While the vaccine breakthrough sparked optimism that the global economy may be saved, countries around the world continue to plan for post-COVID growth.
Last weekend, on Sunday 15 November, fifteen Asia-Pacific countries formed the world’s largest trade agreement, The Regional Comprehensive Economic Partnership (RCEP), covering nearly a third of the global GDP.
The deal was signed virtually at the annual summit of the Association of Southeast Asian Nations (ASEAN). Apart from the 10 ASEAN members, it includes China, Japan, South Korea, Australia and New Zealand while excluding India and the United States, which withdrew under the Modi and Trump governments.
Like any other Free Trade Agreement (FTA), the RCEP aims to reduce tariffs, open up trade in services and promote investment to help emerging Asian economies catch up with the rest of the world. RCEP is quite significant as it comes at a time when the cross-border trade has slowed, and customs duties have become either a cost or a cash flow challenge to businesses. Consequently, it is anticipated to play a significant role in the post-COVID global recovery.
Here is a quick look at some of its important aspects.
RCEP will eliminate tariffs on around 92 percent of goods traded amongst its member states within 20 years of coming into effect. This will allow member states to gain preferential market access with each other.
Simplified custom procedures
Simplifying clearance of goods – including the release of express consignments and perishable goods within six hours of arrival – is particularly a beneficial development because the speed will mean an increase in consumable goods being exported and imported regionally, potentially opening up new markets in the food, agriculture and medical fields.
Common rules of origin
The ASEAN members already have Free Trade Agreements (FTA) with each other, but they can be complex at times due to non-tariff barriers, such as the “rules of origin”. Rules of origin specify how much of local content goes into a product to qualify it for a tariff-free entry into a member state, so a product might face tariffs even within an FTA if it contains components that are made elsewhere outside the member states.
Under RCEP, the rules of origin will be unified for the entire bloc – meaning parts from any member states will be treated equally, which might give companies in RCEP countries an incentive to look within the trade region for suppliers. This is a key advantage given the enlarged geography over which trade takes place under the RCEP.
RCEP will also give a significant boost to foreign direct investment in the region as the Chinese, and regional markets will be seen as an “integrated market” and exports to the rest of the world will become “much more competitive”.
What is next?
RCEP may take months, if not years, to come fully into effect as it will take some time for member states to amend their domestic regulations to comply with the new requirements of the agreement. However, regardless of the delay in enforcement, RCEP will deliver significant economic benefits to many businesses in the long run.
Some could argue, contrary to what the name suggests, that the RCEP deal is not yet fully ‘comprehensive’. Although it touches on intellectual property telecommunications, financial services, e-commerce and professional services, it leaves out environmental protections and labour rights, which have become a key consideration for trade agreements.
Nonetheless, RCEP is a significant step towards harmonisation in the region as it brings together countries that have often had sensitive diplomatic relationships – namely China and Japan.