RCEP: A major driver to boost the Chinese and regional economy

February 17, 2021 08:30
Photo: Reuters

COVID-19 pandemic not only brought about an overall global economic slump, but also wreaked havoc on daily life and upended day-to-day business operations, particular in supply chains. However, a silver lining emerged to offer promise for 2021: the signing of the landmark Regional Comprehensive Economic Partnership Agreement (RCEP) by 15 Asia-Pacific countries. The participating countries, which include 10 ASEAN members, along with China, Japan, South Korea, Australia and New Zealand, make up an estimated 30% of global GDP and the deal is projected to add US$186 billion to the world economy .

As the world’s largest multilateral trade pact, RCEP is a milestone breakthrough for regional economies, holding the potential to divert trade flows and trigger new business trends as companies expand and invest across regional and international markets more easily.

In broad terms, not only will large enterprises and multinational companies reap the rewards that come with RCEP, but small and medium sized enterprises (SMEs) can also benefit from the trade deal as they comprise of over 90% of business entities across the 15 participating countries.

In terms of tariffs, RCEP will harmonize rates and standards as the deal is expected to reduce tariffs on up to 92% of goods traded between the countries. It will take the region closer toward a coherent trading zone, similar to that of Europe and North America, offering benefits for supply chain efficiency, market access and investments. Furthermore, digital copyright and intellectual property regulations will be strengthened to better protect businesses and incentivize trade

The internationalization of RMB

Intra-regional trade between signatories already accounts for nearly three-fifths of total trade activity throughout the Asia Pacific region. The RCEP ensures this number will continue to rise as global companies explore options of building supply chains within the zone. Simultaneously, as economic integration accelerates across Asia Pacific, China will become an increasingly important trading partner for most of the region. A trade boom will no doubt fortify Chinese supply chains too. While China builds stronger economic ties with other RCEP members, it can establish a more complete supply chain by utilizing advanced technologies from the likes of Japan and Korea. Notably, the RCEP is China’s first trade deal with these two countries.

In the financial services space, the deal is expected to facilitate the internationalization of RMB. Currently, over one-fifth of foreign trade with China is now settled in RMB . Through the RCEP, China is likely to become relatively less dependent on Europe and the US for imports of raw materials and intermediate products, thereby increasing the use of RMB in the region.

Furthermore, China is committed to further liberalize trade in the finance, business services and construction sectors, while other RCEP members are also committed to further relax foreign direct investment rules in manufacturing, agriculture and mining. As a result of RCEP, the anticipated increased interconnectivity among the member countries will likely drive demand for banking services.

The opening up of the APAC’s services sector

Under the formal provisions of the RCEP, at least 65% of the region’s services sectors will fully open up to foreign investors. To accomplish this, the RCEP outlines participating countries’ commitments to raise the ceiling for foreign shareholding limits in designated industries, such as professional services, telecommunications, financial services, computer services and distribution and logistics services.

Similar to China’s “negative list” system, RCEP also operates on a ‘negative-list’ strategy. The market at hand will be fully open to foreign service suppliers and investors unless it appears on the list. By ensuring transparency of regulations and measures throughout the bloc, this will also provide foreign businesses with more certainty.

With such profound long-term implications, it is exciting to welcome the year of the ox, where RCEP is anticipated to be in full swing potentially as early as mid-2021. It will be worthwhile to monitor how companies, small and large, both in and out of the trade pact, prepare to unlock the full potential of the liberalization of trade and investment in the bloc.

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Group Chief Financial Officer & Group Chief Operating Officer of Tricor Group