The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement amongst 15 countries in the Asia Pacific — and by far, the world’s largest free-trade bloc to have ever been formed.
Kicked in on 1 January this year for 10 countries in the Asia Pacific, it was initiated in 2012 by the Association of Southeast Asian Nations (ASEAN) in order to strengthen ties with China and other APAC nations.
Asia and cross-border trade
The Asia Pacific, especially ASEAN, has long had a history of close and successful cross-border trading, primarily due to proximity and similarity of cultures, which facilitates logistics and market demand for goods.
However, unlike the European Union (EU), the APAC region had been a little on the slower side to rectify existing bottlenecks in processes, laws, regulations, tariffs, and access to financing, especially in relation to global value chains.
Furthermore, most trade agreements tend to be within these countries’ sub-regional parameters, i.e. Greater Asia, or Southeast Asia.
Leading tech nations in Greater Asia — namely, Japan, South Korea, and China — have been embroiled in political tensions for decades, slowing inter-regional trade there.
This RCEP, interestingly, will mark the first time that China, Japan, and South Korea would be in a free trade agreement — certainly a movement that has gotten the world on the edges of their seats to see how it plays out.
Who are in the RCEP?
Ushered in four days ago, the RCEP agreement kicked into action for Brunei Darussalam, Cambodia, Laos, Singapore, Thailand, Vietnam, China, Japan, Australia, and New Zealand.
South Korea would join the bloc on 1 February 2022, 60 days after its ratification. Other signatory nations including Malaysia, Indonesia, Myanmar, and the Philippines are expected to ratify it soon.
Their agreements will enter into force 60 days post ratification instrument deposit, acceptance, or approval to the Secretary-General of ASEAN.
What will the RCEP bring for signatories?
The RCEP comprises a mix of low, medium, and high-income countries. Its key selling point is the elimination of tariffs for cross-border trade in goods.
It is a big deal, as inter-Asia trade already is bigger than trade between Asia, North America and Europe put together.
Once the RCEP came into effect, 65% of tariffs have gone down to zero — and this number is expected to rise to as much as 90% within 20 years.
For RCEP exporters to enjoy these tariffs, they would need to abide by its common “rules of origin” framework, shared Ajay Sharma, HSBC’s regional head of global trade and receivables finance for the Asia Pacific, in a report by SCMP.
This means sourcing at least 40% of inputs from within the RCEP bloc, in order for their end-products to enjoy the tariffs when they’re exported to other member nations.
Sharma further opined that diversification of supply chains and FDI (foreign direct investment) will be accelerated as companies will find it easier to use ASEAN as a base of production, given lower associated business costs.
He also added that it would “streamline existing FTAs in APAC and strengthen intra-regional trade linkages.”
Digitalization and cross-border trade in ASEAN
As previously mentioned, cross-border trade in ASEAN has been strong and will keep growing as regional cooperation between private and government players further harness the power of technology, given the pandemic’s movement restrictions.
According to Google, Temasek, and Bain, Southeast Asia is predicted to reach a US$1 trillion digital economy by 2030.
Whilst trade was admittedly negatively impacted by the pandemic in the past two years, heavy damage was largely averted through several approaches.
Digitalization in the form of enhanced digital connectivity, automation of operational services, and strong governmental policies prioritizing digitalization in cross-border trade played a huge role in dampening the effects of the pandemic in ASEAN.
Furthermore, the region is one that’s quick to recognize and take advantage of fintech. This is largely applied to foster better financial inclusion, in the region home to the world’s largest population of unbanked and underbanked consumers.
The Asia Pacific has a huge appetite for fintech — reflecting the changing finance and banking landscape, as well as consumer demand, in these regions.
According to Findexable, five ASEAN nations — namely Singapore, Indonesia, Malaysia, Thailand, and Vietnam, are also in the top 20 Asian fintech nations. Findexable publishes the annual Global Fintech Rankings.
For example, the central banks of Malaysia and Thailand launched a cross-border QR payment system in June last year. The retail payment linkage enables consumers and merchants in both countries to make and receive instant cross-border QR code payments.
Both countries had recently undergone pivotal shifts in digitalizing payments. Malaysia promoted its real-time retail payment system and DuitNow, whereas Thailand charted an e-payment roadmap to bolster intra and inter-country retail e-payments.
Multiple countries in Asia have or are in the process of embarking on their own sovereign digital currencies, or, CBDCs (central bank digital currency).
In September last year, it was reported by Tech Wire Asia that central banks of Singapore, Australia, Malaysia, and South Africa will develop prototypes and test shared platforms to process cross-border digital currency transactions.
The RCEP and ASEAN’s digital economy dominance
Aside from fostering smoother payments, digitalization brings with it a host of other benefits for businesses and consumers alike, especially in the digital payments powerhouse that is Southeast Asia.
E-Commerce has been identified as a key driving force of strong intra-regional trade between countries, and its potential is immense in developing nations such as the Philippines.
The role that technologies such as AI and analytics play, especially in e-Commerce, cannot be underestimated too.
E-Commerce players are not just concerned with swimming with small fish — they have far bigger fish (markets) to fry.
Last year, China-based fashion mogul Shein overtook Amazon as the biggest fashion mobile e-Commerce platform in the US. Shein has quietly racked up a valuation that exceeds US$15 billion, too.
In Thailand, fashion e-commerce players such as Pomelo have developed their own machine learning system to boost their platform presence.
Furthermore, emerging fintech such as BNPL also play a part in growing financial inclusion for not just consumers, but MSMEs (micro and SMEs) as well.
A report by Deloitte predicts that digital trade will further accelerate, and leapfrog the region into the golden age of digital trade within the next three years.
The report also suggests that this pivotal shift will be largely facilitated by increased dynamic cross-border e-Commerce activities, which are further strengthened by regional cooperation through the RCEP, increased digitalized lifestyles, and the ongoing development of digital infrastructures.
It’s just a matter of when — not if.