UHY GLOBAL JANUARY 2023 FEATURE


THE NEW HEART OF GLOBAL TRADE?


In Asia-Pacific the world's largest free trade agreement has come into force. But what impact will it have? Our explainer untangles the detail As free trade deals go, the Regional Comprehensive Economic Partnership (RCEP) is a very big deal. The agreement covers around 30% of the world’s population and 30% of global trade. The GDP of its member states stands at nearly USD 26tn, significantly more than the USD 19tn of members of the European Economic Area. It is the largest trading bloc in the world. The RCEP came into force at the start of 2022, after a decade of sometimes fraught negotiation. It includes ten members of the Association of Southeast Asian Nations (ASEAN) – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – plus Australia, China, Japan, New Zealand and South Korea. It may become larger still. Hong Kong has applied for membership, and though India pulled out of the process in 2019 over concerns around the protection of local industries, there are ongoing efforts to tempt it back. The RCEP is certainly an ambitious attempt to liberalise trade in the Asia-Pacific (APAC) region, and its impact is likely to grow in the coming years. But does it make the region the new heart of global trade? We weigh up the evidence. TACKLING MORE THAN TARIFFS The RCEP aims to eliminate tariffs on over 90% of goods over the next ten to 20 years. It will also attempt to prohibit a range of non-tariff measures on imports and exports between member states and encourage transparency. The agreement is expected to be particularly beneficial to those industries currently facing the highest barriers to trade, such as electronic products, machinery, automobile components and some agricultural and food products. Importantly, the RCEP is focused on modern economic realities. As well as reducing tariffs on a broad range of goods and services, it will set new rules in areas like investing, competition, intellectual property and digital copyright. The RCEP also sets out a detailed set of rules of origin (ROO) that will apply to businesses seeking to qualify their goods as originating for RCEP purposes. This is important because it is likely to lead to more integrated and flexible supply chains across the region. Deborah Elms, executive director of the Asian Trade Centre in Singapore, believes the RCEP will significantly boost Asian supply chains. “It’s a trade deal that sets up trade in Asia, for Asia,” she says. “We don’t have as much final production that ends up in Asia. One of the reasons we don’t have that is because trade in the region, especially for finished goods, is too difficult, too expensive – tariffs in place, non-tariff challenges, etc. – so you have less trade in the region than you should have. It’s not a perfect agreement, but the RCEP makes it more likely that firms will create supply chains in Asia, for Asia.” RCEP VS. CPTPP Seven members of the RCEP are also members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP): Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam. The main difference between the two agreements is that the CPTPP spans the Pacific and was due to include the US before the Trump administration pulled out of the deal. Chile, Peru, Canada and Mexico are still involved. The RCEP, by contrast, was only ever envisaged as an ASEAN-led initiative to boost trade in the region focused on the twin economic powerhouses of China and Japan. To overcome wide economic and political differences, the RCEP is necessarily less comprehensive than the CPTPP. For example, it omits any mention of labour laws, environmental protection or nationalised industries. Its economic property rules, though important, are not as detailed as those contained in the CPTPP. Compromising on these kinds of issues helped the RCEP – a largely ASEAN-led initiative – reach agreement with major players like China and Japan. Japan’s membership, in particular, is something of a coup. The country had never before had free trade deals with either China or South Korea. A SIGNIFICANT AGREEMENT The RCEP is a major agreement and has significance in both the economic and political spheres. Japan and China are both likely to benefit substantially. The Japanese government predicts that the RCEP will eventually increase the country’s GDP by 2.7% and create 570,000 jobs. Southeast Asia stands to benefit by USD 19bn annually by 2030, forecasts suggest. The agreement might also give ASEAN nations easier access to China’s Belt and Road Initiative (BRI) funds. The US-based Brookings Institute calculates that the RCEP could add USD 209bn annually to world incomes, and USD 500bn to world trade by 2030, significantly boosting the global economy. According to the Institute: “The new agreements will make the economies of North and Southeast Asia more efficient, linking their strengths in technology, manufacturing, agriculture, and natural resources.” But there is a broader geopolitical significance to the agreement, too, especially for China. The RCEP is likely to help China strengthen relations with its APAC neighbours, at a time when it is competing with the US for influence in the region. China, Japan and South Korea are committed to negotiations on their own separate free trade deal. These talks looked to be stuck, but the success of the RCEP deal may have given them new momentum. CHALLENGES TO CONSIDER There is general agreement that the RCEP is in the best economic interests of participating countries. It replaces multiple single agreements, ensures the faster passage of goods through customs and creates common rules of origin. It replaces piecemeal rules with overarching standards. But like all agreements of this kind, it is far from perfect. For example, any hopes for harmonisation around labour laws and environmental standards have been jettisoned – at least for now – to reduce tensions. In addition, though the tariff reductions are ambitious, many costs will reduce only gradually over time. It may be many years – perhaps up to 20 – before some are eliminated altogether. India dropping out of RCEP negotiations also dealt a blow. As the world’s sixth largest economy in terms of nominal GDP, India’s presence would have given the deal a third economic powerhouse. However, the Modi government feared that certain local industries would be overwhelmed by cheaper Chinese imports. There are also concerns about the agreement's ability to reduce non-tariff trade barriers. More sceptical voices have noted that nearly 600 harmful interventions have come into force since the deal’s signing in November 2020. According to Deasy Pane and Krisna Gupta of the Center for Indonesian Policy Studies, “these interventions include various types of technical barriers to trade, trade remedies, subsidies, licensing, local content measures and different types of export measures. Meanwhile, no commitment to prohibiting non-tariff trade barriers is expressly stated in the 20 chapters of the RCEP legal text.” SHIFTING THE TRADE BALANCE? Will the RCEP turn Asia-Pacific into the new heart of global trade? In some respects, it already is the heart of global trade. IMF forecasts put ASEAN at the top of the chart in terms of trade growth by volume through to 2026, with South and Central Asia in second place. China’s trade growth is set to slow in that period, but from a high base. The RCEP is far from perfect, but it is likely to boost those figures further and ensure continued trade growth over the next decade and more. Questions remain over how large that boost will be. Optimistic forecasts suggest the RCEP represents a sea change in intra-APAC trade. More cautious voices argue that nations in the region will have to overcome some of their protectionist instincts for the agreement to reach its full potential. The RCEP certainly appears to be a progressive step for the region. Importing and exporting businesses across APAC, and those from outside with interests in the region, will be keeping a close eye on how it develops over time. UHY STRENGTH IN ASIA-PACIFIC The UHY network supports clients across the Asia-Pacific region through member firms in 21 countries, including 11 countries covered by the RCEP. As well as offering specialist local and regional knowledge across a wide range of sectors and services, our member firms in the Asia-Pacific region work together with colleagues across the UHY network to provide tailored solutions that best meet client needs. “The RCEP is not about who wins or loses from the trade agreement. It is about pushing firms to be competitive.” Michael Aguirre, managing partner, UHY M.L. Aguirre & Co. CPAs, Philippines UHY ASEAN Group “Indonesia will have easier means to acquire better quality products, for consumers and for production inputs. Investors will look for opportunities in export and import industries too, which will help our businesses to grow and compete in the global market.” Hananta Budianto, partner, UHY Hananta Budianto & Rekan, Indonesia “Enterprises from RCEP member countries participated at the 5th China International Import Expo in November and cooperation continues to open up new opportunities.” Liqian Sun, partner, ZhongHua CPAs LLP, China “It is likely that the RCEP will make local manufacturing and supply chain development easier for member countries than for non-members like the US, which could impact US companies' future competitiveness in the region." Melanie Chen, managing director, UHY LLP, New York, United States For more information about UHY’s capabilities, email the UHY executive office, info@uhy.com, or visit www.uhy.com


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