Alerts and Updates
The Regional Comprehensive Economic Partnership: Summary and Implications for Asia and the Pacific Rim
December 17, 2020
The RCEP is comprehensive, spanning 20 chapters, and covers many areas not addressed in the existing FTAs between ASEAN countries and its dialogue partners
The Regional Comprehensive Economic Partnership (RCEP) was signed on November 15, 2020, by 15 countries—10 members of ASEAN, as well as its dialogue partners South Korea, China, Japan, Australia and New Zealand (collectively, the “parties”). Its goals are to establish a mutually beneficial economic partnership in order to facilitate the expansion of regional and global trade and investment. The RCEP forms the world’s largest trading bloc, accounting for about 30 percent of the global gross domestic product and a third of the world population (2.1 billion people). The RCEP is considered the largest free trade agreement (FTA) in history (the newly created free trade zone is bigger than both the United States-Mexico-Canada Agreement and the European Union).
The Peterson Institute for International Economics estimates the deal could increase global national income by $186 billion annually by 2030 and add 0.2 percent to the economy of its member states on a permanent basis.
The United States is absent from the RCEP as well as from the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which notably absents the USA from two major trade blocs in the world today.
While previously part of the negotiations of the RCEP, India had pulled out of deal talks last year over concerns that lower tariffs could hurt local producers. The signatories to the RECP have however expressed that the door remains open for India to rejoin the RCEP.
The RCEP primarily aims to eliminate a range of tariffs on imports, particularly for goods that already qualify for duty-free treatment under existing FTAs. However, countries are allowed to retain tariffs for imports in sectors regarded as important or sensitive. The RCEP also enshrines rules of origin, laying out common standards for goods to be included under the RCEP and therefore eligible for preferential tariff treatment. The advantage of the RCEP over the many existing bilateral FTAs among the parties is that the RCEP allows manufacturers to source for parts from participating parties and still satisfy the rules of origin without incurring tariffs under a bilateral FTA.
The RCEP is comprehensive, spanning 20 chapters, and covers many areas not addressed in the existing FTAs between ASEAN countries and its dialogue partners (ASEAN Plus One FTAs) (a brief summary of the 20 chapters covered by the RCEP is set out below).
The RCEP is intended to boost competition in a way that drives productivity and to be a unifying set of rules to help facilitate the development of regional supply chains among parties.
The RCEP will enter into force 60 days after six ASEAN member states and three non-ASEAN member states have ratified the agreement.
How Does the RCEP Benefit ASEAN and Singapore?
The signing of the RCEP is an achievement for ASEAN amidst the pandemic-induced economic turmoil around the world, ongoing U.S.-China trade tensions and emerging trade protectionism instituted by national governments.
The RCEP enables ASEAN to spearhead efforts to rebuild global supply chains and trading lines in a post-COVID-19 era by deepening ASEAN's connectivity with established markets like China, South Korea, Japan, Australia and New Zealand. Notably, China, South Korea and Japan are the global leaders for the electronics, cars, textiles and garments industries, and having each of these markets within the trade pact also means that ASEAN can retain its supply chain relevance across these sectors.
In the long term, the integration of regional economies under the RCEP is expected to lead to increased foreign investment amongst participants and from companies based outside the trade bloc hoping to take advantage of the RCEP to increase their footprint in the region. In addition, the RCEP contains investment-friendly provisions such as investor aftercare (including dispute resolution) and intellectual property protection provisions, which should provide further assurance to investors.
Specifically for Singapore, the RCEP will further cement its growing reputation as a strategic location for multinational companies to set up their regional and global headquarters. Singapore is already an attractive destination for businesses around the world because of its stable political and business environment, competitive corporate tax regime, extensive network of tax treaties, highly skilled workforce and strategic geographical location. With the RCEP coming into effect in the near future, there will be greater incentive for global companies to set up their headquarters here to leverage on the increased trade connectivity brought by the RCEP.
How Can Businesses Prepare?
As we wait for the RCEP to come into force, it is important for businesses, both local and abroad, to start assessing the impact and opportunities which the RCEP can bring to their business operations. We offer three suggestions below.
First, when the RCEP takes effect, the fast-growing economies within ASEAN such as Cambodia, Vietnam and Myanmar may become more attractive investment opportunities in light of the greater investor protections set out in the RCEP and the expansion of trade in the ASEAN region.
Second, companies should assess the impact of the RCEP on their regional and global supply chains and whether they can restructure them
s to reap the maximum benefits of the RCEP. In particular, the provisions on tariffs, rules of origin and customs procedures in the RCEP will be relevant and should be looked at in greater detail.
Third, multinational companies may wish to consider setting up their global or regional headquarters in ASEAN so that they are well-placed to leverage the RCEP. In particular, Singapore’s business-friendly policies make it easier for companies to set up their headquarters there. Singapore-incorporated companies can be 100 percent foreign-owned and there are no restrictions on the movement of foreign currency into or out of the country.
The Singapore government actively encourages foreign companies to set up their headquarters in Singapore through a range of incentives. In particular, companies that carry out global or regional headquarter activities of managing, coordinating and controlling business activities for a group of companies may be able to enjoy concessionary tax rates on their qualifying income.
In light of positive developments on the COVID-19 vaccine front, there is quiet optimism that a post-COVID-19 era is on the near horizon. With the RCEP, ASEAN and Singapore are certainly well equipped to recover strongly in the post-COVID-19 era.
Summary of the RCEP (by Chapter)
1. Initial Provisions and General Definitions
The first chapter of the RCEP sets out objectives, which are to establish a modern, comprehensive, high-quality and mutually beneficial economic partnership that aims to facilitate the expansion of regional trade.
2. Trade in Goods
The RCEP aims to achieve a high level of trade liberalisation among the parties. To do so, the RCEP sets out key elements to govern goods-related commitments, thereby ensuring clarity amongst all parties. Key elements include granting national treatment to the goods of other parties, reduction or elimination of customs duties, duty-free temporary admission of goods and rules for applicable tariff treatments in the case of different tariff preferences. The RCEP also contains provisions on nontariff measures that complement tariff liberalisation outcomes, such as provisions for greater transparency on the application of nontariff measures, and includes a process for technical consultations on such nontariff measures to be conducted.
3. Rules of Origin
The RCEP reduces nontariff barriers by creating common rules of origin. The RCEP sets out the requirements for determining originating status of goods and for the contents of a certificate of origin and includes clear direct consignment rules. By facilitating supply-chain management, the rules of origin will reduce transaction and export costs, thereby boosting merchandise exports among the parties. This will foster stronger regional trade integration and is also predicted to attract greater foreign investment.
4. Customs Procedures and Trade Facilitation
The RCEP aims to ensure predictability, consistency and transparency in the application of customs laws and regulations. It also promotes efficient administration of customs procedures and expeditious clearance of goods, speeding up trade between the parties. Customs procedures have been simplified and also harmonised with international standards. The RCEP also sets out various stages of implementation of these measures in order to accommodate the different levels of readiness of the parties.
5. Sanitary and Phytosanitary Measures
The RCEP sets out the basic framework for developing, adopting and applying sanitary and phytosanitary measures in order to protect human, animal and plant life. The RCEP enhances what has been laid out by the prior World Trade Organisation agreement by taking into account regional conditions and adapting relevant international recommendations with regard to equivalence. It aims to facilitate transparency and cooperation among the parties.
6. Standards, Technical Regulations and Conformity Assessment Procedures
The RCEP seeks to recognise, accept and strengthen mutual understanding of each party’s standards, technical regulations and conformity assessment procedures. The RCEP lays out provisions that enhance transparency in the development of technical barriers to trade (TBT) measures in the RCEP region, promote greater regulatory cooperation and ensure good regulatory practice. It also provides mechanisms for parties to address specific trade issues to reduce or eliminate unnecessary TBTs, thereby minimising the adverse effects of TBTs on trade.
7. Trade Remedies
The RCEP safeguards domestic industries by providing parties with a transitional mechanism to address any threats caused by the RCEP to domestic industries. It also reaffirms anti-dumping rights and obligations as laid out by the WTO, and guides parties on the best practices to enhance transparency and due process in anti-dumping and countervailing duties proceedings.
8. Trade in Services
The RCEP opens up avenues for greater trade in services among parties by substantially removing restrictive and discriminatory measures affecting services trade. The RCEP sets out modern and comprehensive provisions, such as rules on market access and most-favoured-nation treatment. Under the RCEP, parties are to schedule their services commitments using the negative list approach, which provides greater certainty for service suppliers of other parties. Going beyond the existing ASEAN Plus One FTAs, the RCEP agreement includes provisions on the reasonability, objectivity and impartiality of domestic regulations affecting services trade.
Further, there are annexes to Chapter 8 of the RCEP setting out specific rules and obligations relating to financial, telecommunications and professional services.
9. Temporary Movement of Natural Persons
The RCEP aims to facilitate the temporary entry and stay of those natural persons engaged in trade in goods, supply of services or conduct of investment. The RCEP sets out commitments, as well as any conditions or limitations to such temporary movements, in order to enhance transparency and expeditious processing in granting such temporary entry and stay to such persons, which may include business visitors and intra-corporate transferees.
In order to create an enabling investment environment in the region, the RCEP agreement contains provisions covering the four pillars of investments: protection, liberalisation, promotion and facilitation. Provisions include a most-favoured-nation treatment clause and commitments on the prohibition of performance requirements that go beyond the parties’ multilateral obligations. The RCEP also addresses investor aftercare by including provisions such as assistance in the resolution of complaints and grievances that may arise.
11. Intellectual Property (IP)
The RCEP provides an inclusive and balanced approach to the protection and enforcement of IP rights in the region. It features provisions that harmonise the protections for standard IP rights, and protects IP rights beyond the level of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights. The RCEP also streamlines procedures for the establishment of IP rights such as those relating to electronic filing of applications.
12. Electronic Commerce
The RCEP includes provisions that aim to promote e-commerce and enhance cooperation among the parties. It encourages parties to improve trade administration and processes by using electronic means, requiring them to adopt or maintain a legal framework that protects e-commerce users. The RCEP also regulates data-related issues regarding cross-border transfer of information by electronic means. The RCEP enshrines the parties’ decision to maintain the current practice of not imposing customs duties for electronic transmissions and, in the event of any disagreements, to first engage in consultations in good faith and make every effort to reach a mutually satisfactory solution.
The RCEP aims to promote competition in markets to enhance economic efficiency and consumer welfare. In this regard, the RCEP includes obligations for the parties to adopt or maintain competition laws and regulations that proscribe anti-competitive activities and to coordinate enforcement actions, while recognizing their sovereign rights to develop and enforce its own competition laws and policies. The RCEP also covers consumer protection, and parties are obligated to adopt or maintain domestic regulations against misleading practices or descriptions in trade.
14. Small and Medium Enterprises (SMEs)
The RCEP recognises the role that SMEs play in economic growth, employment and innovation, and seeks to contribute to their growth. Under the RCEP, parties must maintain a publicly accessible information platform that contains business-related information that would be useful for SMEs. This helps SMEs utilise and benefit from the opportunities created by the RCEP.
15. Economic and Technical Cooperation
To maximise mutual benefits among the parties, the RCEP aims to facilitate economic and technical cooperation in order to narrow development gaps. The RCEP gives priority to activities that provide capacity building and technical assistance to parties that are developing and least-developed, that increase public awareness, and that enhance business’ access to information.
16. Government Procurement
Recognizing the role of government procurement in economic development, the RCEP promotes more transparent government procurement processes and cooperation among the parties. It obligates each party to publish information on government procurement. This is something that has not been covered before by the existing ASEAN Plus One FTAs.
17. General Provisions and Exceptions
The RCEP contains general provisions such as obligations regarding transparency of each party’s regulations and procedures with respect to matters relating to the RCEP itself. It also creates a review and appeal mechanism and protects confidential information. The provisions establish the geographical scope of application of the RCEP; affirm parties’ rights and responsibilities under the Convention on Biological Diversity; and commits parties to take appropriate measures to prevent and combat corruption regarding matters covered by the RCEP.
18. Institutional Provisions
The RCEP establishes its institutional arrangements, as well as the structure for the meetings of the RCEP ministers; the RCEP Joint Committee; the Committees on Goods, Services and Investment, Sustainable Growth and the Business Environment; and other subsidiary bodies established by the RCEP Joint Committee.
19. Dispute Settlement
The RCEP aims to provide effective, efficient and transparent rules and procedures for the settlement of disputes arising under the RCEP, including for interested third parties. To achieve this, it has created a dispute settlement process, which includes provisions allowing the complaining party to select the forum within which to address a dispute concerning the RCEP, requiring parties to first enter into consultations and other voluntary alternative dispute resolution methods, and the creation of panels by the parties to resolve disputes.
20. Final Provisions
The RCEP includes final provisions, which set out the relationship between the RCEP and other international agreements, a general review mechanism, procedures to amend the RCEP and an accession provision. It also designates a depositary to receive and disseminate documents to each signatory party.
For More Information
If you have any questions regarding this Alert, please contact Eduardo Ramos-Gómez, Matthew Poh, Evan Teoh Ye Oon (Singapore), Giles T. Cooper (Hanoi, Ho Chi Minh City), Irene Bao Rong (Shanghai), Christopher M. Neumeyer (Taiwan) or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.