Sunday, November 15, 2020

The largest regional group to boost post-Covid-19 recovery

 The 15 nations in the Indo-Pacific region today signed Regional Comprehensive Economic Partnership (RCEP) agreement – one of the world’s largest trade and investment pacts – that could give a significant boost to foreign direct investment (FDI) in the region.

According to the agreement, the investment provisions in the agreement mostly consolidate existing market access as contained in myriad bilateral agreements. “However, the provisions related to market access and disciplines in trade, services and e-commerce are highly relevant for regional value chains and market-seeking investment,” it claims, adding that the RCEP is already an important FDI destination. “It accounts for 16 per cent of global FDI stock and more than 24 per cent of flows, while global FDI has been stagnant for the last decade, the RCEP group has shown a consistent upward trend until last year.”

The agreement comes at a time of major upheaval caused by Covid-19. The pandemic will lead to a drop in FDI in the region of about 15 per cent. However, this compares favourably to a fall of 30 per cent to 40 per cent in global FDI, and the region looks set to lead the FDI recovery.

“A key challenge for RCEP will be to follow through on economic integration efforts at a time of global and intra-regional geopolitical and trade tensions,” it reads, adding that the global economic recession caused by the pandemic will also limit the potential of RCEP to expand trade, investment GVCs in the short term. “However, a key opportunity lies in the diversity within RCEP, which can lift investment prospects through complementary locational advantages and catch-up development potential.”

Among the members, FDI stock relative to the size of the economy ranges from less than 5 per cent to a multiple of GDP.

The Intra-regional investment – at about 30 per cent of total FDI in RCEP – has significant room for further growth. It is relatively low compared to other major economic partnerships. The ASEAN group, at the heart of RCEP, will play an important role. Already about 40 per cent of investment in ASEAN comes from RCEP members. The agreement is signed by 10 member states of ASEAN, apart from Australia, Japan, China, New Zealand and South Korea. 

According to the agreement, the likely investment policy priorities for the partnership will include boosting investment in sustainable post-pandemic recovery. This requires investment in infrastructure, clean energy and healthcare, all of which rely on increasing international project finance. RCEP includes several top source countries for project finance. There is room for growth, for example RCEP attracts projects in line with its global FDI share but accounts for only about 12 per cent of projects in renewable energy.

Likewise, supporting resilience-seeking FDI is also a part of agreement. The need for multinational enterprises (MNEs) to diversify supply sources and strengthen regional value chains should translate not only in shifting FDI patterns within the region but also in renewed overall growth of international investment in industry. Greenfield investment in trade-exposed manufacturing in the region has decreased by more than 40 per cent over the last decade.

The agreement also aims at promoting investment for development. “The least developed country (LDC) signatories including Cambodia, Myanmar and Lao People’s Democratic Republic respectively receive more than 70 per cent, 80 per cent and 90 per cent of their FDI from other RCEP members,” the agreement reads, adding that economic cooperation under the partnership could further boost both project finance in infrastructure and industrial investment to increase their GVC participation.

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