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RCEP: one small step, not a giant leap, for trade and growth in Malaysia

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Executive Summary
  • In November 2020, the 10 ASEAN member states and five of its regional partners – Australia, China, Japan, New Zealand and South Korea – signed the Regional Comprehensive Economic Partnership (RCEP), which is the world’s largest free trade agreement (FTA) by GDP.
  • RCEP aims to strengthen regional integration in Asia-Pacific across trade in goods (i.e. tariff cuts), trade facilitation (i.e. reducing paperwork), investment (i.e. FDI), e-commerce, etc. 
  • The agreement has been described as a ‘game changer’ due to its potential to regionalise supply chains during the COVID-19 pandemic and ongoing US-China trade war.
  • The FTA came into effect for 10 ratifying countries on January 1, 2022. Malaysia was the 12th state to ratify in mid-January 2022, meaning RCEP will be active there in mid-March 2022.
  • RCEP is relevant for Malaysia because the country trades heavily with the rest of the world, especially with the RCEP countries in sectors such as electrical and electric products (E&E). By linking Malaysia to some of its biggest trading partners, RCEP could help determine the national trade and industrial development agenda.
  • While it is clear Malaysia rightfully ratified the agreement in line with the regional agenda for greater integration, we should still ask to what extent RCEP will contribute to the country’s trade and growth prospects. 
  • From a theoretical standpoint, an agreement the size of RCEP for a trade-dependent nation like Malaysia could be hugely beneficial. In fact, commentators have praised RCEP for moving the ball forward in terms of creating a more favourable regulatory environment for the regionalisation of supply chains, promoting more open trade and setting clearer regional standards. But in practice, does RCEP live up to the hype?
  • In this paper, the author unpacks the key components of RCEP to establish that the agreement is mostly symbolic and consolidatory in nature. Here is a chapter-by-chapter breakdown of the key findings in contrast to the perceived benefits:
Area Perceived benefits Key findings
Trade in goods  (i) Provides tariff-free access to over 65% of goods in the region.

(ii) Improves the intra-regional sourcing of raw materials.

(i) Gains from trade creation in Malaysia will not be substantial because tariffs are low to begin with (average applied tariff on intra-RCEP trade is 1.3%).

(ii) Over 70% of intra-ASEAN trade is currently tariff-free, and only 0.35% of products in the existing ASEAN Free Trade Area are subject to import duties. Tariff cuts are modest at best.

Rules of origin (ROO) (i) Creates a single rule book that harmonises overlapping rules in the region. Establishes formulas through which goods made using a combination of materials from RCEP and non-RCEP countries qualify for preferential access.

(ii) Simplifies the process of exporting and importing goods across the region.

(i) RCEP’s biggest concrete contribution, especially as the first FTA to bring China, Japan and South Korea together. Common ROO saves time and reduces exporters’ paperwork. 

(ii) First step towards further supply chain integration in future. But this also depends on adequate infrastructure, scale economies, agglomeration effects and strategic domestic industrial policy, which are beyond RCEP’s scope. 

Non-tariff measures (NTMs)  (i) Promotes transparency in the application of NTMs (i.e. policies apart from tariffs, such as quotas or regulations, that reduce trade).

(ii) Minimises regulatory barriers by improving access to information on exporting requirements, decreasing transaction costs and promoting conflict resolution.

(i) The recognition of transparency is a step forward. However, RCEP’s provisions on NTMs mostly affirm and uphold existing WTO agreements and ASEAN FTAs to which RCEP member states are already party. 

(ii) The actual reduction of NTMs requires compliance and active cooperation, which RCEP does not impose.

Trade facilitation (i) Reduces customs clearance times and minimises bureaucracy in the shipment of goods.

(ii) Simplifies the process of trading.

(i) Malaysia already exceeds RCEP’s benchmarks on customs clearance. RCEP’s trade facilitation measures are not novel, with many initiatives having already been launched within ASEAN. 

(ii) Nevertheless, the proposed measures could be beneficial in terms of cross-border trade with the regional partners.

Investment (i) Incentivises  investment to spur innovation and technological upgrading.

(ii) Restricts measures that get in the way of free FDI flows.

(i) RCEP’s requirement that host countries treat foreign investors and domestic investors equally has already been enshrined in existing FTAs. 

(ii) Attracting high-quality FDI requires strategic domestic policy to encourage joint ventures and collaboration, which is beyond RCEP’s scope.

Other areas (i) Mutually beneficial agreement, calling for economic and technical cooperation across countries.

(ii) First FTA in the region to discuss SMEs, helping incorporate SMEs into regional value chains.

(i) Cooperation is nonbinding, with the onus being on the more developed countries to assist.

(ii) The recognition of SMEs is a step forward, but RCEP is just a starting point. Domestic policy, which RCEP does not cover, is needed to strengthen SME growth and access to export markets.

  • Therefore, it is more useful to think of RCEP as a small step in the path towards more transparent and integrated trade in Asia-Pacific rather than a game changer in its own right. It functions primarily as a harmonising document that reiterates provisions already in place in ASEAN’s relationship with its regional partners.
  • It is likely that the incremental benefits of RCEP will only materialise in the medium to long term as regional trade itself continues to grow in the current macroeconomic and geopolitical environment. But a country like Malaysia needs to put in place the right domestic policies and strategies to capture its full benefits so that SMEs and large companies, employers and employees, MNCs and domestic firms, can reap equal dividends.
  • At the end of the day, RCEP ratification — while necessary to move regional integration forward does not on its own put Malaysia on the path towards sustained higher growth unless accompanied by changes to domestic economic and industrial policy more broadly.

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