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Explainer | What is RCEP, the world’s largest free trade deal that is under way?

  • Regional Comprehensive Economic Partnership (RCEP) trade agreement took effect for most of the 15 member countries on January 1

  • It is the world’s largest free trade agreement, as it covers nearly a third of the global population and about 30 per cent of its global gross domestic product

The Regional Comprehensive Economic Partnership (RCEP) is a free-trade agreement between the 10 Association of Southeast Asian Nations (Asean) members plus Australia, China, Japan, New Zealand and South Korea.

The deal took effect in Australia, Brunei, Cambodia, China, Japan, Laos, New Zealand, Thailand, Singapore and Vietnam on January 1.

South Korea will follow on February 1, but Indonesia, Malaysia, Myanmar and the Philippines have yet to ratify the deal.

According to a report in The Manila Bulletin at the end of December, the Philippines missed the deadline to ratify RCEP as its Senate went into recess faced with stiff opposition by several groups, mostly agriculture and non-governmental organisations, that have strongly urged senators to reject the trade deal.

The RCEP covers nearly a third of the global population and about 30 per cent of its global gross domestic product, but this is expected to rise to 50 per cent by 2030, according to HSBC.

India withdrew from the deal at the end of 2020 amid concerns its economy could be flooded with cheap Chinese goods and farmers could be hurt by agricultural imports from Australia and New Zealand.

What are the major benefits of the RCEP?

Tariffs on more than 65 per cent of trade in goods are expected to immediately reach zero under the regional agreement, and that figure is expected to rise to around 90 per cent over 20 years.

“The RCEP will promote trade and attract investments to all participants in Asean indeed. The entry into force of the agreement is of great significance for further promoting intra-region free trade,” Bounleuth Luangpaseuth, vice-president of the Lao National Chamber of Commerce and Industry, told the Xinhua New Agency.
“RCEP will open a new chapter for regional economic and trade ties. It will also put Laos in the global spotlight.”

A key benefit of the pact is its common “rules of origin” framework, as RCEP exporters will generally only need to source at least 40 per cent of inputs from within the bloc for their final goods to qualify for tariff preferences when exported to other members, explained Ajay Sharma, HSBC’s regional head of global trade and receivables finance for Asia-Pacific.

“Trade is an important driver of growth for Asia, and RCEP’s entry into force will put Asia back on its pre-Covid growth trajectory. Intra-Asian trade – already larger than Asia’s trade with North America and Europe put together – will receive a further boost with RCEP’s standardised rules of origin,” Sharma said.
“RCEP will make it easier for firms to use Southeast Asia as a production base, and could accelerate the diversification of supply chains and the reallocation of [foreign direct investment] already under way in Asia.”

The pact should also help to streamline existing free-trade agreements in Asia-Pacific and strengthen intraregional trade linkages, Sharma added.

Additionally, he said, foreign businesses may also benefit from building production facilities in lower-cost Asean markets to make use of RCEP trade rules and preferences when trading within the region.

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