Home Economy RCEP demonstrates Asia’s commitment to free trade

RCEP demonstrates Asia’s commitment to free trade

The trade megadeal, which covers almost a third of the world’s economic output, also underscores ASEAN’s importance to global economic integration
CEO of PublicPolicyAsia Advisors & former Deputy Secretary-General of ASEAN
The ASEAN logo in the middle surrounded by the national flags of the 10 ASEAN member states

The Regional Comprehensive Economic Partnership (RCEP) was signed by 15 countries of the Asia-Pacific region last week, after a long and hard eight years of negotiations. The conclusion of the free trade agreement (FTA) at this critical juncture signals the region’s commitment to a sustainable post-pandemic economic recovery from COVID-19. 

It also underscores the region’s commitment to inclusive development, job creation, and the consolidation of regional supply chains based on an open, inclusive and rules-based trade and investment regime.

The RCEP is now the largest FTA globally, covering one-third of humanity and 30% of global trade. It is estimated the RCEP could increase global GDP by $209 billion and global trade by $500 billion by 2030. According to UNTACD, the RCEP will help slow the decline of FDI in the region before leading a global FDI recovery.

The ASEAN-initiated and driven FTA saw India dropping out at the last moment in 2019 due to domestic considerations. That has dented the potential of the FTA to some extent. The US, meanwhile, left negotiations in 2017 in favour of the Trans-Pacific Partnership (TPP), which also it eventually withdrew from.

That resulted in the remaining 11 Parties in the TPP concluding the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which has come into force. Seven RCEP members are party to the CPTPP, including four ASEAN countries (Malaysia, Singapore, Brunei Darussalam and Vietnam). 

In time, the RCEP and CPTPP will form the building blocks for a region-wide FTA. While the CPTPP is more comprehensive, the RCEP’s market size is about five times greater and its annual trade value and combined GDP almost double.

The RCEP is heavily centred on trade in goods, and specifically the elimination of tariffs and non-tariff barriers. But it exceeds the threshold of FTAs that have been previously signed between ASEAN and its partners, and can therefore be considered a more ambitious agreement.

Summing up the RCEP

The RCEP should be viewed as an agreement not only for today but also as an ‘agreement for tomorrow’, as it takes into account emerging trends, and trade and investment realities. It takes into consideration trade digitalisation, the growing prominence of micro, small and medium enterprises that make up the majority of businesses in these economies, the deepening of regional value chains and market competition complexities.

The RCEP may not be a ‘perfect’ FTA, but it is ambitious. While aspiring to attain a higher threshold, it takes into account the different levels of economic development of the countries involved. It is an arrangement that will be mutually beneficial to all parties, while striving towards being modern, comprehensive and of higher ambition.

What is interesting about the RCEP is that it is the first FTA that brings the Plus Three countries of China, Japan and South Korea together under a trade pact. Trade between these three countries is already substantial. These three countries alone contribute around 24% to global GDP and their combined annual trade volume is about $720 billion. The RCEP will buttress this as well as trade between ASEAN and the Plus Three countries.

It will be interesting how the incoming US administration will view the RCEP. The new administration will have to weigh its options as it contemplates its engagement with the Asia-Pacific, and whether it continues to focus on the Indo-Pacific remains to be seen.

The total value of trade in goods between ASEAN and the Plus Three countries stood at $869.1 billion in 2018, or 31% of ASEAN’s total merchandise trade. In the same period, FDI flows from the Plus Three to ASEAN stood at $37.9 billion or 24.5% of total FDI inflows into ASEAN. These numbers will increase further once the RCEP comes into effect.

Moreover, the RCEP also helps maintain ASEAN centrality where ASEAN continues to be the convener and coordinator of the FTAs in the region. 

Key benefits

Trade in goods. The RCEP will eliminate 92% of tariffs in goods traded among the signatories. It will provide national treatment to the goods of other RCEP countries, reduce or eliminate customs duties and provide temporary duty-free admission of goods. It will work towards the removal of quantitative restrictions, and provide transparency on import licensing procedures, and fees and formalities connected with imports and exports. 

Rules of origin. The RCEP will provide clear rules so that originating goods do not inappropriately lose their originating status. Certain provisions exist if a product does not fully satisfy product-specific rules, whereby the product could still acquire originating status. There are even provisions on the treatment applied to packing and packaging materials and containers for transportation and shipment, and the treatment of accessories, spare parts and tools.

Customs procedures will be further streamlined with the RCEP, which will reduce the cost and time for transactions. Express consignments and perishable goods are expected to be cleared by customs within six hours upon the submission of necessary documents. The RCEP will also work towards mutual understanding and recognition of each party’s standards, technical regulations and conformity assessment procedures, making trade more efficient.

Services and investment. About 65% of the services sector will be fully opened up, including professional services, financial services, telecommunications, computer and related services, distribution, and logistics; and additional sectors could be included in the future. Investment gets a boost from the RCEP with the prohibition of the use of performance requirements on investors as a pre-requisite for entering, operating or expanding in the region.

Other trade facilitation measures

Three other areas where improvements will be seen are in intellectual property, competition and e-commerce. RCEP countries have committed to acceding to international IP treaties to streamline applications for a single patent or trademark application designating several countries, thereby making this process more efficient. This will allow businesses with non-traditional trademarks and industrial designs to invest and operate in the region.

Similarly, the RCEP countries will align their competition laws with international best practices. E-commerce will help create a more conducive digital environment for trade. The requirement to maintain a legal framework will support e-commerce development, and protect the personal information of e-commerce users.

In another positive, RCEP countries have agreed to maintain the current practice of not imposing customs duties for electronic transmissions, as per a WTO Ministerial Decision.

Separately, it is encouraging to see government procurement taking its roots in the RCEP for the first time in an ASEAN-initiated FTA. The transparent laws, regulations and procedures will provide greater clarity for businesses that bid for government procurement projects in RCEP countries and that is good news.

What lies ahead?

The conclusion of the RCEP was one key hurdle that has been cleared now. The next critical step will be its ratification as the agreement will only go into effect once six ASEAN signatory countries and three non-ASEAN signatory countries ratify the deal. That said, given the benefits likely to accrue from this FTA, it is likely that the RECP will be in effect by 2021.

The RCEP is now the largest FTA globally, covering one-third of humanity and 30% of global trade. It is estimated the RCEP could increase global GDP by $209 billion and global trade by $500 billion by 2030.

Meanwhile, India too has an opportunity to reconsider joining the RCEP as the agreement provides for its accession upon its entry into force – it does not need to wait out the 18 months required for other countries interested in joining the agreement. Whether it will or not remains to be seen.

Similarly, it will be interesting how the incoming US administration will view the RCEP, particularly given President Trump’s withdrawal of the US from the TPP. The new administration will have to weigh its options as it contemplates its engagement with the Asia-Pacific, and whether it continues to focus on the Indo-Pacific remains to be seen.

But for now, this impressive achievement ought to be cautiously celebrated, for it signals to the world that Asia is open for business, and more importantly, is willing to cooperate and collaborate for greater prosperity. It has also shown that the region is a model for multilateralism and a driving force in the global post-COVID recovery.

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CEO of PublicPolicyAsia Advisors & former Deputy Secretary-General of ASEAN

Pushpanathan Sundram has more than three decades of experience working in the highest levels of government, international organisations and the private sector. He was the Deputy Secretary General of ASEAN (Deputy Minister) for the ASEAN Economic Community (AEC) from 2009 to 2011. He also served in several senior positions in the ASEAN Secretariat from 1997-2008 which included Principal Director of the Bureau of Economic Integration and Finance; Director of External Relations and Special Assistant to the Secretary General of ASEAN. He was instrumental in the development and implementation of the first AEC Blueprint and the first Master Plan on ASEAN Connectivity.

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