• Benedict Pham

RCEPs significance and what it entails

Takeaways

  • Covering ~30% of the worlds GDP and population, respectively 26.2 trillion U.S. dollar and 2.2 billion people, whilst growing with a CAGR of ~6% (2009-2019)

  • Know-how heavy businesses can capitalize on the IPR filing expansion: successful patent applications will be granted to the whole RCEP region

  • China could be an interesting regional headquarter for certain product centric businesses (products sourced, assembled and/or produced in China and traded in the RCEP region)

Virtual signing ceremony of the RCEP agreement with all 15 member countries and the ASEAN secretariat (ASEC).

Photo: Vietnam News Agency (VNA). (2020).


Everybody is talking about RCEP, but what does it consist of?

Eight years after it was formally launched, the Regional Comprehensive Economic Partnership (RCEP) was finally signed on November 15, 2020 in Hanoi, Vietnam. The founding members include the Association of Southeast Asian Nations (ASEAN) plus China, Japan, South Korea, Australia, and New Zealand. At present it is the largest Free Trade Agreement (FTA) covering about 30% of the world’s GDP and population – respectively accumulating to roughly 26.2 trillion U.S. dollars [1] and about 2.2 billion people.

Comparison of the three largest FTAs - RCEP, USMCA & EFTA.

Source: World Bank. (2019). Graphic: DCC - Deutsche China Consult.


The RCEP aims to eliminate tariffs for approximately 90% of goods traded among the members over a period of 20 years after coming into effect. Some project this to happen within the next few years and even as early as next year.


The biggest economic impact will be conveyed through the "rules of origin". According to this rule, all parts and products from any RCEP member will be treated equally. For example, all exported chairs from any RCEP member nation to another will be charged the same tariff for chairs at the border. Under the former network of bilateral and multilateral FTAs there have been cases, where enterprises with an international supply chain suddenly faced different tariffs because parts from another country where assembled to a product. Under the new "rule of origin", if those parts are imported from another RCEP member, the enterprise is not in danger of inconsistent tariffs anymore.


You can find more detailed information regarding the schedule and content of the RCEP agreement here.


The RCEP also sets unprecedent standards for foreign policy making and diplomacy in the Pacific region. Long lasting feuds between China and Japan, Japan and Korea or China and Vietnam as well as recent conflicts - like the dispute between Australia and China - where thought to weigh down the RCEPs efforts, but that did not happen. However, it may prove challenging that, the RCEP must somewhat bring together very diverse social systems, religious beliefs, and even political systems for it to work..


So, it’s bigger, but that doesn't mean it has more potential?

The size of a trade bloc does not determine its growth prospect. But in this case the RCEP is not only larger in size than its "rival" trade blocs, the United States–Mexico–Canada Agreement (USMCA) and the European Free Trade Association (EFTA), but also growing faster. This is illustrated by GDP data of the World Bank: the three largest FTAs the RCEP, USMCA and EFTA were respectively growing with a CAGR of 5.81%, 3.48% and 0.53% from 2009 to 2019. Comparing these three, the RCEP grow nearly twice as fast as the USMCA and more than eleven times faster than the EFTA over the last ten years.


RCEPs meaning for China

Chinas position in Asia will be strengthened through the implementation of the RCEP agreement. Ousting the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and hence, not only temporarily kicking the US out of the region, but also giving China market access to the whole RCEP region without having to follow the more ambitious set of rules that the CPTPP would have implied, will support China to manifest its position in East Asia and South East Asia.


Moreover, Chinas trade with ASEAN has become more important than ever before. In the period from January to May 2020 the total trade volume with ASEAN (~15%) overtook the trade volume with the EU (~14) and the US (~11%). That makes the RCEP with all ASEAN member states even more lucrative and important to China.


Implications for businesses

A more integrated region-wide market brings tremendous benefits for businesses selling their products within one, two, three or more of the member nations. There will only be one set of rules for imports and exports between RCEP member countries instead of an overly complicated network of bilateral and multilateral FTAs. Producers could consequently benefit from a larger region-wide market with more potential consumers.


This also suggests more unhindered region-wide supply chains through greatly simplified exporting and importing. Sourcing from a larger pool of suppliers means that businesses can gain advantage from more diversified and potentially cheaper suppliers. For instance, a China based business with high labor costs could think of importing material and parts instead of moving the whole production line.


Finally, filing for intellectual property protection will take region-wide effect. An enterprise located in one of the RCEP member countries does only need to file a single patent or trademark application for the whole region. Especially know-how heavy market participants will be able to utilize on this aspect of the RCEP agreement.

Sources:

[1] The World Bank Group, Indicators. (2020). GDP (current US$) of RCEP, EFTA & USMCA nations [Data file]. Retrieved from https://data.worldbank.org/indicator

[2] The World Bank Group, Indicators. (2020). Population, total of RCEP, EFTA & USMCA nations [Data file]. Retrieved from https://data.worldbank.org/indicator

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