RCEP: The Largest Free Trade Agreement in the World still relatively unheard of in Italy
Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at: https://www.panorama.it/economia/rcep-accordo-libero-scambio-cina
Overview
Over the past years it seems that the global center of trade is increasingly moving from Western countries to the East，a crystal clear example of which is the Regional Comprehensive Economic Partnership (RCEP) the largest free trade agreement in the history signed by fifteen countries (ten ASEAN countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam; and their five partners: Australia, China, Japan, New Zealand, and South Korea) on the 15th of November 2020. Notable is the first time that the tree main economies in the Asia Pacific areas such as China, Japan and South Korea are signatories of the same agreement.
The RCEP covers a market of 2.3 billion people (effectively a third of the world’s population), USD 29.7 trillion of global output, amounting to 30% of global GDP and it is envisioned to have a swift impact on Asia-Pacific trade, further reinforcing economic inter-dependence of the region.
The RCEP became effective since the 1st of January 2022 and its main goals are the economic integration of the region and the consolidation of the global supply chain. In addition, the RCEP is seen as a major asset in terms of post-pandemic recovery within the region as analysts have projected that by the year 2030, the agreement could increase global national income by USD 186 Billion and add 0.2% to the economy of its member states through improved trade within the region. In effect, the RCEP has created the World’s Largest Trading Bloc, larger than both the United States and the European Union.
Notable omissions from the member countries are the U.S. and India, with the agreement seeming to signal the former’s lagging influence within the region and the latter exiting discussions due to “fundamental issues” during the discussion stages which were left unaddressed.
With that being said, the recent visit of Speaker of the United States House of Representatives, Mrs. Nancy Pelosi, to Taiwan, created some unnecessary tension within the region which is already highly politicized. Of particular concern was the fact that the trip was held shortly before the 20th National Congress of the Chinese Communist Party estimated to be held the upcoming November 2022, a congress held every five years in which major leadership announcements are made. The visit has been ultimately deemed to not have been beneficial for the business environment in Asia, unfortunately ensuring that geopolitics remains very much on the minds of company executives, a factor that is already pushing businesses to reevaluate how they structure their supply chains and business operations.
Although the agreement does not involve the EU, it may create opportunities for European firms and have an effect on EU & Asia moving forward, as it expands the trade connection with RCEP signatories.
Content of the Agreement
The content of the agreement seeks to reduce tariffs incrementally over a 20-year period, streamline customs procedures between the member states as well as replacing a number of bi-lateral agreements within the bloc with a single unified set of rules for signatories.
The main highlights of its contents include:
- National treatment to the goods of the other Parties and the reduction or elimination of customs duties within the trading bloc.
- Cooperation provisions will provide more transparency in the procurement process to enhance mutual understanding of RCEP parties’ respective government procurement laws, regulations and procedures, and a mechanism to facilitate consultation and exchange of information on such matters.
-Parties to the agreement shall implement competition laws and maintain independent competent authorities to enforce such laws. The RCEP will set the legal framework to ensure that such competition laws are transparent and follow due process.
- Parties to the agreement are posed with the task of adopting or maintaining a legal framework which creates a favorable environment for e-commerce development.
- Unified Rules of Origin Between RCEP Parties
Even if the RCEP does not cover labor or environmental standards, nor provisions on services and investment, all in all, we tend to believe that businesses in the region will see a more stable and predictable business environment and a more level playing field.
RCEP & China
The RCEP demonstrates China’s desire to further integrate into the global economy, with countries in the East Asian region now having the incentive to cooperate and develop together.
The trade volume between China and RECP members during the first 11 months of 2021 was around 10.9 trillion RMB (equal to USD 1.6 Trillion), or 31% of the foreign trade in China, as stated by China’s General Administration of Customs, therefore the potential benefits for China of lifting trade barriers are immense in scale.
Since the RCEP has come into force this year, China has encouraged ports to start expatiating procedures for any RECP goods so that customs clearance is down to around 6 hours, as businesses are receiving surges of new orders because of the reduced costs for RCEP members.
The East Asian economy is now becoming fully integrated with RCEP at the helm, and businesses are expected to see a boost in investment and an improved economic environment.
Nevertheless, China is now the only country in the world which still applies a Covid-19 zero tolerance policy which has created a significant slowdown of the national economy in Q2 2022 and is expected to have even a bigger impact throughout the rest of the year. Therefore, to have a clearer picture of the positive effects of the RCEP on China trade we believe that we shall wait until the Covid-19 zero tolerance policy is lifted.
RCEP & European Companies
First of all we shall mention that the EU has many Free Trade Agreements (FTAs) with other RCEP countries (e.g., The EU-Vietnam Free Trade Agreement, The EU-Japan Free Trade Agreement) and also has pending agreements with other RCEP members Australia, Indonesia, New Zealand, and The Philippines. Therefore, for EU companies, the RCEP region is rife with interest amongst its signatories.
We think that European companies can benefit from a reduction in costs under the harmonized Rule of Origin and reduced tariffs among RCEP countries, especially for European companies within industries with an already well-established supply chain in Asia, such as the automotive, electronic machinery, and textile sectors.
The RCEP is primed to nudge some European and other foreign companies towards integrating their operations into a broader regional strategy, with 23% of respondents to the annual Business Confidence Survey conducted by the European Chamber of Commerce in China indicating that member companies expect to see increased opportunities in integrating their China operations into a broader regional strategy. Out of those aforementioned member companies that expect the RCEP to have a positive impact on their business, 67% expect an uptick in revenue due to increased exports from China to other RCEP countries, and 39% anticipate cost reductions as a result of cheaper imports or diversified supply chains. This is especially good news for companies which are well positioned to transform their operations from one RCEP member country to a larger, regional ecosystem.
On the other side, EU manufactured goods could have an increased risk of losing competitiveness in sectors with well-established intra-Asian supply chains in the RCEP market, especially with emerging manufacturing hubs in the region (e.g., Thailand, Vietnam).
Conclusion
As the RCEP creates a unified system of rules in the region, foreign investors will have access to a whole region when they access a single country, with broader markets, lower operating costs and easier outward investment.
The RCEP is however much less ambitious compared to other free trade agreements, for example, the one between Asian countries and the European Union, since tariff barriers will be eliminated in a shorter time than the RCEP, lacking labour rights, environmental standards and does not contain an investor-state dispute settlement, although a commendable acheivement none the less when considering the large differences in the economic systems, development levels, scales and industrial structures of its member countries.
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Another noteworthy aspect is the emphasis on SMEs in the RCEP compared to many EU-Asia agreements, in which the RCEP introduces a platform to provide information on RCEP related content that will be accessible to SMEs, with paperwork also reduced for SMEs to promote better access to regional supply chains that are embedded in a larger market. There remains a potential opportunity for the EU to influence the creation and diffusion of standards in the region (market access questions related to the liberalization of services and public procurement approaches that are only partly covered in the RCEP.)
Therefore from both an institutional and commercial sense, the EU Commission and EU companies shall proactively act within the RCEP Asia Pacific area, which has traditionally been an important hub for manufacturing and trade and now emerging as a focal point for new technologies and critical electronic components such as semiconductors.
[ACD-D&PLC1]Conclude in a positive note mentioning that the EU Commision and as well the Eu companies shall proactively act in the Asia Pacific area important hub for technologies anc critical component such as blue chip and rare lands.
