RCEP – The Rise of Asia
The world’s largest trading bloc – RCEP (Regional Comprehensive Economic Partnership) was created on November 15, 2020, when an FTA (Free Trading Agreement) was signed between 15 Asia-Pacific nations at a virtual summit hosted by Vietnam. It includes 10 ASEAN nations (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) and 5 non-ASEAN nations (Japan, China, New Zealand, South Korea, and Australia).
Genesis of RCEP
The ASEAN Framework for RCEP was adopted by the ASEAN Leaders during the 19th ASEAN Summit in November 2011 in Bali, Indonesia. This was the genesis of the RCEP negotiations which was reiterated in the 20th ASEAN summit held from 3-4 April 2012 in Phnom Penh, Cambodia. The Guiding Principles and Objectives for negotiating the RCEP were adopted in the 1st ASEAN Economic Ministers (AEM) plus FTA partner’s consultations held on 30 August 2012 in Siem Reap, Cambodia. The Joint Declaration of Ministers for the launch of RCEP negotiations was done on 20 November 2012 in Phnom Penh, Cambodia during the 21st ASEAN Summit
Background
In 2012, RCEP negotiations had started between 16 Asia-pacific nations including India, and it was finally created in 2020, after multiple negotiations between member nations and internal domestic consultations for almost a decade. RCEP is the world’s largest FTA (Free Trade Agreement) with 27 percent of global merchandise trade and 30 percent of global gross domestic product (GDP). RCEP majorly comprises 19 percent of foreign direct investment (FDI) outflows and over 18 percent of services trade. RCEP connects about 30% of the world’s population and its output. And in a favorable political context, the mega partnership will generate substantial gains.
Primary Objective
The objective of launching RCEP negotiations is to achieve a modern, comprehensive, high-quality, and mutually beneficial economic partnership agreement among the ASEAN Member States and ASEAN’s FTA (Free trade Agreement) partners. The RCEP negotiations, once finalized, will bring the biggest economies in the region into a regional trading agreement in the largest trading bloc in the world.
Guiding Principles
RCEP is intended to be comprehensive and encompass a variety of subjects like goods, services, investment, economic and technical cooperation, competition, dispute settlement, intellectual property, e-commerce, small and medium enterprises and others. While special and differential treatment (S&DT) is one of the guiding principles, this would chiefly be targeted at the Least Developed Countries (LDCs) in ASEAN, namely, Laos, Myanmar and Cambodia. Another key principle mentions making prominent improvements over the existing ASEAN + FTA while recognizing the “individual and diverse circumstances of the participating countries”. The 3rd RCEP Inter-sessional Ministerial was held on 21-22 May 2017 in Hanoi, Vietnam. The discussions were centered on negotiations in all the areas as well as submission of the revised offers in goods, services, and investment.
- Goods: One of the key areas of negotiation under RCEP is “tariff modalities” on goods. This pertains to the elimination of customs duties on products exported from the RCEP countries.
- Services: The discussions have also been centered on value-added elements in the offer such as Ratchet (automatic binding of any autonomous liberalization in the future) or MFN (provide the same preferential treatment as in any other future FTA).
- Investments: The negotiations revolved around value adds such as MFN and Ratchet, as well as on PPR (prohibition of performance requirements) and ISDS (investor state dispute settlement). Also, there was coverage of Mode 3 (commercial presence abroad) in the services chapter.
Asian Influence on World Trade Economy
The major upheaval caused by CoVID-19 has led to a fall in global FDI. Hence, the RCEP talks were conducted during a compelling time for global economic governance. It has already transcended the growth of other big trade blocs that have emerged over the past decades.
India’s Story
India is a leading software exporter in the world and continues to lead with a 52% market share in services exports from the country. The Indian software product industry is expected to reach US$ 100 billion by 2025. Indian companies are focusing to invest internationally to expand their global footprint and enhance their global delivery centers.
India was a member of the RCEP drafting committee from its inception in 2011. Unfortunately, in November 2019, it decided to opt-out, due to geopolitical reasons. As per a report by the Peterson Institute on International Trade, India could be looking at a GDP gain of INR 4,450 billion if it were an RCEP participant. Especially accounting for the possibilities that participation in the RCEP agreement could open up for the Indian software export market, it becomes even more important for India to reconsider becoming one of the RCEP member nations and leverage the opportunities presented by the same.
The World Trade Hub, a global trading company, is in discussion with the RCEP to negotiate the terms of possible software exports to global companies.
India’s Advantage as an RCEP Member
- The RCEP can help India streamline the rules and regulations of doing trade, which will reduce trade costs.
- It provides a decisive platform for India which could enhance strategic and economic status in the Asia-Pacific region and can complement its ‘Act East Policy’.
- RCEP can push India’s inward and outward foreign direct investment, particularly export-oriented FDI.
- It can enhance India’s existing free trade agreements with the Association of South-East Asian Nations (ASEAN).
- It can also facilitate India’s MSMEs to effectively integrate into the regional value and supply chains.
- India’s comparative advantage in the services sector such as information and communication technology, healthcare, and education services, etc. can create opportunities for Indian companies to penetrate new markets.
Key Opportunities
RCEP will strengthen the trade and investment relations between its member nations. This will essentially be achieved by reducing the non-tariff barriers (NTBs) on goods and services. The agreement’s most crucial feature is that it aligns the rules of origin for product standards manufactured in the different RCEP countries. This enables a more inclusive production chain across all the 15 RCEP member nations, thus, attracting more global trade and enhancing the global value chain (GVC). For example, an importing country will have to accept the product standards of the exporting country from where the product has originated. This level of consumer protection will be extended to all the RCEP members.
Key Challenges
The global and intra-regional geopolitical and trade tensions are major deterrents in the economic integration efforts of the RCEP. In addition, the pandemic-led global economic recession may potentially restrict the trade and investment global value chain, at least in the short term.
Key Features
According to computer simulations, RCEP could add $209 billion annually to world incomes, and $500 billion to world trade by 2030.
Multilateralism is a less-favored trade element in the other parts of the world. Especially when some countries create tariff walls that impact the harmony of the global trading system, Asia-Pacific nations have come together to collectively uphold multilateral policies that are more liberal, cooperative, policy-based, and progressive. This will empower RCEP to restore international economic order.
Also, the fact that seven of the fifteen RCEP countries (Japan, Vietnam, Australia, Brunei, New Zealand, Singapore, and Malaysia) are affiliated to both The Regional Comprehensive Economic Partnership (RCEP) and The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), there is a strong probability of both the major FTAs converging to form the greatest trading bloc in the world. This will imply a strengthened Asian influence on the world trade and economy that facilitates an all-inclusive free trade region of the Asia-Pacific.
Closing Thoughts
RCEP comprises remarkably diverse nations in terms of size, economy, technological advancements, industrialization, etc. Hence, the terms of RCEP concerning the tariff cuts and trade rules are less demanding than those of the CPTPP. The major factors that will deepen the economic integration within Asia are the US-China trade war and the two FTAs – RCEP and CPTPP.
Reduction of trade costs and the creation of a cooperative framework between the RCEP member nation’s trade officials will be an added feature to effortlessly promote cross-border trades. The conglomeration of the individual strengths of economies that includes manufacturing, technology, agriculture, and natural resources marks RCEP as the catalyst for The Rise of Asia.
The World Trade Hub simplifies multilateral trade. We would love to know more about you and add value to your endeavors through our services. Reach out to us today!