China to Ratchet up Influence in Asia-Pacific With Landmark Trade Deal

Donald Trump’s dumping of the Trans-Pacific Partnership (TPP) trade deal, designed to be a cornerstone of US strategic engagement in the Asia Pacific region, presents China with a golden opportunity to strengthen its regional leadership role in 2017, according to Verisk Maplecroft’s analysts.

If Beijing is able to conclude the Regional Comprehensive Economic Partnership (RCEP), a free-trade agreement between 16 Asia Pacific countries, it would form the world’s largest free-trade bloc. This would represent a significant geopolitical win for China and major setback for US influence in Asia.

Unlike the TPP, the RCEP will lack a transformative effect on the business environment of participating states. Maplecroft’s Efficacy of the Regulatory System Index shows considerable variance across the 16 potential members of the bloc.

The worst-performing states, most notably China, will not be compelled to strengthen labour rights or environmental standards or curtail privileges afforded to state-owned enterprises under the RCEP. Regulatory and operational risks in many key Asian sourcing hubs may, therefore, remain significant for years to come.

South China Sea remains potential flashpoint for interstate disputes

One potential barrier to finalising the RCEP is Chinese President, Xi Jinping’s, need to portray a strongman image that may push him to overreact to perceived provocations in the East or South China Seas. This could increase regional tensions and undermine the goodwill needed to conclude the RCEP.

Verisk Maplecroft’s Interstate Tensions Model, which predicts disputes that involve military threats and displays or use of force, but stop short of war, lends credence to this scenario. The South China Sea is identified by the model as a potential flashpoint for tensions in 2017, with an 81% chance of a dispute involving China and one of the other nations involved in territorial claims.

However, any dispute is unlikely to be so great that it will scupper the deal.

Another key determinant of South China Sea tensions is the role the US will play in the region. Maplecroft’s model predicts an 87% chance of a dispute occurring between the US and China.

Threats and displays of force, such as freedom of navigation patrols by the US navy, are the most likely scenario, but the use of military force cannot be rule out entirely.

Indeed, it looks increasingly likely that the incoming Trump administration may abandon the current US policy of maintaining a neutral stance on the validity of individual territorial claims, and adopt a more confrontational posture with regards to China’s activities in the region. This is likely to add fuel to the fire and suggests that 2017 may well witness increasing levels of interstate tensions in the South China Sea.

Other risks to watch

  • Verisk Maplecroft sees three dynamics that could reverse the decades-long rally in global trade volumes: worsening US / China relations; the shaky outlook for economic integration in Europe following Brexit; and the potential for ‘currency wars’ if China allows the yuan to fall more sharply.
  • Sentiment analysis, tracking UK / EU dialogue on Brexit, reveals the ‘mood swings’ in the current relationship, implying that negotiations could descend into rhetorical trench warfare, which would increase the prospects of a chaotic, acrimonious Brexit.
  • Donald Trump’s Middle East senior security and foreign policy picks suggest he will take a tough stance against Iran, which could be bad news for companies looking to invest there. The risk of a gradual unravelling of the nuclear deal has increased.
  • As Erdogan tightens his grip on power, Turkey’s business environment will become increasingly politicised. Companies not toeing the government line will be punished with legal charges or face discrimination during tenders.
  • 2017 may spell the end for Africa’s geriatric dictators. Low oil prices, failing economies and intensifying civil unrest are raising the chances of an Arab Spring type event in Central Africa’s oil producers, including Gabon, Equatorial Guinea and Angola.

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