RCEP – Hong Kong seeks early accession to world's largest free trade agreement

Economic benefit

Hong Kong is readying itself to join RCEP, the world's largest free trade agreement. The agreement, which entered into force on 1 January  2022 for most of its member states, covers 30 per cent of the world's population (2.2 billion people), with a combined gross domestic product (GDP) of US$38 trillion, about a third of global GDP.

Accession into RCEP will offer Hong Kong preferential tariffs for its member countries; improved mechanisms for addressing non-tariff barriers, including customs procedures, quarantine, and technical standards; and a common set of rules on intellectual property, trade, and e-commerce.

Even before Hong Kong joined, the Brookings Institution estimated that RCEP will generate benefits close to US$300 billion by 2032, when its provisions should begin to take effect.1  RCEP is "widely expected to enhance economic integration among the members with measures to facilitate trade, eliminate tariffs, minimize non-tariff barriers, promote e-commerce and increase market access", according to a research report by the Hong Kong Trade Development Council (HKITC) and the Association of Chartered Certified Accountants.2  The report notes that in 2020 alone, total imports and exports from the 15 RCEP members added up to more than US$10 trillion, about 70 per cent of all trade in and out of Asia and Oceania.

RCEP is, however, is frequently compared unfavourably to the more ambitious coverage of the other big, multi-party Asian trade agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). In contrast to CPTPP, RCEP's scope is more limited. RCEP contains lengthy periods of time before many tariffs are fully eliminated, a narrower scope of products covered, and limited provisions for liberalization of trade in services. RCEP also lacks investor state dispute settlement, unlike CPTPP.

The members

RCEP brings many of the key Asian economies together in a regional framework that includes China but not the United States (U.S.). RCEP members include the entire Association of Southeast Asian Nations (ASEAN) (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Thailand, Vietnam, and Singapore) as well as ASEAN's major trading partners, Australia, China, Japan, South Korea, and New Zealand.

The U.S. has been mainly on the sidelines of trans-Pacific FTA negotiations following President Trump's withdrawal from the Trans-Pacific Partnership in 2017. The Biden Administration is now trying to re-engage the region through the Indo-Pacific Economic Framework, which is still early stages.

India is not a member of RCEP. It withdrew its participation after many years as a negotiating party for fears that domestic industries could be hurt by the import of cheaper goods from China and dairy products from Australia and New Zealand.3

RCEP represents the first time China, Japan, and South Korea - respectively the largest, second and fourth-largest economies in the region - will have entered into a common free trade agreement.

Tariff reductions

RCEP will eliminate more than 90 per cent of regional tariffs within 20 years of coming into force. Yet tariff reductions are more limited in coverage than those under CPTPP and other "gold standard" FTAs. RCEP covers about 90 per cent of tariff lines, whereas CPTPP covers close to 100 per cent. RCEP excludes from tariff reductions import-sensitive agricultural products and has long transition periods for liberalization of tariffs on other politically sensitive products.

RCEP will still make significant tariff reductions to important industries in the region. Semiconductors and other technology products will also see tariff reductions, which will benefit countries such as Brunei, Cambodia, Laos and Myanmar, which are not signatories to World Trade Organization (WTO) Information Technology Agreements (ITAs).

Rules of origin

Standardized rules of origin will be one of the significant improvements brought about by RCEP. Products manufactured to RCEP criteria will be able to be transported to all member countries using a single certificate of origin. This should give RCEP members an advantage over non-member exporters such as the U.S., since companies will be able to manufacture and sell goods across the region with just a single certificate of origin. With so many goods being manufactured across the region due to specialization, there has previously been a lot of customs red tape. RCEP sets out to make it easier for multinational corporations to pick and choose which RCEP country is best for each element of the supply chain.

RCEP may also incentivize U.S. and other multinational companies to locate production facilities within the RCEP area to secure preferential access to export markets and lower the cost of product assembly sourced from multiple locations.

Dispute resolution

The dispute resolution mechanism contained in Chapter 19 is compulsory and resembles the Dispute Settlement Understanding of the World Trade Organization (DSU). According to Article 19.2, the objective is to "provide effective, efficient, and transparent rules and procedures for settlement of disputes arising under (RCEP)".

There are certain exceptions. Chapter 19 does not apply to disputes concerning Standards, Technical Regulations and Conformity Assessment Procedures (Chapter 6), Trade Remedies (Chapter 7), Electronic Commerce (Chapter 12), Competition (Chapter 13) and Government Procurement (Chapter 16).

In contrast to the DSU however, there is no appellate review mechanism and nothing to compare with the WTO's Dispute Settlement Body. The situation in this respect is similar to other regional FTAs.

There are provisions for consultations before actions are commenced, and parties are at liberty to choose an alternative method for dispute resolution, including conciliation and mediation (Article 19.7(1)). The complainant can then request establishment of a panel. Each party to a dispute appoints a panelist and then there is a mechanism to appoint a Chair.

Panelists must: (1) have experience in law; (2) have experience in international trade; (3) have experience in other matters covered by the Agreement; (4) remain independent; (5) have no involvement with the matter at issue; (6) comply with the code of conduct; and (7) serve in their capacity and not as a government or organization representative.

Dispute settlement panels produce binding final reports after hearing the dispute, including holding a hearing. Respondents that lose a dispute must notify the complainants of their intention to comply with the reports. If it is impractical to comply immediately, they must communicate what in their view is a "reasonable period" to comply (Article 19.12(5)).

If the respondent fails to comply, the complainant can initiate a compliance review, which results in payment of compensation or, if compensation is not agreed by the disputing parties, the complainant may suspend concessions given to the respondent. Both options are temporary measures and are not preferable to complying with obligations.

Investor-state dispute resolution

RCEP does not presently contain investor-state dispute settlement (ISDS). Under Article 10.18, the parties agreed that ISDS will be discussed within two years following the date of entry into force. ISDS discussions are aimed to conclude three years after commencement of those discussions (potentially as soon as 2027, but still uncertain).

Currently, Chapter 19 permits state-to-state disputes involving alleged breaches of RCEP's investment protections, however no monetary damages are available. In terms of remedies, these are limited to a report finding that the host state has failed to comply with its RCEP obligations (Article 19.15). If the finding is that a measure is not in conformity with the obligations of the host state under RCEP, then the host state must take steps to ensure conformity. While hundreds of ISDS cases have been initiated under various other investment treaties, state-to-state investment disputes are exceedingly rare.

CPTPP, on the other hand, contains ISDS. Investors in the CPTPP region do not need to rely on their home state to bring proceedings to protect their rights. Instead, they can directly sue their host state for monetary damages.

For now, RCEP's member countries will be reliant on pressuring their respective governments to bring state-to-state proceedings to resolve disputes under the agreement.

RCEP is a strong agreement, but not gold-plated

RCEP will still likely become a driver of regional trade, given its massive geographic scope, significant tariff reductions, harmonized rules of origin, and trade facilitation services. RCEP will benefit from the maturing of supply chains in the region and the growing intra-regional trade of production centres, with different producers providing different parts to a finished manufactured good. As the HKITC report notes, a relationship between upstream and downstream enterprises in different production sites will "strengthen further as most raw materials and intermediate products will be able to move freely without trade barriers".

Benefits for Hong Kong

Hong Kong expects to benefit from joining RCEP, as it has close trade ties to almost all the members. Hong Kong already has free trade agreements in force with many RCEP members, making the tariff reductions less important. Still, the favourable rules of origin and trade facilitation sections in RCEP should benefit Hong Kong.

In particular, membership into RCEP is expected to expand demand for Hong Kong's offshore trade and third-party logistics services. Hong Kong's long term status as a hub for dispute settlement could also be buoyed by RCEP's dispute resolution mechanisms.

Whilst FTAs around the rest of the world stall, the momentum given to RCEP with Hong Kong's accession will benefit companies headquartered in the beleaguered "Asia's World City" and will be welcomed by regional trading partners and partners in the global economy.

Companies headquartered in Hong Kong, reeling from COVID-19 restrictions and supply chain headaches, will welcome the agreement and should find ways to take advantage of RCEP's regional trade benefits

Click here for more. 

1. The state of Asian trade and trade agreements in 2022 – Peter Petri and David Dollar, January 2022
2. Tapping the RCEP Opportunities: Hong Kong to Maximise GBA’s Unique Edge as a Business Platform – HKTC, November 2021
3. Why India refused to join the world’s largest trading bloc – Foreign Policy, 23 November 2020

Authored by Ben Kostrzewa, Michael G. Jacobson, Byron Phillips, and Nigel Sharman.