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On November 15th the world’s largest trade agreement was signed in a virtual meeting room, bringing an end to eight years of negotiations. The Regional Comprehensive Economic Partnership (RCEP) links 15 Asia-Pacific economies, including the 10 members of the Association of Southeast Asian Nations (ASEAN), plus Australia, China, Japan, New Zealand and South Korea. This is a historic step – and a major trade blow to the United States.
Trade between the signatories was worth $2.3 trillion in 2019, making the RCEP the world’s largest trading bloc, eclipsing USFTR and the European Union. The member countries account for nearly one third of the world’s population and 29% of global GDP. Commodities – in particular fossil fuels likes oil, coal, and natural gas – will play a central role in this unprecedented trade organization. But this may not be good news for US energy players, who have been hit hard by President Trump’s trade war with China.
Indeed, the agreement will lift tariffs and duties on 90% of commodities traded within the bloc and shore up imports of energy goods. Duties will be lifted among members gradually over the next ten years, with some exceptions remaining in effect until 2040.
RCEP’s membership overlaps with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The CPTPP was signed in 2018 by 11 countries. Notably, the US withdrew from negotiations after Donald Trump took office in 2017. We should regret it now.
Today, the US finds itself on the sidelines of Trans-Pacific trade. However, president-elect Joe Biden promises a return to multilateralism and seems to be making good on it with his recent cabinet appointments. Biden’ national security team, which includes Antony Blinken for U.S. secretary of state and Jake Sullivan as U.S. national security adviser, add a great deal of foreign policy acumen to the incoming cabinet. It remains to be seen how this group will unwind the trade barriers created between the United States and the world’s largest energy importer – China.
So far, China has met only a fraction of its energy purchase commitments under the ‘historic Phase 1’ trade deal touted in January, failing to break even 40% of its year-to-date targets. US LNG suppliers are still reeling from tariffs imposed by China in 2018 in the early days of the trade war. Just weeks ago, China did sign its first long-term deal to purchase US liquified natural gas, agreeing to buy 26 cargoes from Cheniere Energy Inc. between 2021 and 2025.
But when it comes to China, however, there is still a great deal of uncertainty. Trump’s tough stance on the energy—guzzling PRC offers limited maneuvering room for Biden in the short term, but we can at the very least expect to see a softening in tone style of bilateral relations. Biden’s cabinet moves also suggest an attempt to complete Obama’s inconsequential “pivot to Asia” which remains a part of the president-elect’s vision of future Indo-Pacific relations.
The Biden Administration would make a mistake if it curbs oil and gas production of federal lands, limiting US opportunities to export hydrocarbons to energy-hungry Asian markets. If it does so, that niche would be taken by RCEP members Australia, Indonesia and Vietnam, as well as Middle Eastern producers.
The RCEP launch and subsequent US reactions will undoubtedly trigger consequences for the North American and global energy sector. For starters, the new bloc is expected to re-stabilize previously fraught relationships between Asia’s energy buyers and sellers. China and Australia, for example, are currently embroiled in a trade row which could be defused under RCEP.
Australia is the top dog among RCEP energy exporters, and is the single largest source of coal and liquified natural gas (LNG) trade for China, Japan, and South Korea. If RCEP fortifies trade ties and eventually winds down regional import tariffs, it could prove difficult for the US to reboot its LNG exports to China — if and when Trump-era trade restrictions are modified. Furthermore, it may make it more difficult for US energy importers to retain their market share in Japanese and South Korean markets.
Last year, 20% of US coal exports went to Japan and Korea, while nearly 26% of LNG exports went to the same two countries. All told, about 30% of American natural gas exports were destined for RCEP countries in 2019.
Japan, the world’s largest importer of LNG, already receives 67% of its LNG imports from RCEP countries, led by Australia at nearly 40%. The US held 5% of the market in 2019. In South Korea, Australia and Indonesia account for 25% of LNG imports, compared to the US’ 14%. For coal the two Asia-Pacific countries supply 56% of South Korea’s imports, versus the US and Canada’s, 4% and 8% respectively.
Conversely, US exporters could benefit from increased regional GDP growth. Peterson Institute economists predict increased affluence among signatories as a result of free-flowing trade. Across the region, annual national incomes could increase by $165 billion before 2030.
The gains are meant to be especially impactful for China, Japan and South Korea. RCEP represents the first free trade agreement shared by the three countries, which are the region’s first, second and third largest economies, respectively. By 2030, these three manufacturing heavyweights are expected to see their real income rise by 1% thanks to the trade deal.
US LNG exports have shown to be responsive to economic conditions in Asia, and shipments to China are predicted to hit a record in November. Sustained growth in the region could help the US remain a major LNG and coal exporter in coming years, even in spite of China’s closer ties to regional energy players. Much will depend on the Biden administration’s economic and political approach to China, as well as the necessary and continuous support for fossil fuel exports amidst a clean energy transition.