After eight years of negotiations, the signing of the Regional Comprehensive Economic Partnership (RCEP) on 15 November has created the biggest trade group in history. Comprising the 10 ASEAN member states as well as Australia, China, Japan, New Zealand and South Korea, the RCEP covers about 30% of the world’s population and global economic output, and is bigger than the European Union.
“This agreement to create the biggest trade bloc in the world is a very welcome piece of news during a harsh period for the global economy,” said Chamber Chairman Peter Wong.
“It is a tremendous achievement for the negotiators to find agreement among so many different economies. Although Hong Kong is not yet a signatory to the RCEP, we will benefit from the enhanced cooperation and improved ease of doing business across this very dynamic region.”
Benefits of the deal
The RCEP will eliminate at least 90% of tariffs, increase market access among participants, and includes more favourable rules-of-origin terms. Under the RCEP, intermediate goods from all member countries will be treated equally and will not be subject to tariffs. This will improve efficiency and lower costs, and should also encourage member countries to source from one another.
The reduction in red tape will also improve access for SMEs, which currently have very low participation rate in free trade activity in the region. Provisions in the agreement to enable electronic authentication will also help SMEs to access e-commerce markets in member states.
The RCEP is also the first free trade deal that includes China and Japan. Relations between these nations have been strained at times, so the successful conclusion of negotiations is an achievement in itself. And it is not just of symbolic importance. The terms of the agreement will benefit both countries economically as well, as Dr Le Xia, Chief Economist of the Ping An Digital Research Centre, explained, speaking at a Chamber webinar.
“If you look at the industry structures of China and Japan, they are still very complimentary,” he said. “A lot of Japanese companies are very interested in Shenzhen innovation, for example, as the city has a lot of opportunities – even for global Japanese companies.”
Tomohiro Takashima, Director-General of the Japan External Trade Organization (JETRO) in Hong Kong, noted that the RCEP will cover approximately 50% of Japan’s total trade, and 86% of exports from Japan to China will be duty free. Meanwhile, the common rules of origin will foster trade among members.
“This will make building supply chains based on the use of FTAs across the region easier, which was not previously possible,” Takashima said. “For example, a supply chain such as sending parts from Japan to an ASEAN country, to be assembled there then to be exported to another RCEP member country, for example China, will now be a potential scenario.”
China is not part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the other major trade group in the region. So being part of RCEP is a significant step that will open many more markets to the Mainland.
“The RCEP is positive progress for China, as it is now part of this very big free trade zone,” Dr Xia said.
While a lot of attention has focused on the major economies of China, Japan and South Korea, it is worth remembering that the RCEP originated with ASEAN, a bloc mostly made up of small and developing nations. This shows the potential for smaller economies to bring about significant change through successful cooperation.
Growth and innovation
The RCEP includes some of the fastest growing countries in the world, so its share of global economic output is almost certain to rise. According to a KPMG report, this could happen very quickly.
“While the countries which are parties to RCEP may now account for around 30% of global GDP, this is anticipated to rise to nearly 50% by 2030. There is thus the potential for RCEP to serve not only as a major platform for global trade, but the major global platform,” the report said.
ASEAN member states, in particular, offer tremendous potential to businesses and investors, aid, Minesh Pore, Co-founder and CEO of The Buy Hive, at a recent Chamber webinar.
“The population of ASEAN is among the youngest and fastest growing in the world, so innovation is going to come from there in the future,” he said. “There is an opportunity for Hong Kong to take the lead in being an innovation capital to help drive that innovation.”
The young ASEAN population is also digitally native, so if businesses want to access this huge and growing market they will need to have the technology in place, as well as the right products and services.
“ASEAN’s ‘Gen Zs’ are the future consumers, so we will need to follow them,” Pore said.
Limits to the RCEP
The RCEP is not as comprehensive as some other global trade agreements – for example, it does not cover the environment, labour standards or state-owned enterprises. Its intellectual property protection measures do not greatly change the current status, and the financial sector is excluded from many of the digital measures in the deal.
Discussing the RCEP at a recent Chamber webinar, Anne-Laure Descours, Chief Sourcing Officer at PUMA, noted that travel in the region could not be compared to the E.U., for example.
“My dream would be the free movement of people,” she said. “Europe developed so quickly because people could travel.”
Business meetings and cooperation in the region can be difficult because getting travel visas is still a complicated process for residents of many RCEP member states.
“If Hong Kong people could move freely to Vietnam or Indonesia, for example, that would be a great way for Hong Kong to learn, and to bring the expertise of Hong Kong to other countries,” she said.
Also missing from the RCEP is India. The nation was part of the initial negotiations, but dropped out in 2019. However, the signatories of the deal have said that the door remains open for India to join in the future.
When the signing of the deal was announced, Chinese Premier Li Keqiang described it as a “ray of light and hope amid the clouds,” and “a victory for multilateralism and free trade.”
However, Stephen Olson, Research Fellow at the Hinrich Foundation, cautioned against expecting too much from the deal. In a research paper he noted that many limits to the tariffs remain, especially in food exports.
“Supporters of open trade and investment should welcome RCEP, especially for the encouraging signal it sends at a time when the cause of trade liberalization is on its back foot,” Olson said.
He added that we should be realistic about expectations and not fall victim to over-hyping. “Ten years from now, as economists review the evolution of trade in East Asia during the preceding decade, RCEP will be a positive footnote. It is unlikely, however, to have driven the narrative.”
Hong Kong’s role
Hong Kong is not yet a signatory of the RCEP, but the HKSAR Government welcomed the deal and aims to join, said a spokesperson for the Trade and Industry Department (TID).
“Against the unprecedented challenges brought by the Covid-19 pandemic and the headwind of protectionism, RCEP is an important agreement for promoting inclusive development and strengthening regional supply chains, contributing to the post-pandemic economic recovery.”
In 2019, total trade between Hong Kong and the 15 RCEP members amounted to US$765.5 billion, accounting for 71% of Hong Kong’s total trade.
“Hong Kong’s accession to the RCEP will deliver new opportunities for our businesses to access regional value chains,” the TID spokesperson said. “Hong Kong traders, supply chain operators as well as service suppliers and investors will also stand to benefit from a better business environment with reduced compliance costs, simplified procedures, and enhanced transparency.”
Even before the city joins, it is likely to benefit from the closer integration of many of its trading partners. According to a Peterson Institute Working Paper, the RCEP will boost Hong Kong’s GDP by 0.4%, even without being a signatory.
A more collaborative global landscape?
In recent years, the world has seen a retreat from globalization. This trend was emphasized in 2016, which saw Britain vote to leave the E.U. and the United States elect Donald Trump on an “America First” platform. In 2017, Trump withdrew the country from the Trans-Pacific Partnership, the forerunner of the CPTPP.
The signing of the RCEP means that there are now two major trade deals in the Asia Pacific, and the U.S. is not part of either. Whether or not the U.S. returns to active participation in the region will depend on the new administration. President-elect Joe Biden has not made clear his policies in this area, but it is anticipated that he will, at least, take a more cooperative approach than his predecessor.
For now, regional signatories to the RCEP can look forward to seeing the benefits of lower tariffs and enhanced collaboration. With business operations hopefully returning to relative normal as the coronavirus recedes, the RCEP is an added bonus.
“As the world begins its recovery from the Covid-19 pandemic, the RCEP will help by boosting regional economies and improving business efficiency,” said Chamber Chairman Wong. “It is also an example to the world of the fruits of collaboration, which will help pave the way to a more prosperous future.”
Key Points of the RCEP
- Eliminate tariffs on more than 90% of goods
- Opens up 65% of service sectors
- Moves to a negative list approach for foreign service providers
- Harmonise rules of origin
- Multiple countries can be included in the calculation of origin rule
- Intermediate goods from all member countries will be treated equally
- Enhance consumer protection in e-commerce
- Promote acceptance of electronic signatures
Country Population (GDP per capita in $US)
Australia 25,698,300 (50,817)
Brunei 459,500 (76,567)
Cambodia 15,626,444 (4,022)
China 1,400,050,000 (18,158)
Indonesia 263,510,000 (12,432)
Japan 126,760,000 (42,860)
South Korea 51,709,098 (39,446)
Laos 7,123,205 (6,115)
Malaysia 32,273,000 (28,636)
Myanmar 54,836,000 (6,360)
New Zealand 4,786,710 (38,706)
Philippines 109,048,269 (8,270)
Singapore 5,703,600 (101,376)
Thailand 68,298,000 (17,749)
Vietnam 96,208,984 (10,537)