The 15 countries in the Regional Comprehensive Economic Partnership (RCEP) held an elegant virtual signing ceremony on November 15, 2020. The relevant texts and schedules were released shortly afterwards and can be searched here.
The Asian Trade Centre will be delving more deeply into the specific details and producing a series of materials to help companies get ready to use the agreement. For now, here is my first quick technical assessments of the agreement. Note that this early look should not be taken as the definitive guide, as an agreement with 20 chapters across 510 pages and thousands of pages of associated schedules will take some time to unravel. To get a sense of the task ahead, the Korean tariff schedules alone run to 2743 pages.
Compounding the difficulties of making a quick assessment: governments can be quite creative in burying important details inside of different provisions. Flexibilities and exceptions, in particular, are going to be tough to note, understand and unravel.
RCEP will, of course, have important implications for trade in the region, for economic integration and for the future of trade policy. This post, however, will focus on the details of the agreement itself.
The basic structure includes 20 chapters, making RCEP a comprehensive trade agreement that includes commitments in areas like goods, services, investment, intellectual property rights, competition, trade remedies, standards, e-commerce and dispute settlement.
Many of these chapters were not included in the underlying ASEAN+1 agreements that formed the original core of RCEP. Getting these negotiated took significant time, which is partly why RCEP has taken 8 years to reach conclusion.
Overall, RCEP represents a significant achievement. The 15 countries involved (Australia, Brunei, Cambodia, China, Indonesia, Japan, Lao PDR, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Thailand, and Vietnam) are very diverse in nearly every imaginable dimension. Getting an agreement that could successfully navigate the domestic constraints and starting points in all 15 countries is an important accomplishment.
RCEP also represents the first time that many members have engaged in this sort of trade arrangements: especially between China, Japan and South Korea. As expected, this created additional friction as officials grappled with managing outcomes.
To get everyone to agree to similar provisions, RCEP had to show some levels of flexibility in approach. As an example of creative solutions to challenges, the trade facilitation chapter includes an annex in which some individual member countries negotiated different timelines for date of entry into force for specific provisions.
What does this mean in practice? The agreement itself could be more ambitious overall, with some members able and willing to sign on to the entire chapter of commitments at the outset. Some countries, such as Cambodia, which have trade facilitation systems, regulations and legislation that need substantial adjustment to come into compliance with new RCEP rules, have made commitments with range of dates for specific provisions.
Cambodia asked for, and received, an extension of five years to implement provisions like the application of digital technology at customs and the same 5 year extension of the timeline for introducing a range of new rules to manage express shipments. Indonesia asked for delays until February 2022 on two provisions for advance rulings and risk management. Malaysia also asked for one timeline adjustment to February 2022 for express consignments.
Building in implementation delays for some developing country members is an ASEAN tradition that just makes sense. While accepting ambitious commitments helps move the organization forward, reality suggests that some timelines are simply not going to be met. Hence, having the same commitments with delayed timelines for specific items can create win-win outcomes.
Similar levels of flexibility can be seen in the schedules for trade in goods. Some members (Australia, Brunei, Cambodia, Malaysia, Myanmar, New Zealand, Singapore, and Thailand[1]) have just one tariff schedule that is on offer for all other members. In other words, exporters into these markets from any RCEP country will receive the same tariff. As an example, all imported coffee cups sent from any RCEP member firm into Australia or Cambodia will be charged the same tariff for qualifying coffee cups at the border.
The rest of the countries have some variations in their schedules. As an example, Indonesia has schedules for ASEAN and separate schedules for each of ASEAN’s Dialogue Partners (Australia, China, Japan, New Zealand, and South Korea). Coffee cup exporters will need to consult the schedule that matches their country of origin to see what tariff rates are on offer. It may be the case that the coffee cup tariff is lower for firms coming from one market than other, or that the tariff ends up being exactly the same for each of the six schedules for Indonesia.
Since coffee cups should not be viewed as sensitive, it is likely that this line received the same tariff treatment in all of Indonesia’s 6 schedules. Other tariff lines, by contrast, may include significant variations including higher or lower tariff rates, longer times to reduction or elimination of tariffs, or even the exclusion of the tariff line entirely from new treatment.[2]
Japan has scheduled tariffs slightly differently. It has just one schedule, but there are variations possible within the document (shown in the “remarks” column). Coffee cup producers will need to find the associated tariff line and see which rate may apply to which listed countries.
In all markets, the tariff schedules extend to at least 20 years. While this sounds (and looks) alarming at the outset, note that most of the tariffs are cut or even eliminated long before the end of the scheduled period. An unexpectedly large number will be dropping or gone completely on the date of entry into force.
In a surprise, it looks like RCEP members managed to schedule more agricultural trade than originally anticipated. Some of the timelines are long and many sensitive tariff lines never drop to become duty or tariff free. But the number of tariff lines that are simply carved out or excluded appears more modest than expected. (Future work will help unravel these agricultural complexities in greater detail as there are always complications like tariff rate quotas to note.)
Many more tariffs, overall, have been eliminated and many lines drop quicker than expected as well. Member governments are already trumpeting high overall levels of tariff reductions, but these are probably tough to calculate accurately, given all the complexities built into 15 member’s tariff arrangements.
As expected, the RCEP members agreed to one rule of origin for all goods trade. This means that once a product is created to meet RCEP originating criteria, the rules are the same for all 15 member economies. A coffee cup (HS6911), to continue the illustration, needs to either reach an RCEP regional value content (RVC) level of 40% or undergo a change in tariff heading (CTH) at the four digit HS Code level. Once a firm can demonstrate that either criteria has been met, it can be shipped without any further adjustments into all 15 RCEP economies and receive any lowered tariff benefits on offer to RCEP firms.
The basic RVC rule of 40% RCEP content is surprisingly modest. It could certainly have been drawn at a higher overall level. Firms should have less difficulty meeting 40% value addition when the originating materials can be drawn from across 15 substantial economies. (A 40% RVC still allows for 60% content to be sourced from outside Asia.)
Textile producers always seem to have challenges in trade agreements, as the rules can be incredibly complex. RCEP is not yarn-forward or double transformation, but it generally requires change in tariff headings at either the 2, 4 or 6 digit levels.[3]
Services trade is also complex to understand and see what new access might be on offer. Eight members (Cambodia, China, Lao, Myanmar, New Zealand, Philippines, Thailand and Vietnam) have opted to schedule services using a “positive list” approach. To simplify greatly, only those services and investment sectors listed in the Annex II Schedules of Commitments are opened for RCEP participation.
The remaining members (Australia, Brunei, Indonesia, Japan, Korea, Malaysia, and Singapore) chose to use “negative” list scheduling for services and investment in Annex III. In these schedules, governments are required to include any exceptions from the general principle that all services (and investment) will be opened for competition from RCEP member firms.
It is possible, of course, to receive similar levels of openness and protection in both approaches. Having a negative list does not automatically mean greater access, nor does a positive list need to be limited. For example, Indonesia’s schedule of reservations runs to 111 pages, suggesting significant obstacles to trade and investment that are likely to remain.
Page counts alone do not tell the whole story, of course. Even a single negative list reservation can be deeply problematic for business if it is too sweeping. Clearly, further work will be needed to dive into the details.
Note that all 15 RCEP members used negative list scheduling for investment (except for those already covered under Mode 3 in the services schedules for positive lists). The actual commitments for services and investment will take more time to examine.
Investment conditions do appear, on first glance, to be stronger than anticipated. As an example, RCEP members promised to do away with what are called performance requirements, such as requirements to make invested firms use a certain level of domestic content, export a certain percentage of goods, transfer technology as a condition of investment and so forth. The specific provisions run to over a page and go significantly beyond existing ASEAN commitments.
This will be examined more carefully later, but the typical structure of investment protection known as investor-state dispute settlement (ISDS) is not included. However, the agreement does have a long section and a separate annex to detail the rules around expropriation. The agreement also pledges to review mechanisms to manage investor disputes within 2 years of entry into force with a timeline of 3 years for such negotiations to bear fruit.
This is, as should be obvious, a complicated agreement. Fortunately, RCEP members recognized the same thing and have agreed to create an RCEP Secretariat to manage the agreement. It’s unclear exactly how quickly it will come into being or where it might be hosted (here’s looking at you Singapore!). But the inclusion of a Secretariat is an important signal that members want a strong RCEP institutional structure to carry Asian trade commitments into the future.
The agreement is now headed towards entry into force. To start, RCEP requires domestic level approvals in place for 6 out 10 ASEAN members and 3 out of 5 Dialogue Partners. It will be launched 60 days after the 9th state notifies the ASEAN Secretariat (which is acting for now as the official Depositary). The remaining states will join the active agreement 60 days after their own documents are sent to ASEAN.
Finally, RCEP is already positioned to grow in the future. Accession countries can submit expressions of interest just 18 months into the agreement.
Clearly, this initial assessment only touches the surface of what is a remarkably deep and broad agreement. Stay tuned to future Asian Trade Centre posts on Talking Trade and look for our booklets and other products aimed at helping firms understand the possibilities now on offer for doing trade in Asia. For help or details on what RCEP can do for your firm, contact us today at info@asiantradecentre.org.
***This Talking Trade recap was written by a delighted Dr. Deborah Elms, Executive Director, Asian Trade Centre. After years of pushing this particular boulder up a long and steep mountain, it’s a pleasure to see it finally get locked into place for the future!***
[1] Thailand’s schedules do have some variation for Japan for some items. It is possible that the other listed countries have a handful of exceptions embedded in the thousands of pages that will need a careful examination. Future Talking Trade posts and associated RCEP booklets will help unpack these commitments in greater detail and with more certainty.
[2] In cases where a tariff line was not included in the agreement for all or some members, it does not mean that the product cannot be exported to the relevant country. It simply means that the government agreed to no new RCEP access beyond what it may already have committed in tariffs in the WTO and elsewhere. As with any FTA, firms always have the option of using WTO MFN rates and skipping the potential use of the FTA entirely.
[3] The situation gets more complex, as some tariff lines are deliberately excluded. As an example, yarn of manmade staple fibers (HS55.11) must undergo a tariff shift at the four digit level, but cannot include content from 55.09 or 55.10.