Why RCEP Is a Big Deal

Why RCEP Is a Big Deal
Photo Credit: AP / TPG Images

What you need to know

The RCEP trade deal, signed on November 15, shows deep commitments to trade liberalization and regional economic integration, but challenges to implement it lie ahead.

By Eduardo Pedrosa

The Regional Comprehensive Economic Partnership (RCEP) trade deal signed on November 15 is important to both its members and globally. The agreement is significant in its membership and coverage, and it goes further than the ASEAN+1 agreements it was built on in its coverage and its deeper commitments to liberalize trade.

The agreement is also significant in the context of the debate about globalization. This group of economies demonstrate their commitment to continuing economic integration.

More specifically, the deal also fills a void in the regional trade system, providing an arrangement between Japan, South Korea, and China in particular that did not exist before.

RCEP has five important features.

The agreement reinforces the global value chain (GVC) framework. GVCs depend on a bundle of conditions — not just tariffs, but investment, services, and intellectual property. All of these are covered in RCEP. With a strong understanding of the GVC world among members, GVC performance will be a reference point in the evolution of the agreement. The deal’s investment provisions are all based on a negative list approach and exceed existing ASEAN commitments, for example, all removing requirements related to the use of local content. The agreement also establishes a common set of rules of origin, including the accumulation of value across stages of production in different countries and a regional value of content of 40 percent, which is not overly high, especially in the context of such a large member agreement.

Moving to a negative list on commitments is significant for services. This will promote reform, as it draws attention to a list of targets that need dealing with and opens new areas for business. Also important is the attention paid to domestic regulation and signatories’ commitments to accept each other’s arrangements.

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Photo Credit: AP / TPG Images
Leaders and trade ministers of 15 RCEP countries pose for a virtual group photo in Hanoi, Vietnam, Nov. 15, 2020.

The economic cooperation provisions in RCEP will help promote domestic policy change, including regulatory reform. Reform requires effort and institution building, and RCEP includes a chapter on economic cooperation to promote both. For instance, it will be challenging for members to transition to negative list commitments, listing those which really matter and leaving out those which do not, and there is scope within the economic cooperation arrangements under the agreement to support that effort. To be effective, economic cooperation must include dialogue that supports work on domestic regulation.

The deal’s chapter on e-commerce has similar coverage to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). It therefore also offers the scope for exemptions like the CPTPP and shares its issues of interpretation. While it covers less ground than some smaller regional agreements, the RCEP outcome of consensus among this large group of economies, including developing economies, is significant in the context of the ongoing WTO discussions on e-commerce.

Like many ASEAN-led agreements, RCEP includes a chapter on institutional provisions that promote its evolution. This chapter creates the expectation of regular ministerial meetings and establishes a joint committee of senior officials and subsidiary committees on various topics. The text also mandates officials to set up a secretariat for that purpose and for technical support.

An RCEP secretariat will provide scope for competition and cooperation in an already dense regional institutional environment, with APEC surrounding it and ASEAN within. The ASEAN Secretariat has supported RCEP negotiations but the nature of its future relationship — and other regional groupings’ relationships — with the RCEP secretariat is still to be specified. But the scope for a major role is clear.

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Photo Credit:Reuters / TPG Images
A view shows virtual APEC Economic Leaders Meeting 2020, in Kuala Lumpur, Malaysia, November 20, 2020.

An RCEP secretariat faces three immediate challenges. The first is implementation. The second is utilization, ensuring that the agreement leads to more inclusive trade in the region and that all businesses, big and small, can benefit from it. The third is awareness — businesses are faced with a plethora of rules when they trade across borders, and how they benefit from RCEP will take some explaining.

RCEP has some limitations, such as multiple tariff schedules (although a subset of members has a common schedule), some long implementation periods, and a lack of coverage of state-owned enterprises.

The agreement also has a couple of big knock-on effects. They can be described as “adding in” and “adding up.”

The former refers to new members. India is now out of the deal, but can accede without delay. This will become more likely as implementation of the agreement strengthens integration among members, including in areas such as services, e-commerce and generic drugs, in which India could have been active. Access to regional value chains may also be less than otherwise. Current members could support India by engaging with it on specific projects, as occurs with prospective members to other first and second-track bodies in the region.

Other economies can accede after 18 months. While membership of RCEP was driven by ASEAN’s central role — parties had to have an existing agreement with ASEAN — the accession text follows the best practices of open regionalism. Any party can join so long as they accept the terms of the agreement and existing members agree.

The agreement has clearly had an impact in Washington, where it is noted that “RCEP is another reminder that Asian trading partners have developed a confidence about working together without the United States.” This has prompted active consideration of catch-up options for the United States.

On “adding up,” the agreement marks an important milestone for the Asia-Pacific region. RCEP has been identified, in conjunction with the CPTPP, as a pathway towards broader regional integration. Bringing these pathways together would create enormous potential for trade. The question of how to do that now is much less hypothetical.

The News Lens has been authorized to republish this article from East Asia Forum. East Asia Forum is a platform for analysis and research on politics, economics, business, law, security, international relations and society relevant to public policy, centered on the Asia Pacific region.

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