over the next decade or two. The People’s Bank of China has been researching a central bank digital currency for at least 7 years. Major trials have been undertaken during 2019, the most recent of which saw some 50,000 Shenzhen residents receive digital RMB to their mobile phones for spending on Luowu retailers. 

The digital RMB initiative builds on China’s global leadership in electronic payments. Since the early 2010s, China has powered forward with smartphone-enabled payments capabilities, so much so that the use of physical cash is these days an oddity. As I have argued elsewhere, ehe Alipay and WeChat Pay technical capabilities, and near ubiquity amongst China’s consumers, has effectively laid the groundwork for the deployment of the central bank digital RMB.

DCEP is programmable money. Its issuance can be programmed to condition different uses. Some uses can be enabled; others prohibited. The digital RMB can be ‘guided’ to support particular transaction types and not others. It can be activated by predefined users or category of users, which enables the central bank to mitigate risks associated with unregulated capital outflows. Coupled with effective identity management regimes (otherwise known as KYC in financial services circles), programmable money can be internationalised without running the risks of inadvertently funding illicit activity or leading to national capital account problems.

The DCEP is an integral element in a set of initiatives from China that will create the conditions necessary for the adoption of the digital RMB as a transnational trading currency without at the same time opening up China’s capital accounts to global market dynamics. The digital RMB can support the growth in digitalised trade across the RCEP jurisdictions, for example, streamlining operations for parties involved in complex cross-border value chain systems where funds needed to come and go, so that economic activity can proceed with as little disruption as possible.

While the growth of the eRMB is unlikely to replace the USD as the global reserve currency, that it is likely to be popularised in the context of RCEP is likely to raise challenging questions for countries like Australia from a monetary policy and geo-security perspective.

Aside from this question, the opportunity and challenge for Australia is to get itself digitally ready to participate in the blockchain-enabled world of cross-border trade. That China and countries across North and SE Asia have already been engaged in deep technological exchange and e-commerce activity gives them an advantage in understanding the terrain and how best to expand and navigate it in a multilateral context. 

Areas of cooperative potential China / Australia in context of RCEP

Australia and China’s relationship has been fraught of late. Some have described it as the worst it has been for 40 years. That both countries are member signatories of RCEP provides an important avenue by which economic relationships can be rekindled and a modus vivendi of sorts re-negotiated. 

To think that simply being in the same room is a sufficient condition would, however, be an error. It is nothing but a necessary condition. The challenge will be how Australia can contribute constructively and meaningfully to the ongoing development of the multilateral framework that has been opened-up by RCEP in ways that are beneficial to all concerned.

Opportunities exist to first identify areas of mutual or common interest. Achieving agreed standards around e-commerce is one such area, as suggested above. Being open to supporting the role of digital currencies as trade enablers is another area, as is reaching agreement on approaches to data sovereignty and data security. Again, China has taken a proactive and globalist perspective in this arena, laying out its own proposed approaches to global data security. 

China’s Global Initiative on Data Security (GIDS), launched on September 8 2020 by Foreign Minister Wang Yi, lays down important markers that will have implications for how the rules of digital engagement are shaped across RCEP. The principles outlined in the GIDS deserve detailed separate consideration. For now, however, we can simply note that these principles are likely to form the basis upon which China will seek to engage with RCEP nations on these emerging frontiers.

Relocation of activities

The coronavirus pandemic has spurred on many national discussions about the need to repatriate supply chains so as to be less ‘dependent on others’ and more self-sufficient. Much of this discussion has centred on repatriation of industrial activity from China.

On this front, I would simply urge some caution. Disentangling complex chains of production is easier said than done. There are, in any case, many good reasons for companies to locate production facilities in China as recently discussed by MIT’s Dr Yossi Sheffi. 

RCEP is also likely to lead to active and ongoing optimisation of where different activities are located. Rather than seeking to optimise tax and tariff treatments, and arbitrage cross-border differences in arrangements as would be the case pre-RCEP, the post RCEP world points to the opportunity to more fundamentally evaluate the optimal configuration of supply chains across national boundaries.

Sure, supply security is the topic du jour in the aftermath of the pandemic, but one suspects that as the memory of the pandemic recedes, those who control / own capital will again seek to optimise the costs of production / storage / distribution from a whole-of-chain perspective. The ongoing growth of e-commerce, together with the proliferation of blockchain-enabled data sharing systems along supply chains, could in fact lead to a tightening of supply chains whereby producers and consumers get closer together.

What this means is ongoing transformation in the nature and structure of supply chains and where value-adding takes place. Streamlined logistics and advanced intelligence on buying habits and needs could see traditional aggregators give way to direct B2C models at scale; or even enable the proliferation of Consumer-to-Producer (C2P) models where it’s consumer pull that dictates production schedules. Alibaba’s ‘on demand manufacturing’ is one example of the possibility. 

Cost trade-offs between input and production costs on the one hand, and storage / distribution costs will be key considerations going forward. If it becomes possible to remove rent seekers in supply chains, so that we have what can be called ‘supply chains as a service’ models, where will production be located? 

RCEP is an important piece of trans-national multilateral economic architecture, designed to suit the needs of the 21st century. It covers the region that is emerging as the core driver of global wealth creation. RCEP and the member nations are the biggest growth story in town, and Australia is fortunate to have a seat at the table. 

End