On 15 November 2020, leaders of the ASEAN Member States, Australia, China, Japan, Republic of Korea and New Zealand witnessed the signing of the Regional Comprehensive Economic Partnership ("RCEP") Agreement.
The RCEP Agreement marks ASEAN’s biggest free trade pact to date, covering a market of 2.2 billion people with a combined size of US$26.2 trillion.
What is the RCEP Agreement?
The RCEP Agreement is an agreement to broaden and deepen ASEAN’s engagement with Australia, China, Japan, Republic of Korea and New Zealand. Together, the RCEP participating countries account for approximately 30% of global GDP and 30% of the world’s population. The objective of the RCEP Agreement is to establish a modern, comprehensive, high-quality and mutually beneficial economic partnership that will facilitate the expansion of regional trade and investment and contribute to global economic growth and development. Accordingly, it will bring about market and employment opportunities to businesses and people in the markets covered. The RCEP Agreement will work alongside and support an open, inclusive and rules-based multilateral trading system.
What will the RCEP Agreement do?
The RCEP Agreement contains 20 Chapters relating to trade in goods, trade in services, investment, temporary movement of natural persons, rules of origin, customs procedures and trade facilitation, trade remedies, intellectual property, competition, government procurement and institutional provisions.
The RCEP Agreement will eliminate a range of tariffs on imports and the general elimination of quotas, greater transparency on the application of non-tariff measures, administration of import licensing procedures and the application of fees and formalities connected with importation and exportation between the member countries. The RCEP Agreement will provide a single rulebook covering all 15 markets, which has the potential to significantly reduce complexity and, therefore, compliance costs for exporters.
Interestingly, the RCEP Agreement provides a Chapter on Professional Services, which encourages increased dialogue between two or more interested members relating to the recognition of professional qualifications and relevant bodies to negotiate arrangements for mutual recognition of professional qualifications, licensing or registration in professional services sectors of mutual interest.
Benefit for Cambodia – Rules of Origin
Perhaps the most striking feature of the RCEP Agreement, and the one which could favor Cambodia, is with respect to the rules of origin (ROO) definitions, which are now consolidated for the first time amongst participating nations. To recap, ROO provide criteria needed to determine the national source of a product. Their importance is derived from the fact that duties and restrictions in several cases depend upon the source of imports. ROO are used by countries to determine whether imported products shall receive most-favored-nation treatment or preferential treatment and for the application of labelling and marking requirements. Cambodia, for example, follows the 40% rule with respect to the COO requirements under a number of its trade agreements, whereby at least 40% of the value of the imported product must have originated from a member state to qualify for tariff relief.
Australia, China, Japan, New Zealand, and South Korea are technically advanced nations and to that end have high-end factories, where labor and production costs are relatively high. This means that for processes that need careful labor-intensive involvement, such as finishing garments, the unified rules of origin regulations under RCEP should motivate an increase in manufacturing investment for the finishing of products, such as garments.
By comparison, under existing free trade agreements, businesses with global supply chains might face tariffs because their products contain components that are made elsewhere which means they often cannot meet respective countries ROO.
This will hopefully lead to an increase in investment interest from Australia, Japan, New Zealand, Singapore and South Korea (where production costs are higher) in countries with lower-cost and lesser-skilled workers, such as Cambodia.
Under the RCEP Agreement, businesses can move components of their supply chains to low-cost countries safe in the knowledge that — as long as the content comes from anywhere within the 15 markets in Asia meeting the ROOs for RCEP — it can be shipped to any of the 15 markets in Asia without any changes in formulation. In addition, the new RCEP certificate of origin should reduce costs and time for companies.
What happens next?
The RCEP will enter into force 60 days after the date on which at least three non-ASEAN signatories and six ASEAN signatories have completed their necessary domestic ratification procedures and notified the depositary that they are ready.