Regional Comprehensive Economic Partnership (RCEP)

 

What is  RCEP ?

The Regional Comprehensive Economic Partnership (RCEP) is a proposed trade agreement between the member states of ASEAN (Association of Southeast Asian Nations) and its Free Trade Agreement (FTA) partners. The aim is to create an integrated market amongst 15 countries, making products and services more accessible to each other. The RCEP is set to be the world’s largest trade deal as it will account for a third of global GDP (Gross Domestic Product) and cover half the world’s population.

Members comprise the ASEAN states of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Viet Nam, and their FTA partners: China, Japan, South Korea, Australia and New Zealand.

" The RCEP is set to be the world's largest trade deal as it will account for a third of global GDP (Gross Domestic Product) and cover half the world's population. "

Timeline

Introduced in 2011 during the 19th ASEAN Summit, progress on the agreement has been slow, with more than two dozen negotiations conducted. The growing economic impact of the US-China trade war and the US withdrawing from the Trans-Pacific Trade Partnership (TPP) in 2017 pushed RCEP participating members to tackle outstanding issues and move ahead to finalising the partnership.

There was a significant turn of events in November 2019, when India decided to opt out of the RCEP. Reasons cited were concerns about a surge of imports that may potentially harm India’s domestic industry and agriculture, especially with introducing manufactured goods from China and agriculture products from New Zealand and Australia. However, whether India will re-join negotiations or opt-out entirely is still unclear.

In the most recent developments, RCEP was signed by the 15 participating countries in Nov 2020. For RCEP to come into effect, it needs to be ratified by at least six ASEAN counties and three non-ASEAN signatory countries. Currently, Thailand, Singapore, China, and Japan have ratified RCEP in the first half of 2021. The participating countries are targeting entry into force by January 2022.

Free Trade Agreements (FTAs)/ Regional Trade Agreements (RTAs)

Overview

According to the World Trade Organization (WTO), as of January 2020, there were 330 RTAs (Regional Trade Agreements) in force globally. The European Union (EU-28), the North American Free Trade Agreement (NAFTA) and the Association of Southeast Asian Nations (ASEAN) have had little to no change in the export destination in the past decade. In 2017, EU-28 maintained the largest share of intra-RTA trade at 64 percent of its total exports (See Table 1).

Table 1. Exports of Regional Trade Agreements (RTAs), 2008 and 2017
From – https://www.wto.org/english/res_e/statis_e/wts2019_e/wts2019_e.pdf (page 55, Chart 5.8)

 

Potentially, the large number of RTAs in force may unintentionally result in a ‘spaghetti/ noodle bowl’ effect – where each different country partnership requires a different set of trade rules and processes, resulting in trade inefficiencies and deterring businesses. Developing a multilateral agreement could mitigate the issue and ideally supersede all the different bilateral partnerships and develop common rules, such as rules of origin.

" A multilateral agreement ideally supersedes all the different bilateral partnerships and develop common rules, such as rules of origin. "

World Trade Organisation (WTO) – Doha Round of Trade Negotiations

 The Doha Round attempted to create a multilateral trade agreement amongst WTO members joined by most countries. Negotiations started in 2001, but there has been little to no progress, with no piecemeal sub-agreements and the US and EU refusing to reduce agricultural subsidies. The main reasons include a need to achieve overall consensus, as opposed to a majority one. In the latest developments, despite some existing issues being discussed at the WTO meeting in Nairobi 2015, there was a failure to agree that negotiations for Doha Round should continue.

Countries continued to negotiate other trade agreements, though most of them were bilateral in nature, some were multilateral. Focusing specifically on trade groups within Asia Pacific nations, there are three such multilateral agreements that could potentially minimise the ‘spaghetti/ noodle bowl’ effect: ASEAN, CPTPP (formerly known as TPP), and RCEP the below diagram (Table 2).

Table 2. Asia-Pacific trade groupings
From: https://www.eiu.com/industry/article/608652844/all-set-for-rcep/2019-11-06

Trans-Pacific Trade Partnership (TPP) / CPTPP

The Trans-Pacific Trade Partnership (TPP) was introduced in 2005, starting with just four countries – Brunei, Chile, New Zealand and Singapore. The pact was later expanded to include Australia, Canada, Japan, Malaysia, Mexico, Peru, the United States and Viet Nam and was initiated in 2016. The TPP accounted for 40 percent of the global GDP, promising the world’s largest trade deal.

However, in 2017, the United States withdrew from the TPP, a move perceived to be in the direction of protectionism. The 11 remaining countries, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Viet Nam signed the revised Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which came into force December 2018. The CPTPP was much less influential than the initial TPP with the US, as the remaining countries only account for 14 percent of global GDP.

 

Elaborated: RCEP and CPTPP/ TPP

While negotiations were still ongoing for the US-driven TPP, China initiated the RCEP back in 2012 to counter the TPP. However, soon after the TPP was signed, the US withdrew from it in 2017, spurring RCEP members to finalise the trade agreement.

Despite some overlap in the country membership, the main difference between the RCEP and CPTPP was that the TPP (then led by the US) had intentionally excluded China so that the US and member countries could push back against China’s economic dominance. Other significant differences include the CPTPP having high standards for labour and environmental protection and rules for currency manipulation and intellectual property rights – something that the RCEP lacks. The RCEP primarily aims to lower trade tariffs between member countries and open up trade in the service industry.

" RCEP primarily aims to lower trade tariffs between member countries and open up trade in the service industry. "

Although the RCEP does not match up to the higher standards of the CPTPP, it could still go a long way towards lowering trade barriers in Asia, especially among developing countries struggling to meet the standards of the CPTPP.

 

How Will Countries Benefit from RCEP?

" The RCEP provides a means to simplify the processes and procedures for each FTA and reduce any existing trade inefficiencies. "

Overview

 Currently, participating countries have existing trade agreements with associated FTA partners (See Table 3). The RCEP provides a means to simplify the processes and procedures for each FTA and reduce any existing trade inefficiencies. Eventually, avoiding the ‘spaghetti/noodle bowl’ effect, where ASEAN could become entangled with multiple FTAs with different rules and tariff rates for each country. As such, the RCEP can serve as a building block foundation for the multilateral trading system. Businesses will only need to follow one set of procedures rather than navigate several different sets of trading rules with RCEP partners.
 

Table 3. Trade Deals in Force Among Original RCEP Countries
From: https://www.cnbc.com/2019/11/12/what-is-rcep-asia-pacific-trade-deal-slated-to-be-worlds-largest-fta.html

Overall, the RCEP will lead to greater ease of doing business and significantly more opportunities for participating countries. It will encompass about a third of the world’s GDP and about 45 percent of the world’s population. Moreover, with lower trade barriers and improved market access, foreign investors are keen on entering an integrated ASEAN market or encouraging businesses to build their supply chains across RCEP member countries.

" With lower trade barriers and improved market access, foreign investors are keen on entering an integrated ASEAN market or encouraging businesses to build their supply chains across RCEP member countries. "

Benefits of ASEAN

According to research by the Economic Research Institute for ASEAN and East Asia (ERIA), compared to relying on existing bilateral FTAs or intra-ASEAN trade, ASEAN members will benefit more from the RCEP. This is especially the case since, the same commodity might be subjected to different tariff timelines and cuts across separate FTAs. As mentioned previously, having multiple differing trade rules may result in more trade cost and discourage businesses from entering the market.

Furthermore, with the ongoing US-China trade war and its negative impact on the economy, the RCEP could help stabilise country members’ economies. However, it may lead to a heavier economic reliance on China; but ultimately reducing ASEAN’s dependence on the US market.

Small and Medium-sized Enterprise (SMEs)

Since in ASEAN, SMEs employ most of all workers (52 to 97 percent), an objective of the RCEP was also to facilitate greater inclusion of ASEAN SMEs in the global and regional supply chain. Furthermore, under the RCEP, smaller companies may be able to overcome trade barriers such as being unable to meet the rules of origin of multiple countries. The improved market access and simplified trading processes could support the growth of SMEs and their inclusion in the global and regional supply chain.

Other benefits could include SMEs being able to tap into resources previously not accessible. Cooperation with technologically advanced nations such as Japan, South Korea, Australia, and New Zealand could help develop better and more competitive products. It may result in a significant expansion in telecommunication services and agriculture with businesses competing regionally.

Benefits for China

The RCEP was initiated in response to the US-driven TPP that excluded China. However, with the current CPTPP proceeding without the US, America’s position has weakened in the Asia-Pacific, and when RCEP comes into effect, it could strengthen China’s. Moreover, with the RCEP, China will develop closer economic interdependence with some of the United States’ closest allies such as Australia, Japan, South Korea, giving China strategic leverage over the US allies.

What businesses need to do to take advantage of RCEP?

Small and Medium-sized Enterprise

Alongside improved market accessibility, challenges may surface requiring SMEs to be prepared if they want to fully utilise RCEP to their advantage. For example, SMEs will likely face increased competition, notably from larger multinational companies (MNCs). One solution could be to develop human resource to improve productivity and subsequently close the gap between SMEs and their MNC counterparts.

US Companies

Potentially, with the exclusion of the US from the RCEP (and CPTPP), US companies could be left at a disadvantage if they are not geographically located in Asia, as these trade agreements will further develop supply chains in the region.

" US companies without operations in Asia may want to consider expanding to Asia as benefits such as tariff reduction and common rules of origins are based on manufacturing location and not where the company HQ is located. "

Thus, US companies without operations in Asia may want to consider expanding to Asia as benefits such as tariff reduction and common rules of origins are based on manufacturing location and not where the company HQ is located. A US company manufacturing in an RCEP nation and exporting to another participating nation will receive the same benefits.

The future of multilateral trade agreement post Covid-19 Pandemic

Before the outbreak of the Covid-19 pandemic, international relations were relatively unstable with shrinking trust, rising tensions and some degree of international cooperation fatigue. When the Covid-19 Pandemic started spreading globally, it only further weakened international relations. During the COVID-19 pandemic, where the need for international cooperation has never been more crucial, nations are taking unilateral steps to protect themselves. Though some countries managed to prevent an outbreak of COVID-19, others faced multiple waves of outbreaks to the point of insufficient hospitals and medical equipment. Fortunately, those overwhelmed countries managed to receive much-needed support from other countries, stressing the need for international cooperation amongst countries.

Looking beyond the Covid-19 period, if nations can cooperate in times of such a global crisis, it could open doors and refresh negotiations that were at a standstill or progressing slowly. But, on the other hand, it is also possible that nations fall back into a ‘state of anarchy’, supporting protectionism. This would further lead to the rise of bilateral agreements and exacerbate the ‘noodle/ spaghetti bowl’ effect.