The first day of 2022 began with a piece of exciting news – businesses in ten Regional Comprehensive Economic Partnership (RCEP) countries (Australia, Brunei, Cambodia, China, Japan, Laos, New Zealand, Singapore, Thailand and Vietnam) can use the agreement to more easily trade with each other. South Korea is set to follow next with entry into force on 1 February 2022. Indonesia, Malaysia, Myanmar, and the Philippines should be participants shortly.
The RCEP agreement itself holds significant potential with a comprehensive scope stretching across 20 chapters including Rules of Origin, Customs Procedures and Trade Facilitation, Trade in Services and Investment.
RCEP tariff benefits can seem modest compared to many other ASEAN agreements and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) due to a rather long tariff elimination period of up to 20 years or more. It is, however, noteworthy to mention several benefits that RCEP can bring relative to existing agreements in this region particularly for manufacturers and services providers.
Asian manufacturers that were unable to take advantage of existing free trade agreements (FTAs) due to more complex supply chains may now be able to use RCEP to obtain tariff preferences, including duty-free or zero tariff treatment. RCEP provides a single rule of origin (ROO) for production, allowing manufacturers that meet this requirement to enable production and sale to all RCEP markets.
Compared to existing ASEAN+1 agreements with China, Japan, Korea, Australia and New Zealand, RCEP can make it less challenging for manufacturers to produce and sell within the region without altering sourcing, manufacturing location or destination for goods. The use of a single preferential certificate of origin (PCO) document also lowers compliance costs for businesses and eliminates the need for separate paperwork when several FTAs are used.
RCEP can be relatively straightforward to use, especially for companies that are already familiar with taking advantage of FTA benefits.
However, manufacturers may need to carefully examine originating content for export to countries that apply what is called “tariff differentials:” China, Indonesia, Japan, Korea, Philippines, Thailand and Vietnam. These RCEP countries, such as Korea, can apply differing levels of tariffs for products that originate from China, Japan, ASEAN, Australia and New Zealand, with an additional rule that will need to be fulfilled for such products with different levels of import tariffs depending on the country of origin.
Henceforth, to obtain preferential tariffs meant for a certain country, manufacturers will need to ensure that products for export to RCEP countries that apply tariff differentials meet a minimum 20% local value requirement after excluding foreign raw materials listed in the country as shown in the Appendix on Tariff Differentials. For instance, a Singapore manufacturer exporting to Korea will require at least 20% of the total value of materials to be obtained locally or sourced within ASEAN (excluding ASEAN countries that have yet to ratify RCEP) for its importers in Korea to obtain ASEAN preferential tariffs.
Apart from tariff benefits, RCEP members (and even non-members) can benefit from more streamlined customs procedures to facilitate trade. Building on existing ASEAN+1 agreements, RCEP introduces additional guidelines on the issue of advance rulings and on the release of goods at customs that improves certainty and reduces likelihood of shipment delays at the customs. The Chapter on Customs Procedures and Trade Facilitation also includes a scheme for authorised operators to benefit from reduced paperwork requirements, faster clearance of goods, and deferred payments or clearance at the premises of the authorized provider.
While the assessment of benefits of FTAs are often fixated on tariff reductions for goods, it is equally important to recognize services and investment opportunities that RCEP offers to services providers and investors in Asia.
RCEP provides further liberalization to services sectors such as legal services, accounting, architecture, computer services, wholesale trade and insurance, that can go well beyond existing ASEAN+1 agreements. This includes better market access, reduced limitations, and terms and conditions for the provision of services or the establishment of commercial presence in RCEP markets.
For most service sectors, RCEP allows foreign service providers to deliver services across the border without requiring a local presence in the domestic market. Any exceptions are indicated in the country schedules shown in Annex II and III.
Besides ensuring fair and equitable treatment to investment, the RCEP agreement further prohibits the imposition of a range of business performance requirements as a condition for investments and receipt of preferential treatment for investments in RCEP countries including local content requirements, restriction on sales and export of goods or requirements for technology transfer.
Moreover, services and investment commitments made in RCEP are binding. Members used two different approaches for scheduling or writing down their specific commitments for services and investment. Further details can be seen in our booklet with SICC on RCEP services and investment shown here.
As businesses start using the RCEP agreement or deliberate over whether the agreement can be used, they need to note that not all RCEP commitments will be delivered on the day of entry into force as legislative and administrative changes may take time to be communicated and implemented. Thus, at the initial implementation of RCEP, businesses may experience some discrepancies or lag between stated commitments and actual conditions, and it is advisable for businesses to be prepared to provide feedback and engage their governments or seek assistance from trade associations and business chambers to flag any inconsistencies and resolve possible implementation challenges.
***This Talking Trade blog was written by Jia Hui Tee, based on twoRCEP guides on manufacturing and services developed in partnership with the Singapore International Chamber of Commerce (SICC). On February 8, the ATC will also be speaking on RCEP benefits for businesses at an SICC event. If your business requires support in using RCEP and other FTAs, do contact the ATC at info@asiantradecentre.org.***