The trade pact brings together 15 countries to form a free trade bloc as formidable as the European Union.
On November 15, a group of 15 countries, including Australia, China, Japan, New Zealand and South Korea, signed the world’s largest free trade deal. Taken together, it will touch the lives of one third of the global population and have an impact on 30 percent of its economic output.
The Regional Comprehensive Economic Partnership (RCEP) also includes member states of the Association of Southeast Asian Nations (ASEAN).
RCEP comes at a time when the cross-border exchange of goods has slowed because of the Covid-19 pandemic and millions of people have lost their jobs or been forced to take pay cuts.
Similar to the economic integration of the European Union, the RCEP is expected to improve relations among its member-states by creating economic interdependence as companies invest in each other’s countries.
Here’s a quick look at its important aspects.
1- How does the RCEP work?
Countries often sign bilateral free trade agreements (FTAs) allowing the import of each other’s goods with minimum or no tariffs. A tariff is a tax which, for instance, a country imposes on an imported T-shirt to ensure that a similar T-shirt made domestically remains competitive as far as the price is concerned.
Like FTA, a deal such as RCEP seeks to reduce tariffs and simplify custom procedures, making it easier for manufacturers to sell their goods in markets of the member states.
RCEP signatories have decided to eliminate tariffs and duties gradually, while some are being removed as soon as the agreement comes into force.
The ASEAN members, which include Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam, already enjoy close trade ties.
But the new pact simplifies rules for export, and gives them access to a bigger Chinese market and makes it easier to collaborate with tech industries in Japan and South Korea.
Negotiations, which led to the announcement on Sunday in a virtual summit, took eight years to be completed. Trade officials have held more than two dozen rounds of deliberations to iron out complex technical details.
RCEP is the first multilateral free trade agreement between China, Japan and South Korea – the regional powerhouses – which have often argued over trade and investment.
2- The shampoo conundrum
A thorny issue in multilateral trade deals like this one has to do with the rules of origin (ROO), which specify how much of local content goes into a product to qualify it for a duty-free entry into a member state.
It is a complex matter. Except for farm produce, such onions, most of the other goods – such as a laptop – depend on components and raw material purchased from different countries.
Many products, such as a bottle of shampoo, are made from ingredients that are bought from different countries.
RCEP says a company will be free to export under the terms of the agreement as long as 40 percent of ingredients, or raw material, have been sourced from member states. This means 60 percent of the ingredients can still be imported from places outside the RCEP.
3- RCEP and the China-US trade ties
Even though the talks for RCEP started in 2012, it assumed a greater importance after US President Donald Trump walked out of the Trans Pacific Partnership (TPP), a multilateral trade deal that could have been as big as RCEP.
China and the US have been locked in a trade battle for years now. Washington has targeted Chinese tech giant Huawei, which wants to play a lead role in the upcoming 5G mobile networks.
One of the sticking points in the economic relations of the world’s two largest economies, has to do with the state of protection around intellectual property rights in China – American firms often accuse Chinese counterparts of stealing their technology.
In any multilateral trade deal, the US would obviously want a stringent implementation of intellectual property protection. RCEP doesn’t take any concrete stance on these rights.
Similarly, RCEP doesn’t set any benchmarks for how labour and environment issues should be dealt with.
Joe Biden, the US president-elect, will have to deal with the new reality when he takes office in January.
4- Why did India walk away?
Late last year, Indian Prime Minister Narendra Modi pulled out of the deal. That was a big setback for negotiators as India is a major market in the region.
New Delhi said its businesses were not being given enough protection against cheaper Chinese imports. India also said that RCEP does not thoroughly cover areas such as information technology, as the country has an edge when it comes to IT services.
Indian farmers also lobbied hard against joining the bloc, fearing that it could open doors for agri corporations that have a monopoly over seed trade.
5- What happens next?
Not all the provisions of the agreement will be implemented immediately. Cambodia, Indonesia and others have asked for time to alter domestic rules and regulations to bring them in line with the requirements of the RCEP agreement.
It will take time for firms to establish how much benefit they can drive from the agreement, which was made public only this week.
It’s a lengthy document of more than 500 pages and has to be looked at along with thousands of pages that deal with the tariff details of individual countries.