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Regional Comprehensive Economic Partnership (RCEP)

May 24, 2022

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This article has been authored by Anindita Deb, a student pursuing BBA.LLB. from Symbiosis Law School, NOIDA. The objective of this article is to exhaustively discuss the Regional Comprehensive Economic Partnership, its related provisions, and how the countries that are party to this agreement benefit from it.

It has been published by Rachit Garg.

Table of Contents

Introduction

In the ever-growing world of increased globalisation and comprehensive trade deals between nations across the globe, the need for an integrated agreement with provisions aimed at reducing tariffs on trade becomes a boon. The Regional Comprehensive Economic Partnership (RCEP) is one such agreement.

The Regional Comprehensive Economic Partnership was established by the leaders of 16 participating countries to widen and intensify engagement among parties and to increase parties’ participation in regional economic development. The RCEP was built on top of the existing ASEAN+1FTAs (countries with which members have Free Trade Agreements) in order to bolster economic ties, expand trade and investment opportunities, and contribute to narrowing the development gap between the parties. The goal of starting RCEP talks is to reach a contemporary, comprehensive, elevated, and mutually advantageous economic partnership agreement between the ASEAN Member States and ASEAN’s FTA partners.

This article seeks to provide an in-depth description and analysis of the RCEP, its history, its provisions, its benefits, and its implications. After reading this article, the reader will have an exhaustive understanding of what RCEP is and what are the objectives it has set out to achieve.

What is the Regional Comprehensive Economic Partnership (RCEP)

The Regional Comprehensive Economic Partnership (RCEP) Agreement was signed on November 15, 2020, after several rounds of negotiations that began in 2012. It is an overarching agreement between ASEAN and existing partners, the so-called ASEAN Plus Three (APT) countries—the People’s Republic of China (PRC), Japan, and the Republic of Korea, as well as Australia and New Zealand. The Regional Comprehensive Economic Partnership (RCEP) is a regional free trade agreement that will enhance and expand a member nation’s existing free trade agreements with 14 other Indo-Pacific nations.

The Regional Comprehensive Economic Partnership (RCEP) came into force on January 1, 2022, for ten countries: Australia, New Zealand, Brunei Darussalam, Cambodia, China, Japan, Laos, Singapore, Thailand, and Vietnam, with Australia as the founding party. The Republic of Korea signed the RCEP on February 1, 2022, and Malaysia signed it on March 18, 2022. It is a comprehensive and advanced free trade agreement that covers goods, services, investment, economic and technical cooperation, as well as electronic commerce, intellectual property, government procurement, competition, and small and medium-sized businesses.

RCEP negotiations began in November 2012 between the Association of Southeast Asian Nations (ASEAN) and ASEAN’s Free Trade Agreement (FTA) partners. Ministers of 15 countries signed the agreement on November 15, 2020. India declared in November 2019 that it was unable to join the RCEP due to a number of issues, and has since confirmed that it is unable to sign the agreement.

RCEP countries

The RCEP was signed by fifteen countries in 2020 that are all part of the Regional Comprehensive Economic Partnership. These 15 countries included 10 ASEAN members which are as follows:

Brunei-Darussalam
Cambodia
Indonesia
Laos
Malaysia
Myanmar
Philippines
Singapore
Thailand
Vietnam

In addition to the ASEAN countries, five regional countries mentioned hereinunder with which ASEAN members have Free Trade Agreements (FTAs) are also party to this agreement:

Australia
China
Japan
South Korea
New Zealand

Features of the RCEP Agreement

The RCEP has a fairly broad scope of coverage. It has 20 chapters and covers many topics that the ASEAN Plus One FTAs did not. The agreement includes clauses for goods trade, such as origin rules, customs duties, trade facilitation, sanitation facilities and phytosanitary measures, guidelines, regulatory frameworks, and conformity assessment procedures, as well as trade remedies. It also covers trade in services, including financial, telecommunications, and professional services, as well as the temporary movement of natural persons. Other chapters cover topics such as investment, intellectual property, e-commerce, competition, small and medium-sized businesses, technical and economic cooperation, government procurement, and legal and institutional issues such as dispute resolution.

RCEP adds value by providing a single set of rules that allows members to develop and expand supply chains. Technical cooperation and capacity building are included in the agreement to support their actions under it. The RCEP also gives Cambodia, the Lao People’s Democratic Republic (Lao PDR), Myanmar, and Vietnam a lot of flexibility (for example, in terms of enforcement timelines) and includes special provisions for differential treatment, especially for Cambodia, the Lao People’s Democratic Republic (Lao PDR), Myanmar, and Vietnam. This ensures that economies at different phases of development, businesses of various sizes, and a wider range of stakeholders are able to maximise the benefits of their commitments.

Trade in goods

The main contribution of the RCEP to goods trade is that it consolidates existing agreements, bringing Asia one step closer to forming a regional trading bloc. Some tariffs have been eliminated immediately, while others will be phased out over time. On imports from all RCEP partners, some members (Australia, Brunei Darussalam, Cambodia, Malaysia, Myanmar, New Zealand, Singapore, and Thailand) have the same tariff. Other members’ tariff schedules vary, and tariff reduction or elimination phase-out schedules can last up to 20 years. Many of the tariff lines, however, are subject to early rate cuts or elimination well before the scheduled period ends. Furthermore, the fact that many concessions take effect on the date of their enactment is encouraging.

Trade facilitation

The agreement also includes provisions on time frames for the release of goods, perishable goods, and advance rulings, which go beyond the commitments made in the World Trade Organization (WTO) Trade Facilitation Agreement. By promoting compliance with WTO rules and improving cooperation and transparency, the RCEP will open up new avenues for addressing non-tariff barriers. Some countries have made commitments with extended timelines for specific provisions because their trade facilitation systems and regulations require significant changes to comply with RCEP rules.

Rules of origin

Committing to pervasive rules of origin for all commodities is one of the key features of the RCEP. This means that a product that meets the RCEP’s origin criteria is subject to the same regulations in all 15 economies. The RCEP’s common rules of origin could help modern manufacturing processes and trade logistics. The use of regional distribution hubs and the ease of moving goods across the region will be improved, thanks to RCEP members.

The RCEP rules of origin chapter, as is customary, lists the minimum operations and processes that are considered insufficient to confer originating status on goods made with non-originating materials. If a good does not meet a change in the tariff classification rule in the annexe on product-specific rules, the chapter lays out some de minimis rules by which it can still be designated as originating.

Trade in services

By removing the most restrictive and discriminatory barriers to activity, the agreement promotes greater services trade. It includes rules on market access, national treatment, most-favoured-nation treatment, and local presence that are modern and comprehensive. The RCEP adopts a ‘negative’ list approach, in which member economies are open to foreign service providers unless they appear on the list. Eight members (Cambodia, the PRC, the Lao PDR, Myanmar, New Zealand, the Philippines, Thailand, and Vietnam) have chosen to use a ‘positive’ list at first but must switch to a ‘negative’ list within six years of the RCEP Agreement’s implementation.

Investment

The agreement constitutes provisions on protection to create an enabling investment environment in the region. It contains a most-favoured-nation clause as well as commitments to prohibit performance requirements that go beyond the WTO Trade-Related Investment Measures Agreement’s multilateral obligations. With standstill and ratchet mechanisms, investment obligations using the ‘negative’ list method are included. Dealing with investor aftercare issues, such as guidance in attempting to resolve complaints and grievances related to the investments made, strengthens investment facilitation. Although the RCEP does not include an Investor-State Dispute Settlement (ISDS) mechanism, it does include an agenda that allows members to propose one if they all agree. The agreement does, however, include a long and detailed section and a separate annexe that outline the expropriation rules.

E-commerce

The agreement encourages member economies to use electronic means to improve trade administration and procedures. It requires them to establish or uphold a legal framework that promotes the development of e-commerce, which includes data privacy and consumer protection. Members of the RCEP have agreed to keep the practice of not levying customs duties on electronic transmissions. The RCEP includes cross-border data flow obligations, which are the first of their kind for several large and evolving members. These obligations will not pertain to financial services, and exceptions will be made for national defence or other public policy reasons.

Sanitary and phytosanitary measures

The WTO Agreement on the Application of Sanitary and Phytosanitary Measures is upheld and improved by this agreement. It accomplishes this by incorporating relevant global standards, guidelines, and suggestions on equivocation, adaptation to regional conditions (including pest-free or disease-free areas and low pest or disease prevalence areas), risk analysis, audit, certification, and import checks, and emergency measures. In practice, RCEP improves the outcomes of existing ASEAN FTAs in a variety of trade-facilitating ways, including equivalence recognition, emergency measures, and transparency.

Standards, technical regulations, and conformity assessment procedures

The RCEP focuses on improving not only the execution of the WTO Agreement on Technical Barriers to Trade, but also mutual understanding of standards, regulatory frameworks, and guidelines and procedures between members, as well as the exchange of information and cooperation in this area. The agreement includes provisions that promote greater combination elements and good regulatory practice by increasing transparency in the development of technical barriers to trade measures. These provisions are expected to reduce the negative effects of regulations on trade by making information on exporting requirements more accessible, lowering transaction costs for businesses, and institutionalising the process.

Competition

In addition, the RCEP aims to create international competitive markets that boost business efficiency and consumer welfare. The agreement contains provisions for the adoption or maintenance of competition laws, as well as independent competition authorities to impose antitrust laws. It also protects consumer welfare by requiring that RCEP members’ domestic laws and regulations prohibit misleading practices, such as false or misleading trade descriptions, and increase consumer awareness of, and access to, consumer redress mechanisms. The agreement also ensures that competition laws are transparent and that they are implemented in accordance with the law. It also creates a framework to encourage cooperation among the competition authorities of its members.

Government procurement

There are no provisions on government procurement in the existing ASEAN Plus One FTAs. This makes the Regional Comprehensive Economic Partnership (RCEP) a giant step forward for the region, as it is the first time that major ASEAN economies like Indonesia, the Philippines, and Thailand have made meaningful government procurement commitments. The agreement emphasises the critical role of government procurement in regional economic integration, job creation, and growth. The Government Procurement chapter encourages transparency in procurement processes by requiring members to publish government procurement laws and regulations. It also includes provisions for cooperation aimed at improving mutual understanding of RCEP members’ respective government procurement laws, regulations, and procedures, as well as a mechanism to facilitate consultation and information exchange on these topics.

Intellectual Property

Members of the RCEP come from a wide range of developed, developing, and least-developed economies, with a wider range of intellectual property resources. The agreement’s equitable and inclusive approach to intellectual property rights coverage, protection, and enforcement is a key feature. The importance of the RCEP is highlighted by the emphasis it places on fair use, transfer of technology, and socioeconomic welfare in the international community, as well as safeguards to protect rights holders’ interests.

There are also specific provisions in the agreement for establishing an international framework for the protection of biological resources, traditional knowledge, and folklore. This significant step demonstrates the region’s contribution to indigenous peoples’ rights and interests in genetic resources and traditional knowledge. It’s also a significant step forward in international intellectual property protection for addressing the key concerns of developing and least-developed economies, which have plenty of genetic resources and traditional knowledge but lack commercial and industrial resources like patent rights on pharmaceutical drugs and industrial designs, trademarks on renowned brand logos, and copyrights on software.

Small and medium-sized enterprises

Small and medium-sized businesses, including micro-businesses, play an important role in promoting economic growth, employment, and innovation, according to the RCEP. Its goal is to ensure that they benefit from and take advantage of the opportunities presented by the agreement. To that end, the chapter on small and medium-sized enterprises requires RCEP members to share comprehensive information about RCEP online, including the full text of the RCEP Agreement as well as other RCEP-related information pertaining to small and medium-sized enterprises in the region. It also aims to improve cooperation in areas such as e-commerce, intellectual property rights, market access, and innovation.

Implications of the RCEP Agreement on businesses

Given that the 16 RCEP participating countries account for nearly half of the world’s population, 30% of global GDP, and over a quarter of global exports, RCEP has the potential to deliver new opportunities for businesses in the East Asia region. The RCEP will provide a framework aimed at lowering trade barriers and ensuring enhanced market access for products and services for businesses in the region, through:

Recognition of ASEAN’s centrality in the emerging regional economic architecture, as well as ASEAN’s FTA partners’ aspirations in improving market integration and bolstering economic cooperation among participating nations;
Facilitation of trade and investment, as well as increased transparency in trade and investment relations among participating countries, and facilitation of SMEs’ participation in global and regional supply chains; and
Expand and strengthen ASEAN’s economic ties with its FTA partners.

The RCEP recognises the importance of inclusivity, particularly for SMEs to benefit from the agreement and deal with the challenges that come with globalisation and trade liberalisation. SMEs (including micro-enterprises) account for more than 90% of all business establishments in all RCEP participating countries and are critical to each country’s endogenous economic development. RCEP is also committed to implementing fair regional economic policies that benefit both ASEAN and its FTA partners.

Importance and advantages of the Regional Comprehensive Economic Partnership (RCEP)

The agreement strengthens the framework for the Global Value Chain (GVC). GVCs are reliant on a number of factors, including tariffs, investment, services, and intellectual property. RCEP covers everything. GVC performance will be a point of reference in the evolution of the agreement if members have a strong understanding of the GVC world. The investment provisions of the agreement are all based on a negative list approach and go beyond existing ASEAN commitments, such as removing all requirements for using local content. The agreement also creates a common set of rules of origin, including the accumulation of value throughout stages of production in different nations and a geographical value of content of 40%, which is not overly high, especially with regard to the agreement.

The domestic policy change, including regulatory reform, will be aided by the RCEP’s economic cooperation provisions. Reform necessitates effort and the establishment of institutions, and the RCEP includes a chapter on economic cooperation to encourage both. For example, transitioning to negative list commitments, which list those that really matter while leaving out those that don’t, will be difficult for members, but there is room in the agreement’s economic cooperation provisions to encourage that effort. Economic cooperation must include dialogue that supports work on domestic regulation in order to be effective.

From the perspective of the globalisation debate, the agreement is substantially significant. This group of countries shows their commitment to economic integration. More specifically, the agreement fills a gap in the regional trade system by establishing a previously unattainable agreement between Japan, South Korea, and China. These three largest economies are expected to see the most tariff cutbacks. As a result, the RCEP is expected to boost trade between these three country pairs the most. Although China and South Korea have a trade agreement, it has yet to result in significant tariff reductions. Instead, tariffs are still between 8% and 9%, and non-tariff barriers still exist. Furthermore, no trade agreement between Japan and China or Japan and South Korea has been reached. Because these three economies are the most important in Asia, significant trade-creating effects are likely.

Most other modern agreements are more ambitious than the RCEP. While the EU-Canada Comprehensive Economic and Trade Agreement (CETA), which is widely regarded as one of the most holistic approaches in the world, eliminated 99% of all tariffs, the RCEP is only expected to reduce tariffs by up to 90%. Exceptions are expected, particularly in the agricultural sector, which is barely mentioned in the agreement. Full tariff elimination in other areas, such as vehicles, could take up to 20 years.

RCEP, like most modern trade agreements, goes beyond tariff elimination to regulate a variety of other issues. Professional qualifications could be mutually recognised by the negotiating parties. However, no agreement on environmental standards or uniform labour standards could be reached. Members of the RCEP also missed out on the chance to regulate future issues such as e-commerce. Regular meetings to discuss the extension of the negotiated agreement are planned, so it is anticipated that RCEP will bring these subject matters back on the agenda.

Limitations of the RCEP Agreement

The RCEP has limitations. It lacks environmental and worker protections and the tariff cuts it seeks aren’t as significant as those demanded by the other major Asia-Pacific trade agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which includes seven RCEP members. As a result, even for participating countries, it will not bring significant economic benefits.
The real significance of the RCEP is China’s participation. It is the country’s first participation in a regional multilateral trade agreement. Furthermore, as a major consumer, China is critical to the strengthening of regional value chains, allowing RCEP members to reap the benefits of integration.
However, India, a major regional economy, refused to join, citing concerns about increased trade deficits with China and the inability to protect vulnerable industries. Because of the size of its market and its position in supply networks, India’s inclusion would substantially increase the deal’s economic benefits.
The RCEP, with or without India, will not revive multilateralism. On the contrary, despite reflecting a desire for trade liberalisation, the proliferation of regional trade blocs may weaken the multilateral trading system because non-signatories are inevitably excluded. This should be a serious concern for Asian economies, which have built their prosperity by participating in global markets governed by common trade rules. Nonetheless, they are unlikely to be able to revive the multilateral trading system on their own. The rest of the world must pitch in, with the United States of America (US) leading the charge.

RCEP and India : why did India decide against signing the agreement

India withdrew from the China-backed trade agreement after talks failed to address its main concerns. These included threats of circumvention of origin rules due to tariff differentials, as well as the inclusion of a fair agreement to address trade deficits and service opening. The agreement would have reduced import duties on 80 percent to 90 percent of goods and made service and investment rules easier. Some in Indian industry feared that lower customs duties would result in a flood of imports, particularly from China, with which the country has a huge trade deficit. The trade deficit between India and other RCEP countries was also increasing.

India was unable to implement countermeasures such as an automatic tariff hike when product imports exceeded a certain threshold. It also wanted MFN obligations removed from the investment chapter of the RCEP because it didn’t want to hand out the benefits it was giving to strategic allies or for geopolitical reasons to countries with which it had border disputes. India believed the agreement would compel it to extend to all RCEP members benefits granted to other countries in sensitive sectors such as defence.

The RCEP also lacked clarity on market access issues in China and non-tariff barriers faced by Indian businesses.

How does China benefit from the Regional Comprehensive Economic Partnership (RCEP)

Concerned that China would write Asia’s trading rules in the twenty-first century, US President Barack Obama initiated the formation of the rival Trans-Pacific Partnership (TPP), which is even larger and more comprehensive than the RCEP. TPP originally included 12 Asian and Latin American countries, but not China. However, shortly after taking office in early 2017, US President Donald Trump withdrew from the TPP.

The agreement was renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership by the remaining TPP members. All 11 remaining nations’ trade ministers have signed it, and seven have ratified it. However, Trump’s withdrawal significantly reduced its impact and US influence, and the completion of RCEP negotiations gives China an advantage in determining Asia-Pacific trade terms.

Conclusion

The RCEP is a comprehensive agreement to ease trade tariffs charged on the movement of goods across member states. But like every international agreement, it also has its pros and cons. India’s decision to not join the RCEP will affect its future trade relations with Japan and Australia which is why Japan is trying to get India back into the deal. It is open to India to become a signatory to the RCEP whenever it wishes to do so.

The 16 countries negotiating the RCEP together account for a third of global GDP and nearly half of the world’s population, with China and India’s combined GDPs accounting for more than half of that. By 2050, the RCEP could account for half of the estimated $0.5 quadrillion global economy. The RCEP recognises the importance of inclusivity, particularly for SMEs to benefit from the agreement and deal with the challenges that come with globalisation and trade liberalisation.

Some FAQs related to the Regional Comprehensive Economic Partnership

What is the purpose of RCEP?

The RCEP Agreement’s purpose and objectives are to create a modern, comprehensive, high-quality, and mutually beneficial economic partnership that will facilitate regional trade and investment growth while also contributing to global economic growth and development.

What are the key elements of the RCEP?

The RCEP contains provisions related to the following key aspects:

Trade in goods
Trade facilitation
Rules of Origin trade in services
Investment
E-commerce
Sanitary and phytosanitary measures
Standards, technical regulations and conformity assessment procedures
Competition
Government procurement
Intellectual Property
Small and medium-sized enterprises

What is the benefit of the RCEP?

The biggest benefit that will be reaped out of the Regional Comprehensive Economic Partnership is that it eliminates tariffs on nearly 90% of traded goods and harmonises many customs, investment, intellectual property, and e-commerce rules. The RCEP will unfetter the development of regional value chains by establishing a single set of trade rules and simplifying complex issues like rules of origin.

References

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