ONE third of global GDP: that’s the current collective income of all signatory countries to the Regional Comprehensive Economic Partnership (RCEP). Encompassing all states in ASEAN, as well as Australia,
China, Japan, New Zealand, and South Korea, RCEP is the biggest trade deal ever signed, with the bloc’s population amounting to 2.3 billion people.
RCEP discussions began back in 2012, and after eight years and multiple rounds of negotiations, the agreement was finally signed on November 15, 2020. It is expected to be ratified and to then come into force in late 2021.
In so-called “ordinary times”, this deal would already be incredibly important; however, given the upheaval caused by the coronavirus pandemic, the RCEP takes on a new significance as a regional, even global, growth stimulator for a world looking towards recovery.
It represents a marked reduction in barriers to trade across the region and businesses of all sizes across virtually all of Asia are likely to see their opportunities expand. But the greatest gains will go to those who take the time to understand what the deal entails and what it means for their business.
So, what’s the deal?
Prior to the signing of the RCEP, there was already a patchwork of trade agreements in place among ASEAN and several countries in Asia Pacific, and although RCEP doesn’t replace all of them, it does unify a number of them into a single agreement, creating a much more uniform approach to conducting trade in the region, and doing away with what’s often been labelled the ‘noodle bowl effect’ of having multiple, sometimes overlapping agreements.
One important aspect of the RCEP is the reduction of tariffs across at least 92 per cent of all products, some as soon as the agreement comes into force, and some over the course of a number of years. This will substantially reduce the cost of moving many categories of goods across the bloc.
But arguably the most significant benefit will be the cumulative rules of origin. Ordinarily, for a product to qualify for particular tariff exemptions under a trade agreement, a sufficient proportion of it must be certified as ‘made’ in the exporting country. Whether or not a product is considered as originating from a particular country depends on varying factors along the supply chain.
This can be challenging with a bilateral agreement involving only two economies, but under RCEP, qualifying as an originating good becomes easier; as long as a sufficient proportion of the good being exported is made of inputs sourced from any of the 15 members of the bloc, it will qualify for the relevant tariff exemptions.
Better still, businesses need only apply for a single unified RCEP certificate of origin to ship anywhere within the bloc, reducing the time and cost needed to apply.
RCEP also has provisions regarding competition, laying out rules to prevent anti-competitive behaviour across the bloc, while at the same time allowing individual markets to maintain certain exemptions on the basis of public policy or public interest.
Why is this a win for businesses and economies?
Researchers project that in the year 2030 alone, RCEP will be generating an additional US$186 billion worth of income for the global economy.
Through substantially lowering barriers to trade among member states, the agreement will pave the way for greater regional integration and cooperation, allowing countries to build on their strengths while filling gaps in their capabilities by working with other signatory markets.
A more unified set of trading regulations means businesses won’t have to work through multiple different sets of rules when trading with different countries across the bloc – something which is particularly important given the high volume of intra-Asian trade.
The removal of tariffs across a range of goods and services is substantial, but it’s not uniform; there are carveouts for some countries and industries (for instance, agricultural products are one area where some markets have sought to either slow or minimise the reduction of tariffs), and the reduction of tariffs will be staggered over time.
Over and above making life easier for businesses, RCEP is likely to drive the creation of regional supply chains, while further strengthening existing ones. Indeed it’s possible that some companies will be able to conduct all of their trade through the RCEP framework, meaning they’ll only ever need to adhere to one set of trading regulations.
The logistics of success in the RCEP framework
The signing of the RCEP provides a tremendous opportunity for businesses across Asia to capitalise on cross-border trading opportunities. In particular, having a range of geographically close markets open up will be important to smaller businesses who want to make their first forays into selling internationally.
Success is not a given though, and ensuring that businesses are able to get the most out of the deal will require careful logistical planning.
For example, while RCEP is expansive, it doesn’t go as far as some trade deals in removing barriers to trade, and as such, some businesses and industries are likely to see more benefit than others, depending on what they produce, and where they intend to export to.
There may also be instances where an existing trade deal between two countries offers better terms than those laid out in RCEP, so some businesses may end up using different trading frameworks for different shipments, depending on what’s being exported and where it’s going.
Because of this, businesses may require the assistance of trade experts who can help them to map out the most feasible regional expansion options, taking into account the improved, if still uneven, tariff landscape.
From the perspective of diversifying and strengthening supply chains – which has become a priority for many businesses around the world in the wake of the pandemic – RCEP is an opportunity to work greater flexibility into existing models, or even develop entirely new ones.
One option could even be an ‘RCEP-ready’ supply chain, where all operations are brought within the borders of the bloc to simplify and reduce the cost of the movement of goods and provide a closer-to-home alternative that reinforces a reliable product supply.
The signing of the world’s biggest trade agreement is welcome news for economies across Asia Pacific. Once ratified, there is tremendous potential for the RCEP to be a catalyst for businesses across Asia Pacific that are ready to unlock new cross-border opportunities.
And with the deal soon to come into force, now is the time to start preparing.
The writer is the director of public affairs at UPS Asia Pacific.