The RCEP Agreement: what implications for the European Union? A focus on Singapore

Photo credit: https://e.vnexpress.net/infographics/economy/world-s-largest-trade-pact-rcep-facts-and-figures-4192825.html

The Regional Comprehensive Economic Partnership (RCEP): what is it?

The RCEP is a free trade agreement (FTA) signed by fifteen countries (ten ASEAN countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam; and their five partners: Australia, China, Japan, New Zealand, and South Korea) on 15 November 2020. The negotiations, which started in 2012, initially included India, which gave up in 2019 due to the potential consequences of the manufacturing and agricultural liberalisation of relevant political industries and the influx of Chinese products.

The FTA, which became effective from the 1st of January 2022, is considered, together with the Comprehensive and Progressive Transpacific Partnership (CPTPP), a “mega-regional” trade agreement. The main goals are the economic integration of the region and the consolidation of the global supply chain. As will be shown later, although the agreement does not involve the EU, it might create opportunities also for European firms, since it expands the trade connection with the RCEP signatories, as will probably happen after 2023 with the Comprehensive Agreement on Investment (CAI) ratification. Moreover, according to the “Policy Department for External relations of the European Parliament”, the RCEP is much less ambitious compared to other FTAs, for example, the one between Asian countries and the European Union[1], since tariff barriers will be eliminated in a shorter time than the RCEP; this latter lacks labour rights, environmental standards and does not contain an investor-state dispute settlement (ISDS) tool, present at the contrary in the most recent single FTAs with the EU.

Fig.1. Martin N., RCEP: Nations signed up to world’s largest free trade deal, DW, 27/12/2021, https://www.dw.com/en/rcep-asia-readies-worlds-largest-trade-deal/a-60267980

The RCEP is the most prominent FTA in terms of global GDP, trade and population compared to the United States-Canada-Mexico Agreement, the EU’s FTAs and the CPTPP (also due to the withdrawal in 2016 of the US by the Trump administration) as it involves fifteen parties for a total global GDP of 28.70%, a global trade of 27.80% (the double of the “CPTPP”) and a total population of 29.65 (more than four times the “CPTPP”)[2].

Fig. 2. Richter F., Total 2019 GDP of member countries of selected regional free trade agreements, Statista, from World Bank, 16/11/2020, https://www.statista.com/chart/23503/combined-gdp-of-regional-trade-blocs/

RCEP’s economic expectation

The agreement includes the biggest exporter countries in the world such as China and Japan, but also mid-size economies, which are well integrated in the global market: it is the case of South Korea, Vietnam, and Singapore. Instead, small economies (e.g., Laos, Brunei, Cambodia) see in the FTA the opportunity to increase their exports[3].

The twenty-page long RCEP document contains some significant innovations: firstly the signatories set the elimination of customs duties by 92% within 20 years. Even if some particular agricultural goods are not subject to regulation, the agreement will cancel tariffs and quotas on over 65% of goods traded set in Chapter 2 ("Trade in Goods"). Secondly, the RCEP, compared to the CPTPP, enhances intellectual property (IP) protection since the rules also cover non-traditional sectors such as industrial designs and digital copyright. Consumer protection for e-commerce (data protection, online purchase, transparency) is guaranteed. Thirdly, government procurement will enforce transparency since the procedures, the laws and the regulations will be public.

Article 3.4.2. RCEP contains indications about the cumulative rules of origin (ROO) (14+1) of the fifteen member states. The simplification of the rules of origin (ROO), facilitating the management of the supply chain[4], will create great economic benefits for foreign trade firms. Since all RCEP members can be considered as one economic region; if a good is produced in more than one RCEP member state, the initial raw material will be considered in the same value as the final processing country. Consequently, the industrial, supply and value chain of the East Asia region will be more integrated. A concrete example is represented by China, the largest economy in the region. The Chinese raw materials can be easily traded in the whole region and better used in a variety of industries such as the textile, the electrinonic, the agriculture [5].

The RCEP agreement has been welcomed by some people with some scepticism, since it lacks labour rights, environmental standards[6] and state-owned enterprises, both pillars of the TEU and EU-ASEAN FTAs, and the fact is not encouraging, since the fifteen RCEP members registered the lowest ranking in the “World’s worst countries for working”[7]. Experts question the impact the free and unregulated economy may have on the population, in particular, a group of six Asian trade unions such as IndustriALL Global Union and UNI Global Union that, in July 2019, issued a joint statement asking RCEP countries to implement five elements in the agreement. Firstly, they insisted that all members must adhere to the International Labour Organisation (ILO) conventions since China, Laos, Malaysia, Singapore, Thailand and Vietnam still have to ratify it. The hope is that with the “Strategy for cooperation in the Indo-Pacific”, ASEAN countries will be spurred on to respect the Sustainable Development Goals (SDG) and the Paris Agreement and ILO International Labour Standards.

Secondly, the Unions demanded to omit the Investor-State Dispute Settlement (ISDS) mechanism from the agreement, since it would bypass the rules of democratically elected domestic legislation. Nonetheless, investors, if a RCEP party commits an infringement of the obligation, can still express their claim by diplomatic protection, and subsequently appeal to Article 19.3 (a) (b) of RCEP “Dispute Settlement Mechanism” (DSM)[8]. Although it was revoked by the agreement in November 2019, there is still the possibility to reactivate it in the future, three years after its signing. Third, the Unions are against the implementation of government procurement, so the single countries’ governments can decide their own industrial policies to preserve local industries and jobs. Fourth, on the Union's thrusts, RCEP documents were made public in November 2020 so that single states could have reviewed the text before ratifying. Fifth and last, at the Union’s request, was to conduct a human rights assessment by RCEP signatories' countries on sectors that could appear more vulnerable such as work, SMEs, etc[9]. The request appears necessary since according to the 2020 Global Rights Index “Cambodia, Indonesia, the Philippines, South Korea, and Thailand were not able to guarantee basic human rights to their citizens”[10].

What implications for the EU?

Many scholars wondered if the European Union would be disadvantaged and would remain excluded from the largest free trade zone ever signed. The cost reduction and the facilitation of trade among RCEP countries might decline the European’s competitiveness of products. However, in the long run, European firms, willing to diversify the supply chain in the RCEP countries, might benefit due to closer market integration, less transaction costs and an easier exporting[11]. The EU-ASEAN trade and economic relationship can be explained through the so-called "Mexico effect”. Mexico benefits from the FDI due to the Agreement it has with the US and Canada. German companies – to supply the US market – produce in Mexico, where manufacturing costs are more advantageous and the additional possibility to deliver duty-free goods from Mexico to the US. In the same way, companies that produce in an ASEAN country, will furnish the Chinese market with relatively restrictions and tariffs (Finanzgruppe).

The High Representative of the Union for Foreign Affairs and Security Policy (HR/VP) Josep Borrell, is positive about the RCEP effects for the EU:[12] Just as we believe in free and fair trade and in multilateralism as the route to get there, so we can be happy when others also take their path to enhance their own prosperity. And by growing the global economy, RCEP will help provide more – not fewer – opportunities for trade with the region, just as our Single Market provides opportunities for them. As EU we tend to have more ambitious FTAs with almost all countries in the RCEP agreement[13].

Furthermore, during the pandemic, Europe and ASEAN have strengthened their partnership since the EU donated 800 million euros (the highest amount of money compared to other partner regions) to ASEAN through the “Team Europe Initiative”. Likewise, ASEAN supports the EU COVAX initiative to distribute a global supply of vaccines[14]. Indeed, the EU sees the Indo-Pacific region as a “natural partner” and the ASEAN as a “strategic partner”. As noted in the table below, although the EU is not one of the RCEP members, it will not be excluded from the market advantages since the EU established FTAs with two ASEAN countries (Singapore and Vietnam), Japan and South Korea; it concluded the Comprehensive Agreement on Investments (CAI) with China, however, analysts say that it will not enter into force before 2023[15] due to the reciprocal sanctions on the possible abuse of human rights in the Xinjiang region. The EU is also under negotiation with the Philippines and Indonesia (ASEAN), Australia, and New Zealand, but we do not know when they will take effect.

Fig. 3. EU-Asia FTAs. Author: Ganyi Zhang, 06/01/2021, Upply. https://market-insights.upply.com/en/impact-of-the-new-intra-asian-trade-agreement-on-the-asia-europe-supply-chain. Initial source: European Commission.

Also, the time of EU – PTAs with ASEAN members' tariff barriers reduction or elimination will be shorter in time compared to the RCEP tariff liberalisation: RCEP will eliminate 92 % of the customs duties on goods from member states. By comparison, the EU-Japan EPA will eliminate 97 % of the customs duties on goods from the EU (vice versa even 99 %), the EU-Vietnam FTA 99 % and the EU-Singapore FTA even 100 %[16].

Tariffs will be eliminated in a shorter period, for example in the EU-Singapore PTA, 84% of custom duties on goods were removed on the signature day (21 November 2019), whereas the last 16% will be cancelled in five years.

A particular focus will be put on Singapore, which demonstrates how the EU was able to create strong trade relations, even without signing macro-regional trade agreements.

A focus on Singapore

Singapore can be considered a mid-size, emerging country. Among the RCEP parties, Singapore’s share of exports to GDP ranges to more than two thirds, mainly manufacturing goods such as “machinery and transport equipment, mineral fuels, lubricants and related materials, chemicals and related products, n.e.s.”[17] Before the RCEP, Singapore signed with the European Union the “EU-Singapore Free Trade Agreement (EUSFTA)” and “Investment Protection Agreement (EUSIPA)” in October 2018 and entered into force in November 2019, after seven years of negotiations. The main goals are the removal of all custom duties and the reduction of bureaucracy, the facilitation of particular and strategic products trade such as technology and pharmaceutical products[18]. The EU planned to reduce the 75% of the tariff in five years after the entering into force of the agreement, except for the agricultural sector. On the Singapore side, almost all tariffs were scrapped[19]. The FTAs achieved great results from the beginning. In fact, almost immediately after the entry into force, despite the ongoing pandemic crisis on the global supply chain, the EU imports from Singapore increased by 12% for a total amount of 9.7 billion euros, while the Europe exports to Singapore amounted to 12.5 billion[20]. Pharmaceutical products, fundamental for the fight against the Covid-19, registered a significant increase.

Barbara Plinkert, the EU Ambassador to Singapore stated: A clear evidence of the benefits of the EUSFTA on tariff reduction and elimination for Singapore exports to the EU, despite the challenging conditions for international trade and supply chains since the outbreak of the current pandemic[21].

Singapore demonstrated to be a favourable trading partner of the EU, the second in size, the first receiver of the European investments in Asia, and in 2020 the bilateral FDI increased compared to the previous years. For this reason, the EU registered a positive balance in trading with the Asian country[22].

The EUSFTA can be considered a “new generation” bilateral agreement, since it contains some progressive provisions, such as intellectual property protection, competition, sustainable development, biodiversity, promotion of labor rights (ILO), civil society initiative, discrimination discouragement[23], and digitalization[24]. In fact, one year after the agreement, the two counterparts met online in November 2020 to discuss the “Trade and Sustainable Development” (TSD) of the EUSFTA[25]. Both counterparts are willing to reach the climate neutrality objective of 2030 through the European Green Deal (renewable energy, energy integration, smart cities, etc.) and the Carbon Border Adjustment Mechanism (CBAM), still being designed.

The progressive evolution of the EUSFTA did not stop. In fact, in December 2021, the two counterparts started the discussion to strengthen the EUSFTA on digital trade[26]. The expansion of the cooperation of the digital market will benefit above all small and medium-sized enterprises, businesses, and workers, since the digital economy sector in Southeast Asia is supposed to triple its value between 2020 and 2025 (nowadays more than 60% of the global GDP is digital). The Agreement, based on the Indo-Pacific Strategy Joint Communication of the 16th of September 2021[27], emphasises on digital policy cooperation with agreeing partners, specifically Singapore, Japan and Korea on common standards for emerging technologies. The main objectives are the use of AI based on democratic principles and the respect of the human rights, support start-ups and SMEs in innovate and facilitating the business opportunity, increase the resilience in the supply chain[28]. The Agreement is also in line and somehow complementary with the ongoing World Trade Organisation (WTO) e-commerce rules negotiations on digital trade.

Conclusions

After having defined the RCEP, its content and implications, I asked If the Agreement could disadvantage the EU from the largest FTA ever signed. According to the estimates of the European University Institute (EUI),

Europe will also gain (marginally) from Asia-Pacific megaregionalism; the open nature of the CPTPP and RCEP will lead to some external trade creation and the more attractive environment for Europe’s multinational corporations will also be advantageous.

The EU can rely on numerous single FTAs with Asian countries (Singapore, Korea and Japan) as stressed by Borrell, complying with more modern standards and values of sustainability, digital and protection of human rights. During the pandemic, the EU and ASEAN countries showed resilience since they cooperated in distributing vaccines all around the world throughout the COVAX initiative. However, since the RCEP is a “living agreement”, new rules will be created over time with the potential to become global norms. It is the duty of the EU to keep track of future updates, otherwise there is the risk that it will be excluded from improvements.

[1] https://www.europarl.europa.eu/RegData/etudes/BRIE/2021/653625/EXPO_BRI(2021)653625_EN.pdf [2] https://www.europarl.europa.eu/RegData/etudes/BRIE/2021/653625/EXPO_BRI(2021)653625_EN.pdf [3] https://www.europarl.europa.eu/RegData/etudes/BRIE/2021/653625/EXPO_BRI(2021)653625_EN.pdf [4] https://www.europarl.europa.eu/RegData/etudes/BRIE/2021/653625/EXPO_BRI(2021)653625_EN.pdf. [5]https://www.allbrightlaw.com/EN/10475/621866ffa1744ca3.aspx#:~:text=When%20the%20origin%20of%20goods,originating%20in%20the%20processing%20country [6]https://eeas.europa.eu/headquarters/headquarters-homepage/88997/regional-comprehensive-economic-partnership-%E2%80%93-what-does-it-mean-eu_en [7]https://eias.org/op-ed/rceps-impact-on-workers-are-there-any-winners-assessing-the-labour-and-economic-implications-of-the-mega-regional-deal/ [8]http://arbitrationblog.kluwerarbitration.com/2020/12/08/the-rcep-investment-chapter-a-state-to-state-wto-style-system-for-now/ [9]https://eias.org/op-ed/rceps-impact-on-workers-are-there-any-winners-assessing-the-labour-and-economic-implications-of-the-mega-regional-deal/ [10]https://eias.org/op-ed/rceps-impact-on-workers-are-there-any-winners-assessing-the-labour-and-economic-implications-of-the-mega-regional-deal/ [11]https://eias.org/op-ed/rceps-impact-on-workers-are-there-any-winners-assessing-the-labour-and-economic-implications-of-the-mega-regional-deal/ [12]https://eeas.europa.eu/headquarters/headquarters-homepage/88997/regional-comprehensive-economic-partnership-%E2%80%93-what-does-it-mean-eu_en [13]https://eeas.europa.eu/headquarters/headquarters-homepage/88997/regional-comprehensive-economic-partnership-%E2%80%93-what-does-it-mean-eu_en [14]https://eeas.europa.eu/headquarters/headquarters-homepage/85434/strengthening-eu-asean-partnership-urgent-necessity_en [15] https://www.cnbc.com/2021/06/15/eu-china-investment-deal-still-possible-but-not-before-2023-analyst.html [16] https://www.europarl.europa.eu/RegData/etudes/BRIE/2021/653625/EXPO_BRI(2021)653625_EN.pdf [17] https://www.europarl.europa.eu/RegData/etudes/BRIE/2021/653625/EXPO_BRI(2021)653625_EN.pdf [18] https://ec.europa.eu/trade/policy/in-focus/eu-singapore-agreement/ [19]https://www.china-briefing.com/news/how-european-union-businesses-can-reach-the-e21-trillion-rcep-free-trade-market-access-via-existing-agreements/ [20]https://eurocham.org.sg/eu-imports-from-singapore-increased-by-12-in-the-first-six-months-of-entry-into-force-of-the-eusfta-despite-covid-19/ [21]https://eurocham.org.sg/eu-imports-from-singapore-increased-by-12-in-the-first-six-months-of-entry-into-force-of-the-eusfta-despite-covid-19/ [22] https://ec.europa.eu/trade/policy/countries-and-regions/countries/singapore/ [23] https://trade.ec.europa.eu/doclib/docs/2018/april/tradoc_156714.pdf [24]https://trade.ec.europa.eu/doclib/press/index.cfm?id=2337#:~:text=7%20December%202021-,Joint%20Statement%3A%20EU%20and%20Singapore%20agree%20to,bilateral%20partnership%20on%20digital%20trade&text=This%20marks%20the%20EU%20and,Free%20Trade%20Agreement%20in%202019. [25] https://trade.ec.europa.eu/doclib/docs/2020/november/tradoc_159089.pdf [26]https://trade.ec.europa.eu/doclib/press/index.cfm?id=2337#:~:text=7%20December%202021-,Joint%20Statement%3A%20EU%20and%20Singapore%20agree%20to,bilateral%20partnership%20on%20digital%20trade&text=This%20marks%20the%20EU%20and,Free%20Trade%20Agreement%20in%202019 [27] https://eeas.europa.eu/sites/default/files/jointcommunication_2021_24_1_en.pdf [28]https://trade.ec.europa.eu/doclib/press/index.cfm?id=2337#:~:text=7%20December%202021-,Joint%20Statement%

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