By Andy Cheah
In November 2020, 15 countries from Asia Pacific — the 10 ASEAN member states, together with China, Japan, South Korea, Australia and New Zealand — signed the Regional Comprehensive Economic Partnership (RCEP) trade agreement, the world’s largest free trade agreement (FTA).
Against a backdrop of rising trade protectionism, anti-globalisation and the severe disruption and uncertainty to global production and supply chains from the COVID-19 pandemic, the RCEP reaffirms the members’ commitment to trade liberalisation and closer economic cooperation, especially in Asia.
Based on existing FTAs among its members, the RCEP will cover 30 per cent of the world’s gross domestic product (GDP) and population, as well as 27 per cent of the world’s total trade (i.e. merchandise exports and imports) value, based on 2019 data.
Next step — ratification
For the RCEP to come into force, the member countries would need to ratify the agreement, which is expected to take place this year. The RCEP will eliminate as much as 90 per cent of the tariffs on imports among its member countries over the next 20 years.
Under the RCEP, there will be improved tariff elimination concessions over and above existing regional and bilateral FTAs. Simplified customs procedures and enhanced trade facilitation measures will enable efficient administration of procedures and expeditious clearance of goods. This includes the release of express consignments and perishable goods within six hours of arrival, thus lowering transaction time and costs for all parties.
These measures will enable businesses, such as those in the chemical, plastic and processed food sectors, to benefit from improved efficiency, higher cost savings and greater speed to market when selling their products to RCEP member markets.
The virtual signing ceremony of the Regional Comprehensive Economic Partnership on 15 November 2020. Photo: Kusuma Pandu Wijaya/ASEAN Secretariat
The aim of the RCEP is also to open up trade in services, to facilitate the flow of foreign investments and to enhance protections in areas such as e-commerce and intellectual property. Only companies with a presence in RCEP member countries will be able to access privileges under the RCEP agreement. This will in turn help to boost foreign direct investment (FDI) inflows from non-RCEP countries. Competition among RCEP members for these FDI inflows will certainly be strong.
For the services trade sector, we can expect greater foreign participation alongside an increase in to permissible foreign shareholding limits in some RCEP markets. Certain sub-sectors, including telecommunications, financial services, computer-related services, professional services and distribution and logistics services, will be open to 51 per cent foreign equity participation.
In addition, supply chains and value chains will be further integrated through the RCEP, as regional cumulation will allow businesses to include the use of raw materials and parts sourced from any of the other 14 RCEP markets as originating content. This makes it easier for businesses to meet the required rules of origin for their exports and thus benefit from preferential treatment and cost efficiencies.
However, taking into account each country’s different rules and regulations, the RCEP still leaves room for detailed discussion on the practicality of the single source of origin. This will be a driving factor for the member countries to review their policy-level approaches in order to meet existing and new trade partner requirements.
Easier access to China and ASEAN’s growing markets
As the world’s second largest economy, China’s trade with the RCEP members is already quite substantial. As a group, RCEP is China’s largest trade partner, accounting for more than 32 per cent of the country’s total trade. This is far ahead of ASEAN’s 15 per cent share. In addition, China’s Belt and Road Initiative (BRI) will be entrenched further with the conclusion of RCEP, given that many member states are also connected via the BRI. The RCEP makes it easier for many Chinese companies to invest in the RCEP member markets, while the other member countries will also benefit from having access to opportunities in China.
“RCEP also fits into China’s new economic development strategy of ‘Dual Circulation’ with a goal to double its economy by 2035. This strategy aims to power the country’s next stage of growth by capitalising on domestic consumption demand as well as opening up to more foreign investments.”
With China’s retail market set to overtake the US to become the world’s largest within the next few years, many businesses are seeking access in a quick and efficient manner. Coupled with the rising affluence in ASEAN, the RCEP will also help attract investors beyond the region into its "integrated market". With nearly half of the world’s manufacturing output produced by RCEP members, the agreement will further elevate their export competitiveness and efficiency.
RCEP also fits into China’s new economic development strategy of “Dual Circulation” with a goal to double its economy by 2035. This strategy aims to power the country’s next stage of growth by capitalising on domestic consumption demand as well as opening up to more foreign investments. China's effective containment of COVID-19 also provided a stable and positive foundation for its continued growth, which will in turn reinforce the prospects of RCEP members, especially ASEAN which has close ties to China thanks to the BRI.
Positive impact of RCEP in a post-COVID-19 world
While the COVID-19 pandemic has highlighted weaknesses in supply chains, with companies acting to diversify their supply sources and end markets, the RCEP will provide a more conducive environment for companies as they strengthen their resilience post-pandemic.
A woman shops for canned food in a supermarket. In the early stages of the outbreak, panic buying and shipment delays due to the pandemic led to supply chain disruptions in many countries. Photo: Shutterstock
According to our survey of 300 UOB clients across Asia, implementing a major strategy shift such as supply chain realignment will take one to three years for the majority of companies and three or more years for more than a third of companies. Undoubtedly, the RCEP, with its many free trade measures and incentives, will facilitate the shift and promote greater business and trade flows into ASEAN.
Thailand, as a member of ASEAN, will also enjoy the benefits that the RCEP brings. Exports, foreign business ownership, standard of labour treatments and environmental policies and frameworks could be some areas in which Thailand can further enhance its appeal as an investment destination.
UOB, with our strong Asian heritage, strategic regional franchise in Greater China and ASEAN and commitment to facilitating cross-border trade and commerce, is well-positioned to contribute to the RCEP agenda. As business flows along the Greater China-ASEAN trade corridor continue to grow given supply chain diversification, UOB will continue to connect businesses, from small- and medium-sized enterprises to large corporates, to regional growth opportunities.
This article was first published in the ASEAN Insights column, Krungthep Turakij, 29 January 2021.
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