REGIONAL COMPREHENSIVE ECONOMIC PARTNERSHIP
November 15 will be remembered as a historic day in the history of the world in general, and of Asia in particular, as on this day, ten ASEAN nations, plus five other Asia-Pacific countries – China, Japan, South Korea, New Zealand and Australia – entered into the world’s largest free-trade agreement aptly named as Regional Comprehensive Economic Partnership (RCEP). This is the world’s biggest trade deal in terms of GDP which is expected to drive economic growth in a region hard-hit by the coronavirus pandemic. The new free trade zone will be bigger than both the US-Mexico-Canada Agreement and the European Union.
The deal excludes the United States and India—the former withdrew from a rival Asia-Pacific trade pact in 2017 whereas the latter pulled out last year over concerns that lower tariffs could hurt local producers. The US is absent from RCEP and the 11-nation Trans-Pacific Partnership (TPP) deal that US President Donald Trump pulled out of shortly after taking office. This leaves the world’s biggest economy out of two trade groups that span the fastest-growing region on earth.
The RCEP, which includes a mix of high-, middle and low-income countries, was conceived at the 2011 ASEAN Summit held in Bali, Indonesia, while its negotiations were formally launched during the 2012 ASEAN Summit in Cambodia. Representatives from the RCEP signatory states first gathered to negotiate the RCEP in November 2012. After an arduous eight-year negotiation period, a combination of factors such as slowing global growth, disruption to trade patterns, and US shift away from multilateralism, mobilized participating governments to push ahead with the pact despite long-standing differences. Initially, India was also part of those negotiations, but it indicated in late 2019 that it had a number of issues, preventing it from joining the agreement. The grouping has, however, left the door open for its future entry. However, even without India, RCEP will still be the world’s largest free trade agreement.
The landmark agreement consists of 15 countries: 10 member states of the Association of Southeast Asian Nations (ASEAN), China, Japan, South Korea, Australia, and New Zealand. ASEAN members include Cambodia, Indonesia, Laos, Myanmar, the Philippines, Thailand, Brunei, Singapore, Malaysia and Vietnam.
What does it do?
RCEP is a modern and comprehensive free trade agreement, covering trade in goods, trade in services, investment, economic and technical cooperation, and new rules for electronic commerce, intellectual property, government procurement, competition and small- and medium- sized enterprises.
The primary aim of the RCEP is to establish a comprehensive economic partnership – building on existing bilateral ASEAN agreements within the region with its FTA partners. It will be guided by a common set of rules and standards, lowered trade barriers, streamlined processes, and improved market access.
For investors, RCEP will deliver substantial new trade and investment opportunities within the participating countries – covering roughly 30 percent of the global GDP (US$26.2 trillion) and 30 percent of the world’s population to form Asia’s largest trade bloc to date.
Details of the RCEP agreement
The RCEP agreement includes 20 chapters covering many of the articles typically found in a free trade agreement. Notably, it makes significant strides by way of harmonizing the rules of origin and strengthening IP measures. But some critics have pointed to the weaker commitments for e-commerce and the omission of a labour and environment protection clause, when compared with the CPTPP.
- Common rules of origin
One of the most significant changes under RCEP is that the rules of origin will be unified for the entire bloc. This will mean that investors will only require one certificate of origin for trading in the region and can bypass the tedious processes of checking and adjusting to the specific rule of origin criteria in each country. When implemented, investors can expect lower costs, added flexibility and regional supply chains streamlined.
- Trade in goods – reduced tariffs
Under RCEP, tariffs will be eliminated on around 92 percent of goods implemented progressively over the next 20 years, in accordance with each party’s Schedule of Tariff Commitments. This will allow participating countries to gain preferential market access with each other. However, some agricultural and sensitive goods will be excluded from these tariff reductions.
- Trade in goods – simplified customs procedure
Simplified customs procedures and enhanced trade facilitation provisions will allow efficient administration of procedures and expeditious clearance of goods, including the release of express consignments and perishable goods within six hours of arrival.
- Trade in services
Under RCEP, at least 65 percent of the services sector will be fully open to foreign investors, with commitments to raise the ceiling for foreign shareholding limits in various industries, such as professional services, telecommunications, financial services, computer services, and distribution and logistics services.
Not unlike the negative list system in China, RCEP will also take on a ‘negative-list’ approach where the market will be fully open to foreign service suppliers, unless it appears on the list. This ensures transparency of regulations and measures which will allow greater certainty for businesses.
RCEP eases the process required of investors entering, expanding or operating in RCEP countries. It also prevents the adoption of further restrictive measures and includes a built-in investor-state dispute settlement mechanism that can be evoked by the member states.
- Intellectual protection
RCEP raises the standards of IP protection and enforcement in all participating countries. Aside from securing the protection rights for copyright and trademark in the normal sense, it also goes further to protect non-traditional trademarks (sound marks, wider range of industrial designs) and forms of digital copyright, which goes beyond what was included in the CPTPP.
The agreement covers areas, such as online consumer protection, online personal information protection, transparency, paperless trading and acceptance of electronic signatures. It also includes commitments on cross-border data flows. This provides a more conducive digital trade environment for businesses and provides for greater access to RCEP markets.
- Government procurement
Participating RCEP countries have committed to publish laws, regulations and procedures regarding government procurement, as well as tender opportunities if available. This allows greater transparency for businesses to pursue government procurement market opportunities in the region. RCEP have also committed to a review aimed at improving this in future.
RCEP will connect about 30% of the world’s people and output and, in the right political context, will generate significant gains. According to computer simulations, RCEP could add $209 billion annually to world incomes, and $500 billion to world trade by 2030.
It is estimated that RCEP and CPTPP together will offset global losses from the US-China trade war, although not for China and the United States. The new agreements will make the economies of North and Southeast Asia more efficient, linking their strengths in technology, manufacturing, agriculture and natural resources.
The effects of RCEP are impressive even though the agreement is not as rigorous as the CPTPP. It incentivizes supply chains across the region but also caters to political sensitivities. Its intellectual property rules add little to what many members have in place, and the agreement says nothing at all about labour, the environment, or state-owned enterprises — all key chapters in the CPTPP. However, ASEAN-centered trade agreements tend to improve over time.
Southeast Asia will benefit significantly from RCEP ($19 billion annually by 2030) but less so than Northeast Asia because it already has free trade agreements with RCEP partners. But RCEP could improve access to Chinese Belt and Road Initiative (BRI) funds, enhancing gains from market access by strengthening transport, energy and communications links. RCEP’s favourable rules of origin will also attract foreign investment.
RCEP, often labelled inaccurately as “China-led,” is a triumph of ASEAN’s middle-power diplomacy. The value of a large, East Asian trade agreement has long been recognized, but neither China nor Japan, the region’s largest economies, were politically acceptable as architects for the project. The stalemate was resolved in 2012 by an ASEAN-brokered deal that included India, Australia, and New Zealand as members, and put ASEAN in charge of negotiating the agreement. Without such “ASEAN centrality,” RCEP might never have been launched.
A Coup for China?
While China is party to a number of bilateral trade agreements, this is the first time it has signed up to a regional multilateral trade pact. Many analysts believe that the RCEP is a coup for China, by far the biggest market in the region with more than 1.3 billion people, allowing Beijing to cast itself as a “champion of globalisation and multilateral cooperation” and giving it greater influence over rules governing regional trade. This is evidenced by the remarks made by Chinese Premier Li Keqiang’s after the virtual signing. He said, “It clearly shows that multilateralism is the right way, and represents the right direction of the global economy and humanity’s progress.” The deal also solidifies China’s broader regional geopolitical ambitions around the Belt and Road initiative.
RCEP and the China-US Trade Ties
Even though the talks for RCEP started in 2012, it assumed a greater importance after US President Donald Trump walked out of the Trans-Pacific Partnership (TPP), a multilateral trade deal that could have been as big as RCEP.
China and the US have been locked in a trade battle for years now. Washington has targeted Chinese tech giant Huawei, which wants to play a lead role in the upcoming 5G mobile networks. One of the sticking points in the economic relations of the world’s two largest economies has to do with the state of protection around intellectual property rights in China—American firms often accuse Chinese counterparts of stealing their technology.
In any multilateral trade deal, the US would obviously want a stringent implementation of intellectual property protection. RCEP doesn’t take any concrete stance on these rights. Similarly, RCEP doesn’t set any benchmarks for how labour and environment issues should be dealt with.
The 21st century is inexorably shaping up to become the golden era of the Asia-Pacific region’s economic cooperation, multilateralism and progress, while the world’s still biggest but now troubled economy has in recent years fallen backward into perilous protectionism and unilateralism.
In the current context of sluggish worldwide economic growth amid the Covid-19 pandemic, the signing of the Regional Comprehensive Economic Partnership during the Association of Southeast Asian Nations Summit chaired by Vietnam is big, positive news that will boost early regional economic recovery and global stability.