Publications & Events
Client Alert
Alert

15 Asia-Pacific Countries Sign World’s Largest FTA; A Closer Look at RCEP’s Key Outcomes and Implications

After eight years of negotiations, Economic Ministers from 15 Asia-Pacific countries signed the Regional Comprehensive Economic Partnership (RCEP) on November 15, 2020 during a virtual signing ceremony on the sidelines of the 37th ASEAN Summit hosted by Vietnam. The RCEP consolidates and builds upon existing ASEAN+1 free trade agreements (FTAs)with five regional trading partners ("dialogue partners") and aims to establish a single, harmonized, predictable set of regional trade rules that incentivize businesses to locate their supply chains within the covered Asia-Pacific region.

Comprised of 20 chapters,2 the RCEP contains rules governing such topics as market access for goods and services, rules of origin, standards, temporary movement of natural persons, investment, e-commerce, competition, government procurement, and intellectual property, albeit with varying degrees of ambition and substance. Notably absent from the RCEP are chapters that address industrial subsidies, state-owned enterprises, labor rights, and the environment.

The RCEP's 15 members include a diverse mix of high-income economies (Australia, Brunei, Japan, Korea, New Zealand, and Singapore), upper middle-income economies (Indonesia, Malaysia and Thailand), lower middle-income economies (Cambodia, Laos, Myanmar, the Philippines, and Vietnam), and importantly, the second largest economy in the world (China). India was an original participating economy, but withdrew its membership in November 2019 over market access concerns, primarily with China.

Once implemented, the RCEP will be the world's largest trade agreement, covering approximately 30% of global GDP and one-third of the world's population. It will be larger than other major trading blocs, including the European Union, the United States-Mexico-Canada Agreement (USMCA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

 

Key RCEP outcomes

  • Trade in goods: According to Singapore's Ministry of Trade and Industry (MTI), market access for goods covers tariff elimination of at least 92% of goods traded among RCEP parties within a 20-year timeframe.

    Notably, the RCEP does not deliver significant new market access for goods in terms of tariff reduction and elimination as most RCEP parties already have existing FTAs in force with each other through a combination of bilateral and plurilateral agreements, including the ASEAN+1 FTAs and the CPTPP. Only China and Japan, Korea and Japan, and Japan and New Zealand do not have existing FTAs implemented between each other. Still, many of the tariff outcomes under the RCEP are improvements over the status quo under existing FTAs.

    Certain RCEP members including Australia, Brunei, Cambodia, Malaysia, Myanmar, New Zealand, Singapore, and Thailand have just one tariff schedule that applies to all other members. In other words, exports into these countries from any RCEP member will receive the same tariff with some minor exceptions. On the other hand, the remaining countries have some variations in their schedules. For example, Indonesia, Vietnam, China, and Korea have one schedule for ASEAN and separate schedules for the dialogue partners. Meanwhile, Japan has just one tariff schedule, but there are variations possible within the schedule shown in the "remarks" column. While not ideal, this type of flexibility in scheduling of tariff commitments has been a common feature in past ASEAN+1 FTAs. Nevertheless, traders will need to find the associated tariff line and see which rate may apply to which countries.

  • Rules of origin: The RCEP will provide traders with a single set of rules and procedures for preferential tariff treatment to access tariff preferences for trade with other RCEP parties, which should reduce complexity and compliance costs for participating traders who previously had to navigate origin rules under disparate ASEAN+1 agreements or bilateral FTAs. The RCEP adopts a product-specific-rules of origin (PSR) approach, where the criteria by which to determine if a product qualifies for preferential tariff treatment will differ from product to product. Under the PSRs, most products adopt co-equal rules, which provide some flexibility for companies to utilize either a change in tariff classification (CTC) or a regional value of content (RVC) rule of 40% to meet the rules of origin requirement. Many of the PSRs are already familiar to companies trading in the region under the ASEAN+1 FTAs; however, it remains to be seen how companies will adapt to these PSRs in practice. In addition, regional cumulation rules are permitted to facilitate inputs from the most efficient and cost-effective regional source, whereas third-party invoicing and self-declaration by approved exporters and producers will also be available subject to an implementation period.
  • Customs procedures and trade facilitation: The RCEP provides for simplified customs procedures and enhanced trade facilitation provisions to expedite clearance of goods, including the release of express consignments and perishable goods within six hours of arrival. Certificate of origin arrangements include options for use of self-declaration, while proof of origin can be accepted in electronic format.
  • Trade in services: The RCEP establishes rules for the supply of services including obligations to provide access to foreign service suppliers (market access), to treat local and foreign suppliers equally (national treatment), and to treat foreign suppliers at least as well as suppliers of any other non-RCEP country (most-favored nation (MFN) treatment). There is, however, some complexity in the scheduling of specific commitments for services (similar to the trade in goods tariff schedules mentioned above). For instance, Cambodia, China, Laos, Myanmar, New Zealand, the Philippines, Thailand, and Vietnam adopt a positive list approach to the scheduling of specific services commitments. However, these countries must transition to the negative list approach, where market access is open to foreign services suppliers, unless exceptions have been applied, within six years after entry into force of the RCEP. In contrast, Australia, Brunei, Indonesia, Japan, Korea, Malaysia, and Singapore adopt the negative list approach for services liberalization immediately.

    At least 65% of services sectors will be fully open with increased foreign shareholding limits including professional services, telecommunications, financial services, computer and related services, distribution, and logistics services. The RCEP will also include a "ratchet-mechanism" whereby future unilateral liberalization for selected sectors is locked in, allowing for the reduction of barriers to services and investment trade over time.

  • Investment: The RCEP's investment provisions cover core investment protections including rules requiring payment of compensation where an investment is expropriated, fair and equitable treatment, compensation for losses due to conflict and civil strife, and free transfer of investment-related capital. The RCEP also includes commitments to prohibit performance requirements on investors as conditions for entering, expanding or operating in RCEP parties. However, the RCEP does not provide for investor-state dispute settlement (ISDS) but includes a built-in work program, which will commence no later than two years after the Agreement's entry into force. This work program must be concluded within the following three years to consider whether to amend RCEP to include ISDS. Any change would require the consent of all RCEP parties.
  • Electronic commerce: The RCEP covers commitments on cross border data flows and provides for a more conducive digital trade environment. It also limits the scope for government to impose restrictions including requirements to localize data. There are also provisions concerning the digitalization of trade documentation and the use of electronic signatures and electronic authentication to facilitate cross-border trade. These provisions expand existing rules under the ASEAN-Australia-New Zealand FTA (AANZFTA) as well as other bilateral FTAs. The inclusion of these e-commerce obligations will modernize the trading relationship among RCEP parties, particularly those not party to the CPTPP.
  • Intellectual property (IP): The RCEP will raise standards of IP protection and enforcement including non-traditional trademarks such as sound marks and a wide range of industrial designs. RCEP parties, which have not done so already, commit to accede to IP treaties that will enable companies to file a single patent or trademark application instead of having to file individual applications in each country. RCEP's outcomes on geographical indications (GIs) take the approach secured under the CPTPP whereby all parties must adopt or maintain transparency obligations and due process with respect to a regime provided for the protection of GIs. This includes considering whether a term is a commonly used descriptive term in that market, and providing procedures to oppose and cancel GIs.
  • Government procurement: The RCEP is the first trade agreement where a number of individual parties as well as ASEAN as a whole have included rules on government procurement. The parties commit to publish laws, regulations and procedures regarding government procurement, while cooperation provisions set out a mechanism to facilitate consultation and exchange of information on government procurement matters. While the CPTPP contains more ambitious government procurement commitments, the RCEP marks the first time that major ASEAN countries such as Indonesia, Thailand, and the Philippines commit to improved transparency and cooperation on central government procurement.

 

India's withdrawal

Originally, 16 RCEP member countries, including India, launched the first round of RCEP negotiations in November 2012 and announced the substantive conclusion of negotiations in November 2019 after 31 negotiating rounds. India announced at the final negotiating round that it would abandon the RCEP until its outstanding concerns are resolved. A key area of contention was India's unwillingness to agree to the same level of market access commitments, fearing that vulnerable sectors in India would suffer and find themselves unable to compete with more advanced and efficient producers in other RCEP member countries like China, Australia and New Zealand. India also raised concern over the threat of circumvention of rules of origin due to tariff differentials between RCEP parties, asserting that this could lead to a serious influx of agricultural and industrial imports and compound India's already large and growing trade deficit with China.

RCEP members continue to encourage India to return to the agreement. During the November 2020 meetings, the other 15 parties agreed on special fast-track accession provisions3 whereby (i) India can rejoin the RCEP from the date of entry into force as provided in Article 20.9 (Accession); (ii) India may submit a request in writing of its intention to accede to the RCEP any time after the signing of the agreement; and (iii) India may participate in RCEP meetings as an observer and in economic activities undertaken by the RCEP parties. Despite these accommodative efforts, many contend that India is unlikely to rejoin the RCEP in the near term.

 

Entry into force

As next steps, all RCEP parties will begin their respective domestic procedures required for implementation. The agreement will enter into force 60 days after six ASEAN member states and three ASEAN FTA dialogue partners have submitted their instruments of ratification to the Secretary-General of ASEAN, who acts as the Depositary for the agreement. For ASEAN countries, a source within Thailand's Ministry of Commerce (MOC) indicated that it usually takes up to 6-12 months for six member countries to complete their ratification procedures for each ASEAN FTA. For ASEAN's dialogue partners, it will likely take at least six months for three dialogue partners to complete their ratification procedures. With this in mind, the RCEP is likely to enter into force in late 2021 or early 2022 although it may take businesses more time to understand how to utilize the agreement and take advantage of its benefits.

The RCEP will be open for accession by other new members 18 months after its entry into force although the procedures for accession have yet to be adopted by the RCEP Joint Committee. A likely and relatively uncontroversial candidate is Hong Kong, which implemented an FTA with ASEAN in 2019.

 

Implications

The signing of the RCEP represents a positive step forward for free-trade and multilateralism in the Asia-Pacific region, particularly given the uncertainty and economic strain caused by the COVID-19 pandemic and the retreat to protectionism by many countries. While less ambitious than the CPTPP, the RCEP lays the foundation for deeper cooperation in the future and is notable as it brings together countries that have yet to conclude trade agreements with each other, such as Japan and China.

Although the RCEP was originally an ASEAN-led initiative, many now regard it as a China-backed alternative to the CPTPP, which excludes China but includes various Asia Pacific countries.4 The United States is notably absent from both agreements, which over time are likely to strengthen intra-Asian integration around China (in the case of RCEP) and Japan (in the case of the CPTPP). Although never a participant in the RCEP negotiations, the United States withdrew from the CPTPP's former iteration, the Trans-Pacific Partnership (TPP), in January 2017. With the US presidential transition now underway, it remains uncertain how quickly President-elect Joe Biden can develop an Asia trade policy approach to rebalance the economic and strategic interests of the United States, including whether the United States should seek to renegotiate the terms of the CPTPP or join it outright. Such a decision will not happen quickly, particularly owing to staffing challenges at key government posts, a potentially divided congress, and most importantly, the impending expiry of Trade Promotion Authority (TPA) – also known as fast-track authority whereby the president of the United States can negotiate trade agreements that Congress can approve or deny, but not amend – on July 1, 2021. Thus, US companies may decide to increase their investments in production facilities or relocate more of their operations within RCEP/CPTPP countries to benefit from the agreements' preferences and participate in the Asia-Pacific market, counter to current US policy to re-shore manufacturing activity and boost employment in the United States.

In the decade to come, the RCEP and the CPTPP are set to boost intra-Asian trade, influence the direction of global value chains, and determine the future trajectory of the Asia-Pacific's economic architecture. In the case of the RCEP, while the economic benefits are more modest and may take years to materialize, the symbolic messaging inherent in RCEP, being the world's largest trade agreement.

 

Click here for the RCEP legal text and annexes

 

1 These ASEAN+1 FTAs include the: (i) ASEAN-Australia-New Zealand FTA; (ii) ASEAN-China FTA; (iii) ASEAN-Japan Closer Economic Partnership; and (iv) ASEAN-Korea FTA.
2  The 20 chapters are (i) initial provisions and general definitions; (ii) trade in goods; (iii) rules of origin; (iv)  customs procedures and trade facilitation; (v) sanitary and phytosanitary measures; (vi) standards, technical regulations, and conformity assessment procedures; (vii)  trade remedies; (viii) trade in services; (ix) temporary movement of natural persons; (x) investment; (xi) intellectual property; (xii) electronic commerce; (xiii) competition; (xiv) small and medium enterprises; (xv) economic and technical cooperation; (xvi) government procurement; (xvii) general provisions and exceptions; (xviii) institutional provisions; (xix) dispute settlement; and (xx) final provisions.  There are also a number of chapter specific annexes and schedules.
3 See the Minister’s Declaration on India’s Participation in the RCEP here.
4 CPTPP members include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.  The CPTPP is not yet in force for Brunei, Chile, Malaysia, and Peru.

 

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2020 White & Case LLP