RCEP: What does it mean for future Asia-Pacific trade and U.S. companies operating in the region?

Introduction

After eight years of back-and-forth negotiations, Asia’s Regional Comprehensive Economic Partnership on Trade (RCEP), the world’s largest regional trade agreement, was signed in an online ceremony on 15 November 2020. The agreement poses challenges for the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), a rival regional trade pact comprising Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.  RCEP’s members include the 10 members of the Association of Southeast Asian Nations (ASEAN) (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Thailand, Vietnam, and Singapore) along with Australia, China, Japan, South Korea, and New Zealand. The U.S. withdrawal from TPP-12, the conclusion of CPTPP on 8 March 2018, and the signing of the RCEP Agreement in November 2020 mean that the United States is not part of the two major regional free trade agreements in the Asia-Pacific.

While many observers have underestimated the tangible benefits of RCEP, it is expected to have a significant effect on regional trade.  The final RCEP trade deal lowers tariffs, modestly expands services trade, harmonizes rules of origin across the region, and generally promotes expanded intraregional trade and sourcing. RCEP will cover 30 percent of the world’s population (2.2 billion people), with a combined gross domestic product of US$38 trillion, about a third of global gross domestic product. The goal is for the agreement to enter into force on 1 January 2022, although some participants reportedly want an earlier entry into force. The signing of the agreement came about this year in part because India, which had become a major roadblock, dropped out.

RCEP is expected to stimulate regional Asian trade. The Brookings Institution has estimated RCEP will add US$209 billion a year to world incomes and US$500 billion to world trade by 2030. ¹ Below is a summary of some of the benefits and limitations of the RCEP, particularly as compared to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). ²

Tariff reductions

RCEP will eliminate more than 90 percent of import tariffs within 20 years of coming into force. RCEP’s tariff reductions are more limited in coverage than CPTPP and TPP-12, however. The exact extent and timing of RCEP’s tariffs cuts requires sorting through lengthy country schedules and exclusions. RCEP appears to cover about 90 percent of tariff lines, whereas CPTPP covers around 99 percent. RCEP also includes extensive exclusions for import-sensitive agricultural products and 20-year transition periods for certain tariff cuts to go into full effect. While some members (e.g., Australia, Brunei, Cambodia, Malaysia, Myanmar, New Zealand, Singapore, and Thailand) will apply a single tariff schedule to all other RCEP members, the remaining members have elected to phase out their tariffs at different rates for different RCEP members. This differentiating approach means tariffs on imports into an RCEP market may differ from depending on which RCEP Member they are coming from – at least until the cuts are fully phased in.

RCEP will still make important changes. Tariffs are likely to be eliminated on 86 percent of industrial goods exported from Japan to China, with almost 90 percent of auto parts exported to China entering duty-free. Japan will keep tariffs on farm products such as rice and wheat but will abolish tariffs on 56 percent of agricultural products imported from China and 61 percent of farm items imported from ASEAN. ³  While many technology products are already duty-free under the World Trade Organization’s Information Technology Agreements (ITA I and ITA II), RCEP covers several countries that are not ITA signatories, e.g., Brunei, Cambodia, Laos, Malaysia, and Myanmar.  

Moreover, the agreement represents the first time China, Japan, and South Korea have entered a free trade agreement together. These countries represent the largest, second-largest, and fourth-largest economies in the region, respectively. In a joint statement, the bloc members said the deal “will play an important role in building the nation’s resilience through an inclusive and sustainable post-pandemic economic recovery process.”

Trade in services and e-commerce

RCEP is expected to boost intraregional trade in services, including commitments that will allow businesses to deliver cross-border services such as education, engineering, and back-office processing. The services obligations are a mixture of “positive list” (Cambodia, China, Laos, Myanmar, New Zealand, Philippines, Thailand, and Vietnam) and “negative list” (Australia, Brunei, Indonesia, Japan, Korea, Malaysia, and Singapore) approaches. This mixed approach and incomplete coverage make it unclear to what extent trade in services will be increased under the agreement.

RCEP’s data provisions are more limited than other agreements. While RCEP prohibits members from requiring the localization of data as a condition for doing business, it does not include broader provisions to ensure freedom of cross-border data flows or a prohibition on localization requirements, unlike CPTPP, the United States–Mexico–Canada Agreement (USMCA), and the U.S.-Japan Digital Trade Agreement. ⁴ 

RCEP expands existing e-commerce rules under the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA) and will update the e-commerce regulations for certain RCEP parties. It also contains more specific rules, such as limiting spam email.

Rules of origin

One of the most important benefits of RCEP is its new standardized rules of origin. Once fully implemented, products manufactured to RCEP criteria can be transported to all member countries using a single certificate of origin. The harmonized rules of origin mean that companies will no longer need to confirm and accommodate information requirements and local content standards specific to each country. RCEP has a relatively low 40 percent regional value content requirement, meaning that just 40 percent of a product must be produced in the RCEP region to qualify for duty-free treatment in most cases. It also allows a change in tariff heading at the four-digit level to meet the RCEP origination criteria.

By contrast, the new USMCA generally has a 60 percent regional value content and even higher 70-75 percent regional value content for motor vehicles and key parts. RCEP’s harmonized rules of origin, lower regional value content, and duty-free access are designed to promote expanded and flexible intraregional trade. Rules of origin costs can range between 1.4 percent and 5.9 percent of export transaction amounts, which means that exports could be boosted by as much as US$90 billion on average annually. ⁵ 

Intellectual property (IP)

RCEP contains separate provisions for the protection of a wide array of IP rights, including copyright protections for authors, performers, musicians; patents, provisions protecting broadcasters, protections for broadcasts, electronics rights management, trademarks, and traditional knowledge and folklore. RCEP also has provisions promoting transparency and due process for the identification, protection, and use of geographical indicators (GIs) for all members.

As part of RCEP, member countries commit to ratifying seven international IP treaties. Since these treaties apply broadly to all signatories and implementation is unlikely to be limited to RCEP members, it should raise and harmonize intellectual property protection and enforcement standards within the region and broadly benefit non-RCEP signatories to the treaties, such as the United States and Europe. RCEP requires national treatment to all parties to RCEP, subject to the exceptions in The Agreement on Trade-Related Aspects of Intellectual Property Rights.

Trade facilitation

RCEP promises a new single set of rules and procedures for accessing preferential tariffs in any of the member states; improved mechanisms for addressing nontariff barriers including customs procedures, quarantine, and technical standards; and a common set of rules on intellectual property, trade, and e-commerce.

There are also provisions promoting the digitization of trade documentation and the use of electronic signatures and electronic authentication to facilitate cross-border trade. Members will benefit from simplified customs procedures and enhanced trade facilitation provisions, allowing for the rapid transit of urgent deliveries and perishable goods.  This will also reduce opportunities for bureaucratic foot-dragging and corruption in some markets if fully implemented.

Effects on U.S. trade in the region

The U.S. has been on the side-lines of Asia-Pacific free trade following President Trump’s withdrawal from the TPP after taking office in January 2017. One consequence of RCEP is that it brings many of the key Asian economies together in a regional framework that includes China but not the U.S. This regional integration comes at a time when President Biden wants to support American manufacturing, but has paused new trade deals for an indefinite period.

RCEP companies will be able to manufacture and sell goods duty-free across the region with just a single certificate of origin once tariff cuts are fully phased in, which is likely to encourage companies to source from other RCEP suppliers and reduce the overall cost of RCEP goods. This may displace U.S. exports and make it harder for U.S. companies to compete with RCEP companies and imports. It could also put pressure on U.S. companies to locate production facilities in RCEP to secure preferential access to RCEP markets or take advantage of RCEP’s low regional value content requirements and preferential access by assembling goods in RCEP that require bringing together parts and components from multiple RCEP suppliers, e.g. China.

While RCEP is more limited than TPP-12 or CPTPP, it’s likely to reduce U.S. market share in the Asia-Pacific, particularly in RCEP markets where U.S. exports do not benefit from preferential access under existing U.S. Free Trade Agreements (FTAs) (i.e. U.S.-Korea FTA, U.S.-Australia FTA, or U.S. Singapore FTA, and the Trump administration’s U.S.-Japan “early harvest” agreement). This could be a particular concern for U.S. farmers, since agricultural products tend to be subject to higher duties in many markets. However, the CPTPP and RCEP phase-out periods for agricultural tariffs tend to be longer than those for industrial products and some products are completely excluded from tariff cuts, so the U.S. may have some time to sort this out.

RCEP is likely to put pressure on the Biden administration to pick up where President Obama left off with the unfinished “pivot to Asia” and for the U.S. to join CPTPP or revitalize TPP-12. To date, President Biden has been noncommittal about joining CPTPP or TPP-12, and it is unlikely to be a key priority in his first year in office when the focus will be on rebuilding the U.S. economy. Moreover, it would require renegotiating certain provisions of CPTPP that were dropped when the Trump administration withdrew and convincing Congress to extend the congressional “Trade Promotion Authority”/fast-track procedures which expire on 1 July 2021 but are generally viewed as a prerequisite for any major trade negotiation.

RCEP’s limitations

There are some notable deficiencies in RCEP that may limit its long-term economic benefits. Many agricultural products and politically sensitive goods are excluded completely from tariff reductions. The tariff reductions are around 90 percent of goods, ⁶  far less than “gold standard” free trade agreements like the CPTPP where 99 percent of goods will be duty-free when the agreement is fully implemented. Many politically sensitive or import-sensitive RCEP tariffs will be phased out over long periods.

RCEP also does not deal with problems arising in regard to state-owned enterprises (SOEs), which the Obama administration added to TPP-12 with an eye to presenting China with a take-it-or-leave it set of SOE reforms if it ever decided to join TPP. Nor does it attempt to address labor rights and environmental concerns, which are a key part of CPTPP, USMCA, and TPP-12.

Investor-state dispute settlement (ISDS) provisions were dropped apparently at the request of New Zealand, whose current administration is adamantly opposed to ISDS. ⁷  Instead, once the agreement is in force, member states will re-evaluate the ISDS issue within two years. ⁸ Such commitments to revisit contentious issues are usually throwaways that rarely lead to future progress. Unlike CPTPP and USMCA, it does not include provisions on labor rights or environmental standards. 

Lastly, the agreement does not include India, which broke off discussions because of concerns that domestic industries could be adversely affected by cheaper manufactured goods from China and milk and dairy products from New Zealand and Australia. It is possible that India will restart negotiations with RCEP members in the future, but given recent tensions with China and India’s long-standing political sensitivities about lowering industrial and agricultural tariffs, it seems unlikely in the near to mid-term.

Conclusion

In spite of RCEP’s shortcomings, it will be an important driver of regional trade, given its historic geographic coverage in bringing together China, Japan, and South Korea together in a regional FTA for the first time. Moreover, the fact that there are now two major trade agreements in Asia carries political and symbolic weight of regional trade cooperation that can’t be ignored, particularly since the U.S. isn’t part of them.

While RCEP is a much more limited agreement than CPTPP or TPP-12, it puts pressure on the U.S. to reengage in Asia-Pacific or risk getting crowded out by China’s expanding regional presence. This is particularly true if China follows through on Chinese President Xi Jinping’s statement at the recent Asia-Pacific Economic Cooperation (APEC) Leaders Summit that China would “favorably consider” joining the CPTPP. ⁹  With China and South Korea now hinting that they also want to join CPTPP, the U.S. may need to move swiftly to avoid falling further behind in shaping Asian trade rules in Asia-Pacific.

On a purely commercial level, despite its more limited coverage, RCEP’s tariff preferences and rules of origin will favor goods and services from RCEP members, encouraging firms to source within the region, and in combination RCEP and CPTPP are likely displace at least some competing U.S. goods, services, and farm exports. At the same time, RCEP is likely to boost the region’s competitiveness by lowering duty and trade facilitation costs for goods that incorporate parts and components sourced within the region, e.g., from China or allowing firms to avoid U.S. Section 301 duties. The extent of these impacts still needs to be sorted out as analysts pour through the schedules, as duties are phased in over time, and as China’s and India’s intentions regarding RCEP and CPTPP become clearer in the years to come.

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