The world’s largest free-trade deal just turned a year old. And like a toddler, while its full potential remains yet to be seen, there are glimmers of “hope” that it will develop into everything that was envisioned years ago when its member countries hailed it as a groundbreaking step toward lowering trade barriers in Asia.
But for now, the Regional Comprehensive Economic Partnership (RCEP) is still finding its footing. And analysts say that the pact – once regarded as a China-backed alternative to the eventually scrapped US-led Trans-Pacific Partnership – needs more time to grow into a trade behemoth benefiting its 15 signatory countries in the Asia-Pacific region.
When it took effect last January, the 20-year agreement was seen as a standard-setting means to internationalise the yuan in regional trade while integrating supply chains and erasing restrictive trade practices and tariffs on a range of goods.
And the RCEP could very well continue to grow and live up to those high expectations, including through new guidelines that can maximise its potential – that’s the hope of businesses such as Hong Kong-based Opal Cosmetics.
Although Hong Kong is not currently an RCEP member, it has applied to join the pact. But Opal is already qualified to take advantage of the benefits because it exports Chinese-manufactured products to the likes of Thailand, the Philippines, Australia and New Zealand.
“The US dollar is commonly used for trade in international markets. However, within RCEP, the costs of manufacturing, and the income from retailing, do not involve the US dollar,” explained Opal executive director Eva Tsang.
Companies that produce goods in mainland China may have to deal with not only the yuan and the currencies of their consumer markets, but also the US dollar in international deals.
“In my opinion, there is a chance for new rules to be set in RCEP for long-term [business] partnerships wherein it is not necessary to risk suffering the fluctuations of three [or more] currencies,” she said, adding that the yuan and Japanese yen are the two major candidates to be anchor currencies among RCEP members.
“With more [yuan] business, it will also set the stage for greater [yuan] internationalisation,” she added.
The RCEP covers nearly a third of the global population, accounting for about 30 per cent of the world’s gross domestic product, and this is expected to rise to 50 per cent by 2030. The trade pact involves China, Australia, Japan, New Zealand, South Korea and members of the Association of Southeast Asian Nations (Asean).
The pact took effect in Indonesia at the start of 2023, while the Philippines’ Department of Trade and Industry has said that it will sign the deal into law in the first quarter of this year. Myanmar has reportedly ratified the deal, but it has yet to be accepted by the Asean secretariat following the nation’s 2021 coup.
Tsang said that the RCEP offers on-the-ground businessmen “hope”, as it could help Asia get away from “US hegemony” while encouraging economies in the region to become more efficient by “linking up their strengths in technology, manufacturing, and natural resources”.
But the “biggest challenge” always lies in the smooth operation of supply chains, she explained, as one set of rules for trade and customs procedures should be created under the RCEP to form a new and diversified network with lower costs, due to tax breaks and greater flexibility.
But despite its current shortcomings, the RCEP has had some positive impacts over the past year.
Another Hong Kong-based company, OneAsia Network, sees the deal as a boon for business. The firm provides digital infrastructure and support services to clients across the Asia-Pacific region, and it says business increased by up to 40 per cent over the past year.
“With the tariff reduction, manufacturers will build inventory facilities at different spots under RCEP to increase competitiveness by moving closer to their customers,” explained Charles Lee, CEO and founder of OneAsia, adding that business growth is expected to continue for the next five years.
In addition to his company’s current footholds in Beijing and Shanghai, as well as in Japan, Malaysia, Singapore, Thailand, Vietnam and Indonesia, expansion plans are being considered in the Philippines and Cambodia.
But despite the obvious benefits of the trade deal, Nukila Evanty, a Jakarta-based member of the Asia Centre research institute’s advisory board, sees “exacerbated problems” for small and medium-sized enterprises resulting from “a flood of imported goods” into Indonesia.
“Chinese apples, plums and consumer electronics, plus Japanese-brand air conditioners, sell for less than local rivals and have more abundant after-sales services,” she said, adding that companies in China have “more labour and skills”.
And Jayant Menon, a senior fellow at the Singapore-based ISEAS-Yusof Ishak Institute, said that the “temptation” of member states to “turn inward” during uncertain times still persists.
“Members such as Malaysia and Indonesia have resorted to export controls on food and agricultural products in a desperate attempt to contain rising prices,” he said, adding that “big bang effects” of the RCEP will take time to materialise, as will the removal of long-held non-tariff barriers.
China’s Ministry of Commerce said last month that the country’s trade with other RCEP members grew by 7.9 per cent, year on year, to 11.8 trillion yuan (US$1.74 trillion) in the first 11 months of 2022, accounting for 30.7 per cent of the total foreign trade value.
The robust growth of trade, though, is not yet a common narrative among participating members, according to Haris Shaiful Bahari, a trade and economics researcher with the Institute of Strategic and International Studies in Malaysia.
“There was a noticeable uptick in overall trade activities post-March 2022. It could be said that RCEP came at a time when the Malaysian economy needed a shot in the arm to boost trade and investment activities,” he added.
But he is waiting for the release of the March 2023 trade data to find out how much of this uptick in trade activity can be attributed to the RCEP alone.
SCMP cited Commerce Ministry spokeswoman Shu Jueting saying in late December that “more efforts will be made to promote the high-quality implementation of the RCEP” through improving the efficiency of its comprehensive utilisation.
But further illustrating how the RCEP currently leaves much to be desired, and how it has the potential to grow and expand, is the fact that many small and medium-sized enterprises are still unable to take advantage of the deal, owing to its complicated provisions, according to David Sit, assistant principal economist with the Hong Kong Trade and Development Council.
“They have limited resources to study the RCEP legal texts and relevant regulations, or they prioritise survival in tough economic conditions such as those in the past year,” he said, stressing the importance of providing easy access to the most relevant and up-to-date information on the trade agreement, while further cultivating its development.