Markets
RCEP Explained: The World’s Biggest Trading Bloc Will Soon be in Asia-Pacific
RCEP Explained: The World’s Biggest Trading Bloc
Trade and commerce are the lifeblood of the global economy. Naturally, agreements among nations in a certain geographical area help facilitate relationships in ways that are ideally beneficial for everyone involved.
In late 2020, the Regional Comprehensive Economic Partnership (RCEP) was signed, officially creating the biggest trade bloc in history. Here, we break down everything you need to know about it, from who’s involved to its implications.
Who’s in the RCEP, and Why Was it Created?
The RCEP is a free trade agreement between 15 nations in the Asia-Pacific region, and has been formalized after 28 rounds of discussion over eight years.
Member nations who are a part of the RCEP will benefit from lowered or completely eliminated tariffs on imported goods and services within the region in the next 20 years. Here are the countries which have signed on to be member nations:
| Country | Population (M) | Nominal GDP ($B) |
|---|---|---|
| 🇦🇺 Australia | 25.7 | $1,359 |
| 🇧🇳 Brunei | 0.5 | $12 |
| 🇰🇭 Cambodia | 15.7 | $26 |
| 🇨🇳 China | 1404 | $14,723 |
| 🇮🇩 Indonesia | 270.2 | $1,060 |
| 🇯🇵 Japan | 125.8 | $5,049 |
| 🇰🇷 South Korea | 51.8 | $1,631 |
| 🇱🇦 Laos | 7.3 | $19 |
| 🇲🇾 Malaysia | 32.9 | $338 |
| 🇲🇲 Myanmar | 53.2 | $81 |
| 🇳🇿 New Zealand | 5.1 | $209 |
| 🇵🇭 Philippines | 108.8 | $362 |
| 🇸🇬 Singapore | 5.8 | $340 |
| 🇹🇭 Thailand | 69.8 | $502 |
| 🇻🇳 Vietnam | 97.4 | $341 |
| RCEP Total | 2,274.2M | $26,052B |
Source: IMF
But there is still some work to do to bring the trade agreement into full effect.
Signing the agreement, the step taken in late 2020, is simply an initial show of support for the trade agreement, but now it needs to be ratified. That means these nations still have to give their consent to be legally bound to the terms within the RCEP. Once the RCEP is ratified by three-fifths of its signatories—a minimum of six ASEAN nations and three non-ASEAN nations—it will go ahead within 60 days.
So far, it’s been ratified by China, Japan, Thailand, and Singapore as of April 30, 2021. At its current pace, the RCEP is set to come into effect in early 2022 as all member nations have agreed to complete the ratification process within the year.
Interestingly, in the midst of negotiations in 2019, India pulled out of the agreement. This came after potential concerns about the trade bloc’s impacts on its industrial and agricultural sectors that affect the “lives and livelihoods of all Indians”. India retains the option to rejoin the RCEP in the future, if things change.
The Biggest Trading Blocs, Compared
When we say the Regional Comprehensive Economic Partnership is the biggest trade bloc in history, this statement is not hyperbole.
The RCEP will not only surpass existing Asia-Pacific trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in size and scope, but also other key regional partnerships in advanced economies.
This includes the European Union and the U.S.-Mexico-Canada Agreement (USMCA, formerly known as NAFTA). How does the trio stack up?
| Nominal GDP, 2020 | Population, 2020 | |
|---|---|---|
| EU | $15.2 trillion | 445 million |
| USMCA | $23.7 trillion | 496 million |
| RCEP | $26.1 trillion | 2.27 billion |
| World | $84.5 trillion | 7.64 billion |
With the combined might of its 15 signatories, the RCEP accounts for approximately 30% of global GDP and population. Interestingly, the total population covered within the RCEP is near or over five times that of the other trade blocs.
Another regional agreement not covered here is the African Continental Free Trade Area (AfCFTA), which is now the largest in terms of participating countries (55 in total), but in the other metrics, the RCEP still emerges superior.
Implications of the Regional Comprehensive Economic Partnership
The potential effects of the RCEP are widespread. Among others, the agreement will establish rules for the region around:
- Investment
- Competition
- E-commerce
- Intellectual property
- Telecommunications
However, there are some key exclusions that have raised critics’ eyebrows. These are:
- Labor union provisions
- Environmental protection
- Government subsidies
The RCEP could also help China gain even more ground in its economic race against the U.S. towards becoming a global superpower.
Last, but most importantly, Brookings estimates that the potential gains from the RCEP are in the high billions: $209 billion could be added annually to world incomes, and $500 billion may be added to world trade by 2030.
Central Banks
Which Countries Hold the Most U.S. Debt?
Foreign investors hold $7.3 trillion of the national U.S. debt. These holdings declined 6% in 2022 amid a strong U.S. dollar and rising rates.
Which Countries Hold the Most U.S. Debt in 2022?
Today, America owes foreign investors of its national debt $7.3 trillion.
These are in the form of Treasury securities, some of the most liquid assets worldwide. Central banks use them for foreign exchange reserves and private investors flock to them during flights to safety thanks to their perceived low default risk.
Beyond these reasons, foreign investors may buy Treasuries as a store of value. They are often used as collateral during certain international trade transactions, or countries can use them to help manage exchange rate policy. For example, countries may buy Treasuries to protect their currency’s exchange rate from speculation.
In the above graphic, we show the foreign holders of the U.S. national debt using data from the U.S. Department of the Treasury.
Top Foreign Holders of U.S. Debt
With $1.1 trillion in Treasury holdings, Japan is the largest foreign holder of U.S. debt.
Japan surpassed China as the top holder in 2019 as China shed over $250 billion, or 30% of its holdings in four years.
This bond offloading by China is the one way the country can manage the yuan’s exchange rate. This is because if it sells dollars, it can buy the yuan when the currency falls. At the same time, China doesn’t solely use the dollar to manage its currency—it now uses a basket of currencies.
Here are the countries that hold the most U.S. debt:
| Rank | Country | U.S. Treasury Holdings | Share of Total |
|---|---|---|---|
| 1 | 🇯🇵 Japan | $1,076B | 14.7% |
| 2 | 🇨🇳 China | $867B | 11.9% |
| 3 | 🇬🇧 United Kingdom | $655B | 8.9% |
| 4 | 🇧🇪 Belgium | $354B | 4.8% |
| 5 | 🇱🇺 Luxembourg | $329B | 4.5% |
| 6 | 🇰🇾 Cayman Islands | $284B | 3.9% |
| 7 | 🇨🇭 Switzerland | $270B | 3.7% |
| 8 | 🇮🇪 Ireland | $255B | 3.5% |
| 9 | 🇹🇼 Taiwan | $226B | 3.1% |
| 10 | 🇮🇳 India | $224B | 3.1% |
| 11 | 🇭🇰 Hong Kong | $221B | 3.0% |
| 12 | 🇧🇷 Brazil | $217B | 3.0% |
| 13 | 🇨🇦 Canada | $215B | 2.9% |
| 14 | 🇫🇷 France | $189B | 2.6% |
| 15 | 🇸🇬 Singapore | $179B | 2.4% |
| 16 | 🇸🇦 Saudi Arabia | $120B | 1.6% |
| 17 | 🇰🇷 South Korea | $103B | 1.4% |
| 18 | 🇩🇪 Germany | $101B | 1.4% |
| 19 | 🇳🇴 Norway | $92B | 1.3% |
| 20 | 🇧🇲 Bermuda | $82B | 1.1% |
| 21 | 🇳🇱 Netherlands | $67B | 0.9% |
| 22 | 🇲🇽 Mexico | $59B | 0.8% |
| 23 | 🇦🇪 UAE | $59B | 0.8% |
| 24 | 🇦🇺 Australia | $57B | 0.8% |
| 25 | 🇰🇼 Kuwait | $49B | 0.7% |
| 26 | 🇵🇭 Philippines | $48B | 0.7% |
| 27 | 🇮🇱 Israel | $48B | 0.7% |
| 28 | 🇧🇸 Bahamas | $46B | 0.6% |
| 29 | 🇹🇭 Thailand | $46B | 0.6% |
| 30 | 🇸🇪 Sweden | $42B | 0.6% |
| 31 | 🇮🇶 Iraq | $41B | 0.6% |
| 32 | 🇨🇴 Colombia | $40B | 0.5% |
| 33 | 🇮🇹 Italy | $39B | 0.5% |
| 34 | 🇵🇱 Poland | $38B | 0.5% |
| 35 | 🇪🇸 Spain | $37B | 0.5% |
| 36 | 🇻🇳 Vietnam | $37B | 0.5% |
| 37 | 🇨🇱 Chile | $34B | 0.5% |
| 38 | 🇵🇪 Peru | $32B | 0.4% |
| All Other | $439B | 6.0% |
As the above table shows, the United Kingdom is the third highest holder, at over $655 billion in Treasuries. Across Europe, 13 countries are notable holders of these securities, the highest in any region, followed by Asia-Pacific at 11 different holders.
A handful of small nations own a surprising amount of U.S. debt. With a population of 70,000, the Cayman Islands own a towering amount of Treasury bonds to the tune of $284 billion. There are more hedge funds domiciled in the Cayman Islands per capita than any other nation worldwide.
In fact, the four smallest nations in the visualization above—Cayman Islands, Bermuda, Bahamas, and Luxembourg—have a combined population of just 1.2 million people, but own a staggering $741 billion in Treasuries.
Interest Rates and Treasury Market Dynamics
Over 2022, foreign demand for Treasuries sank 6% as higher interest rates and a strong U.S. dollar made owning these bonds less profitable.
This is because rising interest rates on U.S. debt makes the present value of their future income payments lower. Meanwhile, their prices also fall.
As the chart below shows, this drop in demand is a sharp reversal from 2018-2020, when demand jumped as interest rates hovered at historic lows. A similar trend took place in the decade after the 2008-09 financial crisis when U.S. debt holdings effectively tripled from $2 to $6 trillion.
Driving this trend was China’s rapid purchase of Treasuries, which ballooned from $100 billion in 2002 to a peak of $1.3 trillion in 2013. As the country’s exports and output expanded, it sold yuan and bought dollars to help alleviate exchange rate pressure on its currency.
Fast-forward to today, and global interest-rate uncertainty—which in turn can impact national currency valuations and therefore demand for Treasuries—continues to be a factor impacting the future direction of foreign U.S. debt holdings.
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