Asian Summits Result In US$186 billion RCEP Free Trade Agreement

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Op/Ed by Chris Devonshire-Ellis 

  • Deal signed on Sunday covers 30% of global trade and 2.2 billion consumers
  • No RCEP tariff reductions but mutual acceptance of professional qualifications opens up doors for services sectors 
  • Rules of Origin standardized across all RCEP members
  • Cambodia, Laos & Myanmar finishing processes to receive foreign investment
  •  Regional handling of mutual ecommerce standards yet to be determined

The 15th East Asia Summit was held this weekend, an important regional forum that includes all ten ASEAN nations, China, India, Russia, Japan, South Korea, Australia, New Zealand and the United States. The summit, held in virtual format, was chaired by Prime Minister of Vietnam Nguyen Xuan Phuc in his capacity as chair of ASEAN.

At (virtually) the same time, the US-ASEAN summit was held as were meetings of the ASEAN secretariat.

Among all this activity, the highlight has been the finally agreed signing of the much delayed Regional Comprehensive Economic Partnership (RCEP) free trade deal, which covers almost a third of the global economy, accounts for 30 of the world’s population and involves 2.2 billion consumers. Beijing has been working hard since to keep the momentum, with RCEP now including the ten ASEAN nations, China, Japan, South Korea, Australia and New Zealand. It has taken eight years to agree with some significant bumps along the way. India backed out of the plan last year after political pressure bought by domestic Indian corporates nixed the deal following fears of cheaper imports impacting the local market.

RECP will take already low tariffs on trade between member countries still lower, as multilateral negotiations over tariff reductions continue. The important thing is it has now been signed, with a slightly strange online ceremony, taking place yesterday (Sunday November 15). Leaders of the RCEP countries took turns standing behind their trade ministers who, one by one, signed copies of the agreement, which they then showed off to the video conference cameras.

RCEP unifies Rules of Origin and Professional Qualifications recognition 
According to estimates by International economics professors at Johns Hopkins University, RCEP will add US$186 billion to the size of the global economy and 0.2 per cent to the gross domestic product of its members. The benefit of cheaper goods will spread throughout ASEAN and the RCEP members as well as filter through to consumers in Europe and the United States.

The agreement has all the usual elements included in a free trade deal, tariff reductions or elimination, standardized customs procedures, services, and investment and so on. However RCEP also consolidates Rules of Origin definitions and quotas for the first time amongst participating nations. Just one Rule of Origin document is now sufficient to cover all countries in RCEP.

The Rules of Origin aspect alone will motivate an increase of manufacturing investment as concerns finishing of products, such as garments, in countries with lower-cost and lesser skilled workers such as Cambodia, Laos, and Myanmar, and will be of special interest to manufacturers from Australia, Japan, New Zealand, Singapore, and South Korea where production costs are higher.

There is still work to be done though, and the RCEP deal isn’t yet fully ‘comprehensive’. Agriculture is largely omitted – all nations within RCEP wishing to protect their respective markets, and RCEP does relatively little to set common standards for products. Environmental issues and human rights – including labor – are also unaddressed. RCEP has additionally been unable at this stage to agree on ecommerce regulations, with members unable to agree any rules on cross-border data flows or a customs moratorium on data transmission. That area will be a major source of interest in future discussions.

Although tariff reductions were not on the immediate agenda, RCEP nations have agreed to mutually recognize each others professional qualifications, potentially opening doors for RCEP market opportunities for lawyers, dentists, doctors and other professions. RCEP should help reduce manufacturing costs and make life easier for companies by letting them export products anywhere within the bloc without meeting separate requirements for each country.

Asian Trade decisions for India and the United States 
However, the RCEP agreement does finally formalize various aspects of inter-regional trade and does place these major economies on the same page going forward. The main two questions as regard participation still to be resolved are whether India can negotiate with its domestic corporates to allow participation. If not, then the country faces a future of being bypassed in global manufacturing in the longer term, as its domestic barriers will be too high to be attractive to foreign investors, including all MNC’s who would like to both sell to India as well as export manufacture there. India’s current stance as regards foreign involvement in its domestic market will see thousands of potential foreign manufacturers stay away.

That means India will miss the economic dividend it has right now: a competitively priced and available labor force of some 500 million. China used its demographic dividend to its advantage, not permitting vested interests to interfere with national growth policy. If India’s domestic businesses seek to close doors, they will ultimately stagnate their own products while global manufacturers looking to reduce manufacturing overheads will relocate to Africa, whose African Continental Free Trade Agreement will shortly come to fruition. There are signs that this is already starting to happen.

The United States meanwhile has found itself excluded from both of Asia’s major trade agreements, not part of RCEP and with President Trump having withdrawn the United States from the Trans-Pacific Partnership (TPP) agreement at the early stage of his Presidency. This now leaves the US without influence in the Asian regions trade policy and direction. It remains to be seen how President-elect Joe Biden’s administration deals with this omission.

However, the motivation for foreign investors either looking to enter, or expand in Asia has been significantly increased.  While work remains to be done, a Free Trade Agreement that covers Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Thailand and Vietnam will spur regional investment, where manufacturing and finishing can most competitively be conducted, and result in more choice for global consumers.

Manufacturers wishing to discuss the RCEP new Rules of Origin and Professional Qualifications opportunities may contact us at asia@dezshira.com 

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About Us

Silk Road Briefing is written by Dezan Shira & Associates. The practice assists foreign investors throughout Asia and has offices in India and Russia. In Iran, we have a long standing partnership with practices in Tehran and have similar arrangements with firms in Azerbaijan and Kazakhstan. For assistance please email us at asia@dezshira.com or visit us at www.dezshira.com

 

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