The Regional Comprehensive Economic Partnership (RCEP) is a proposed agreement between the Association of Southeast Asian Nations (ASEAN) member states and its free trade agreement (FTA) partners. The negotiations are focused on the following: Trade in goods and services, investment, intellectual property, dispute settlement, e-commerce, small and medium enterprises, and economic cooperation.

RCEP follows the recent entry into force of “mega-regional” trade deals, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP-11), which includes seven RCEP members and four countries in the Americas (Figure 1). Although overall RCEP has less extensive commitments than other recent trade agreements (e.g., CPTPP or the U.S.-Mexico-Canada Agreement), many analysts view RCEP as an achievement for the multilateral trading system, which faces myriad challenges. The collective economic weight of its membership gives RCEP the potential to deepen some trade patterns and supply chains in Asia through lower trade costs and streamlined rules.

Figure 1. Asia-Pacific Members of Regional FTAs

RCEP is the world’s largest regional trade agreement by several metrics (Figure 2). Its envisioned economic footprint was even larger before India withdrew in 2019 over various concerns, including reportedly competition with China. RCEP accession procedures are not restricted by geography and offer an expedited process for India.

Figure 2. Economic Indicators of Major Trade Deals

Source: CRS with data from World Bank and WTO.
Notes: CPTPP and RCEP include 7 overlapping members; EU-Japan trade does not include intra-EU trade.

The RCEP underpins Asean’s role in leading a multilateral trade agreement of this magnitude and it will give a much-needed boost for a swift and robust recovery for businesses and people in Asean, particularly during the current Covid-19 pandemic crisis.”

The goal is to eliminate tariffs and quotas in 65% of goods and services traded across the region, with a revised definition governing “rule of origin”. For example, a product made in Malaysia with components procured from Japan might face import taxes in Australia. Under RCEP, components from any member nation would be treated equally, cutting down red tape and onerous documentation. This will encourage firms to invest more in the region, including building supply chains and services, and generate more jobs.

Services surge

Growth in services may get a big boost. While trade in goods has flattened, service flows have become the real connective tissue of the global economy. “Trade in services is growing 60% faster than trade in goods — and Asia’s services trade is growing 1.7 times faster than the rest of the world’s,” notes a McKinsey study published in July 2019. “While India and the Philippines are among the biggest exporters of back-office business services, trade in knowledge-intensive services is still in its infancy across most Asian countries and represents an important gap to be filled.”

In 2000, Asia accounted for just under 33% of global GDP in terms of purchasing power parity; it is on track to top 50% by 2040. “By that point, it is expected to account for 40% of the world’s consumption,” the McKinsey study reports. “Asia is making not only economic progress, but rapid strides in human development, from longer life spans and greater literacy to a dramatic surge in internet use.”

The 10 members of Asean — Malaysia, Singapore, Indonesia, Thailand, Brunei, Vietnam, Cambodia, Laos, Myanmar and the Philippines — have a combined population of 661 million and US$9.7 trillion in purchasing power parity. They join five others — Japan, South Korea, Australia, New Zealand and China — to form the 15-member RCEP. The RCEP will help streamline supply chains, which in turn could benefit manufacturing across the region, especially Malaysia.

Manufacturing is a major component of Malaysia’s economy and contributes about 23% to its GDP. Up to 98% of companies in the manufacturing sector are small and medium enterprises (SMEs), which are mostly Malaysia-focused but with great potential for export. The manufacturing sector employs 17% of the country’s workforce, compared with 62% in the services sector. That is natural, given that services need a huge human component while manufacturing requires a major capital outlay.

However, it is services that will benefit the most from RCEP. Every type of cross-border transaction now has a digital component. The heart of the digital economy is data, or the flow of information across businesses and governments, crossing national boundaries. Malaysia and Singapore were the first two countries in Southeast Asia to introduce legislation to tax digital trade in goods and services, both of which started on Jan 1, 2020.

Malaysia defines “digital service” as one that is delivered or subscribed over the internet or electronic networks, where the delivery of the service is automated and uses IT across all touchpoints. Foreign service providers (FSPs) who offer digital services to consumers need to be registered as foreign registered persons (FRPs). It is mandatory for an FSP to be registered when the total value of digital services provided to consumers in Malaysia exceeds RM500,000 per year, as per guidelines from the Royal Malaysian Customs Department. The applicable digital trade tax rate is 6%.

Alibaba positioning in RCEP

Malaysia was also the first country in Southeast Asia to launch the Digital Free Trade Zone (DFTZ) in November 2017. It was an initiative between Alibaba, Malaysia Digital Economy Corporation (MDEC) and Malaysia-based Fusionex, which powers the DFTZ eServices Platform. Fusionex implemented the electronic Trade Facilitation Platform (eTFP) to boost digitalisation of trade documents and processes.

Penang has also leveraged Fusionex’s eTFP to facilitate trade. “The platform will provide easier and frictionless trade and remove unnecessary barriers, inefficiencies and wastage,” the state government said. “It will also connect a multitude of players — from marketplaces to seaports, airports, freight forwarders, government agencies, customs, logistics providers, warehouses, trucking, cargo insurance, banks, business merchants and other agencies.”

Should you be receptive of RCEP? Of course, you should. For one, RCEP’s scale far exceeds the Trans-Pacific Partnership, which has 11 countries, including Malaysia and Singapore, minus the US (Figure 3). For another, RCEP opens trade doors beyond Asean. Finally, RCEP may facilitate technology transfer that would otherwise not occur, enabling SMEs to get into international trade.

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23 Mar 2022