RCEP: A new trade engine to revive economies

Estimates from World Bank suggest that the productivity ‘kicks’ alone could raise real incomes by 5% by 2035e in economies like Thailand, Vietnam, and Malaysia.

>> RCEP to improve Vietnam’s access to large consumer markets: Standard Charter Bank

What’s all this about?

The Regional Comprehensive Economic Partnership (RCEP) agreement came into force on 1 January 2022. It covers Australia, mainland China, Japan, New Zealand, South Korea and 10 ASEAN members, though not all economies have ratified the agreement yet (Indonesia approved the deal in August, while the agreement took effect for Malaysia in March and for South Korea in February, with these economies joining 10 others that have been trading under the new preferential terms since the start of 2022). The Philippines is still in the final stages of approval for ratification.

The scope of RCEP is not as wide-ranging as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the regional free trade deal that went before it, especially on topics like labour and the environment. However, RCEP provides reasonable coverage for trading rules and procedures, enabling tariffs on more than 90% of the goods to eventually be eliminated. RCEP’s generous rules of origin, especially given the sheer number of nations involved, mean that local businesses can benefit from exporting tariff-free within the bloc, provided some of their inputs (typically around 40%) are sourced from other RCEP members.

Share of products with zero tariff between RCEP members 

Results after eight months

Since taking effect at the beginning of the year, several businesses have rushed to take advantage of the new deal. For example, table 1 sets out a number of certificates of origin under RCEP issued by various Chinese customs authorities. Meanwhile, there are 43,600 RCEP certificates of origin issued between January and May in 2022, which are valued at USD2.08bn, according to the China Council for the Promotion of International Trade (CCPIT). Uptake of RCEP trade preferences is only likely to grow as the deal continues to be implemented and further liberalization is phased in.

>> Vietnamese seafood has variety of opportunities to RCEP thanks to loosened origin rules

Beyond making use of tariff concessions, there are other benefits, too. For Japan, signing up to RCEP meant it was the first time it has entered into a free trade agreement with China. On the back of RCEP, Chinese automaker Guangxi Auto quickly struck a deal with Japanese EV startup ASF Company to produce a range of small EV commercial vehicles in China for sale in Japan. The two companies intend to collaborate on developing prototypes as per an agreement signed at the RCEP Business Leaders Forum earlier this year.

An express sea route between Qingdao in China and Osaka in Japan also opened in June 2022 after Qingdao and Dongchen Line Co agreed a strategic cooperation deal once RCEP took effect. Under this route, vessels can be directly boarded with loading equipment (e.g. trucks) and cargo, with the sailing time cut from two to three days to just 36 hours.

Despite the trade challenges in the short term, HSBC said this piece focuses on the broader horizon. Estimates from ADB show that markets including Japan and South Korea will experience the largest jump in exports in 2030e as RCEP is the first free trade agreement that includes China, Japan and South Korea, three of the more technically advanced economies in East Asia.

“Trade liberalisation should also trigger a productivity kick for Asia and drive more FDI flows. Estimates from World Bank suggest that the productivity ‘kicks’ alone could raise real incomes by 5% by 2035e in economies like Thailand, Vietnam, and Malaysia”, said HSBC.