Risk was off yesterday. Both equities and oil drifted lower for most of the day. The market that has been detached from the realities of the here and now shifted its focus back from next month and next year to the present. The coronavirus will be contained – a new vaccine developed by Oxford University and AstraZeneca produced an encouragingly strong immune response in older adults. Together with Pfizer/BioNTech and Moderna mass vaccination is expected next year. Until then, however the fight against the invisible enemy is raging on with all the inevitable consequences. The US Labour Department provided a sobering reality check yesterday. As the rise in infection rates is unstoppable the job market suffers. Initial jobless claims were up last week, and more than 20 million people were on unemployment benefit at the end of last month. While the US President’s unsubstantiated claims of fraudulent election is being heard in courts across the country 12 million people will be without benefits from next month, after two support programmes expires after Christmas. The US Treasury is also ending one of its emergency lending programmes. US stocks finished the day unchanged-to-slightly-higher thanks to a late rally triggered by news that Senate majority leader Mitch McConnell agreed to resume talks on fiscal stimulus.
Not that they needed one but the OPEC+ producer group has also been served with a stark reminder of the job ahead. Libya’s oil production is now 1.25 mbpd and as a result December exports are also at levels not seen for months. Preliminary programme seen by Reuters puts the loadings of Es Sider, the country’s largest crude stream, at around 258,000 bpd next month. Additionally, the National Oil Corporation has held discussions with France’s Total to explore ways to increase production. The extra Libyan barrels are still widely expected to be accommodated when the next OPEC+ meeting gets under way at the end of the month but until the ink dries on the paper nothing can be taken for granted.
Liberals believe that multilaterism is fundamental to the world order that was established after World War II as it has been crucial to create and maintain peace and prosperity. Alliances of numerous countries that pursue common goals have also been central to manage political or economic crises in the past. Changes over the past 10 years have reduced the importance of multilateral relationships as the electorate in several countries voted against the establishment and advocated political parties and politicians who believe that a nation’s prosperity can be achieved via bilateral co-operations or unilateral action. Right wing parties of several EU member openly support anti-EU stance, Britain, fed up with its “vassal” status with the European Union is about to go on its own way and Donald Trump’s presidency was characterized by bi or unilateral intentions. During Mr Trump’s four year the US has left the Paris Climate Agreement, withdrew from the Trans-Pacific Partnership and has threatened to break away from the World Trade Organization. Time will tell whether bilateral relationships are more effective but the health catastrophe that is posing unparalleled threat to everyday living and the global economy suggests otherwise. The lack of co-ordinated, or multilateral action, if you like, has led to unnecessary loss of lives and economic damage.
The divergence from the liberal ideology and multilaterism in the developed part of the world inevitably left a void and there are willing participants in the global arena who are more than willing to fill this void and turn it to their advantage. The latest example of this trend is the signing of the Regional Comprehensive Economic Partnership (RCEP) last weekend, the biggest trade agreement in history.
RCEP is a mammoth trade deal, which includes the ten member countries of the Association of Southeast Asian Nations (Asean) and China, Japan, South Korea, Australia and New Zealand. It could have grown into an even more formidable group of nations had India not withdrawn its application last year as it is worried about opening up its market to Chinese exporters. According to economists, the agreement could add nearly $200 billion per year to the global economy by 2030. Member countries are responsible for one-third of the global population and for 29% of the global GDP. RCEP is expected to be bigger than the UMCA (US-Mexico-Canada Agreement that replaced NAFTA) or the European Union.
The RCEP will lower or even completely eliminate tariffs on imports on a variety of goods and services in the next 20 years and will regulate investment, competition, e-commerce, financial services and intellectual property. It does not, however, include provisions on labour and environmental standards.
Probably the most important segment of the agreement is the “rule of origin”. Participating nations already have free trade agreements (FTAs) in place with each other, but these different FTAs have different rules of origin. An Indonesian manufacturer using Chinese part in its product could face tariffs in other Asean countries. The RCEP eliminates all that as parts from any member countries will be treated the same way. Companies with global supply chains within the RCEP will be incentivized to deal with suppliers from the trading bloc.
There is a valid argument that the newly born RCEP is the direct consequence of the Trump administration’s economic policies. To counter growing Chinese influence in the region President Obama pushed for the creation of the aforementioned Trans-Pacific Partnership, another comprehensive trade agreement with 12 participating countries – but not China. With the US withdrawal from the pact in 2017 its impact greatly diminished and possibly paved the way to the signing of the RCEP last weekend – a trade agreement in which China is a dominant player and which is so diverse that it is likely challenge trading zones in other parts of the world.