At Last, An RCEP Deal

The Regional Comprehensive Economic Partnership (RCEP) is reaching its final stages, with officials aiming to sign the agreement in February or March 2020. RCEP, which has been in the works since 2012, would be the world’s largest trade agreement by population and GDP. A study from the Brookings Institution suggests that RCEP has the potential to grow the global real incomes by $285 billion annually if put into place before 2030, which in absolute gains is twice that of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The deal makes significant strides on rules of origin, intellectual property, and tariff reduction, while falling short in other areas like e-commerce. Nonetheless, RCEP represents a significant achievement for free trade in the Asia-Pacific.

Q1: What is RCEP and where do negotiations stand?

A1: RCEP is a trade deal involving 15 countries in the Asia-Pacific region. When negotiations were launched in 2012, the bloc originally included all 10 countries from the Association of Southeast Asian Nations (ASEAN) plus Australia, China, Japan, New Zealand, South Korea, and India. RCEP began as an attempt to integrate trade agreements between ASEAN nations and their major trading partners (“dialogue partners”) into a single agreement. When signed, RCEP will be the world’s largest trade agreement.

At the end of the last negotiating session in November, the agreement was all but finalized. Officials announced plans to sign the agreement in February 2020. Officials had stated in previous years that RCEP was close to being finalized without an agreement coming to fruition. However, unlike previous instances, in early November, leaders from RCEP countries declared that text-based negotiations and “essentially all market access issues” had been concluded and that a legal scrub of the agreement would be undertaken to prepare for signature in 2020. A legal scrub is traditionally the last box to check before an agreement is signed. That leaders have ordered this final step suggests signature is more likely than not in coming months. RCEP negotiations had reached a critical point for the Asian economy as slowing global trade, increasing Asian integration, and disruption of trade patterns all put pressure on RCEP nations to come to an agreement.

During the final negotiations, Indian prime minister Narendra Modi announced that India would pull out of the agreement. While India’s move was somewhat unexpected, the departure will not impact the progress of RCEP. The remaining 15 nations plan to move forward, aiming to sign the agreement in 2020 and implement it in 2021. The RCEP provisions that specifically address India will be frozen, and other small changes may be made in order to account for India’s departure. RCEP will remain open for India to rejoin at any time (RCEP also contains a more general accession provision), but it is unlikely that India will look to rejoin prior to the signing of the agreement.

Q2: Why did India leave the trade pact?

A2: Prime Minister Modi stated that India’s withdrawal was the result of “core concerns” with RCEP, and Indian minister of external affairs Subrahmanyam Jaishankar said that no agreement was better than a bad agreement. India’s main concerns with the agreement revolved around e-commerce sections and trade imbalances, particularly in agricultural and industrial trade. India pushed for a provision on “data localization” within the e-commerce section, which would require that any data collected on citizens of a certain country remain in that country unless approval is granted for its removal. Opponents to the proposition argued that the provision would hinder the function of e-commerce and provide opportunities for governments to mishandle data.

India also had major concerns over trade imbalances as it had trade deficits with 11 of the 15 nations involved in RCEP. Fearing that the deal could result in a flood of manufacturing and agricultural products into their market, India was unwilling to remove tariffs on many sensitive industries, such as dairy. India would have had to significantly decrease its tariff and non-tariff barriers, which currently cover up 90 percent of imports depending on country of origin, if it were to proceed with joining RCEP.

Prime Minister Modi also faced opposition from the public and business community in India regarding RCEP. Industries raised concerns about the ability to compete with cheaper exports (mainly from China), and both the prime minister’s political party and the opposition party pushed for him to withdraw from the agreement.

Q3: What does RCEP cover, and how does it compare to other regional agreements?

A3: While some have criticized RCEP for not covering as much or breaking down as many barriers as the CPTPP, RCEP provides tariff reductions, although some market access issues still need to be hammered out. The agreement provides a framework for future negotiations and changes. RCEP spans 20 chapters, compared to the CPTPP’s 30 chapters and the 34 chapters in the United States-Mexico-Canada Agreement (USMCA). In addition to lacking breadth compared to the CPTPP and the USMCA, RCEP is also expected to lack the depth of those agreements. The exact tariff schedules will not be known until the agreement is signed in 2020 and are expected to be unambitious compared to the other agreements. Most members are expected to reduce tariffs on only 80 percent of tariff lines (although with India’s withdrawal that number may increase to 90-93 percent) and maintain carveouts for agricultural products. By contrast, the CPTPP once fully implemented would reduce tariffs to zero on 99 percent of tariff lines. Tariff schedules were primarily negotiated bilaterally within the agreement, so schedules will change based on which countries are involved.

One of the most significant changes under RCEP is the creation of common rules of origin for the entire bloc. Once implemented, RCEP countries will only require a single certificate of origin. This will allow companies to easily ship products between RCEP countries without needing to worry about specific rule of origin criteria in each country or for each manufacturing step. A common rule of origin for the RCEP bloc will lower costs for companies with supply chains that stretch throughout Asia and may encourage multinationals that export to RCEP countries to establish supply chains across the bloc.

RCEP also includes limited provisions on services, investment, and standards. In each of these areas, the rules are relatively weak. RCEP members used a mix of positive and negative lists for services, with CPTPP members opting for the more ambitious latter format. The section on intellectual property was stronger than expected, and the digital copyright rules go beyond what was included in the CPTPP. The agreement does not include labor or environmental chapters. RCEP contains an investor-state dispute settlement provision, but it will not be operational unless members decide to activate it in three years when they revisit the provision. RCEP also includes a competition chapter; however, unlike the CPTPP, it does not include disciplines on state-owned enterprises.

One of the main points of conflict in negotiations revolved around e-commerce, and the resulting sections on it were lackluster in content. E-commerce and digital trade are of increasing importance in Asia as it already leads in many indicators of global readiness, such as mobile phone use and online shopping. Many hoped RCEP would include provisions that would decrease barriers for e-commerce and create coherent rules throughout the region. However, the agreement fails to include prohibitions on data localization or barriers to cross-border data flows. Proponents hoped RCEP would emulate the CPTPP and the USMCA to prevent individual countries from restricting the movement of information across borders, which is a key way for businesses to not only reach customers abroad but coordinate activity across countries. Unlike the CPTPP and the USMCA, RCEP also does not include a customs duty prohibition on electronic transmissions, which would have prevented countries from imposing customs duties on digitally delivered products. The inability to agree on a customs moratorium sends a gloomy signal for prospects for the survivability of the global moratorium on duties on electronic transmissions. The global moratorium, established by the World Trade Organization, expires at the end of this year and requires consensus to renew.

Q4: How could RCEP impact the United States and U.S. companies?

A4: The Obama administration worried that the failure to ratify the Trans-Pacific Partnership would allow China to write the trade rules in the Asia-Pacific through RCEP. China has long backed RCEP as an opportunity to set regional rules for trade without the influence of the United States. China has pushed hardest for the deal among group members as it stands to gain economically and in influence. RCEP is important to China because of declining U.S.-China commercial activity and its maturing economy. Due to rising domestic labor costs, China is eager to find duty-free imports from RCEP partners to replace imports from the United States that are subject to tariffs imposed in response to U.S. duties. Liberalized access to developing markets also gives its domestic businesses more certainty that they will not have to rely solely on internal consumer demand. Also, China likely hopes that increased exchange in high-tech know-how with South Korea and Japan will keep it on its path to climb up the value-added chain as articulated in the Made in China 2025 policy directive.

Despite concerns about China, some U.S. companies could take advantage of RCEP if they have preexisting Asia operations or are planning on expanding to the region. Particularly, the tariff reduction and other benefits, including common rules of origin, for RCEP nations are applied based on manufacturing location, not the headquarters of a company, so a U.S. firm that produces in an RCEP nation can export to other RCEP nations and receive the same benefits.

On the other hand, the U.S. government now finds itself in a situation where it is not a party to either of the two major trade agreements in the region (RCEP and the CPTPP). Both agreements will encourage the development of supply chains inside their regions, which will leave U.S. companies at a disadvantage unless they are located there. The U.S. absence from the agreements also encourages both groups of members to look elsewhere for regional leadership—to China in the case of RCEP and Japan in the case of the CPTPP. Over the long term this will work to the United States’ disadvantage in geopolitical as well as economic terms.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Jack Caporal is an associate fellow with the CSIS Scholl Chair. Lydia Murray is an intern with the CSIS Scholl Chair.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Lydia Murray

Intern, Scholl Chair in International Business

Jack Caporal