Fifteen countries conclude Asia’s largest trade pact

On 4 November 2019, during the ASEAN summit in Bangkok, fifteen of the sixteen countries negotiating the Regional Comprehensive Economic Partnership, known as RCEP, announced that they had concluded the negotiations on the text of its twenty chapters and on almost all market access issues. The fifteen are the ten members of ASEAN, plus China, Japan, South Korea, Australia and New Zealand. India decided not to join the commitment, considering that its essential concerns remained unresolved.

The aim is for the agreement to be signed in 2020, after a legal review of the texts. The participants left the door open for India to join later. Although the announcement marks a milestone, it should be remembered that it is not yet ready for signing nor, of course, for application, which will also require ratification by each country. The texts took seven years to negotiate, a long time that reflects the difficulty of harmonising very different economies, from the most advanced to the least developed.

What RCEP is

RCEP is a free-trade agreement that reduces tariffs among its members and harmonises rules on trade in goods and services, investment, intellectual property, e-commerce and rules of origin. It is estimated to bring together close to 30% of the world’s population and output, which would make it one of the largest trading blocs on the planet.

For China it is a way of consolidating its trading weight in the region at a time of tariff war with the United States. For countries such as Japan or Australia it is a complement to other agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, in force since December 2018, which includes neither China nor India. It is part of a race to create alternative trade frameworks. For some analysts, India’s absence limits the pact’s economic reach, although the open door keeps alive the possibility of a later accession.

What it means for Europe

The European Union has responded to that movement with its own agreements: that with Japan, in force since February 2019, and that with Vietnam, signed in June. An increasingly integrated Asia can be both an opportunity and a challenge for European companies, which compete with Asian suppliers that benefit from more flexible rules of origin within the bloc.

Supply chains will tend to be organised around the region, with more trade in components and intermediate goods among its countries. For a Spanish exporter this can be positive if it sells to the region, but it may transfer competitive pressure if its customers start replacing it with intra-regional suppliers. By including common rules of origin, a manufacturer can combine components from several countries of the bloc and still benefit from reduced tariffs, which favours the integration of regional chains.

What to review

Companies with suppliers, customers or production in Asia should follow the timetable of RCEP and of the European agreements, and assess which tariff preferences might apply to them. It is also worth reviewing the rules of origin of their products, which determine whether they can benefit from a specific agreement.

At the strategic level, it makes sense to ask whether the company depends too much on one market or supplier, and which Asian markets may be relevant in the medium term. Consult your adviser to assess your international exposure. Bear in mind that RCEP does not replace the European agreements with Japan or Vietnam but coexists with them; that is why it matters to know which rule of origin applies to each product.

World trade is being reorganised into blocs, and it is worth knowing which of them each business plays in.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.