The deal is expected to increase access to Chinese investment, such as this Chinese-funded mall in Colombo, Sri Lanka © Paula Bronstein/Getty Images
The deal is expected to increase access to Chinese investment, such as this Chinese-funded mall in Colombo, Sri Lanka © Paula Bronstein/Getty Images

World's biggest trading bloc 'likely to boost supply chains'

18 November 2020

A total of 14 countries in the Asia-Pacific region including China, Japan, South Korea and Australia have created the world’s biggest trading bloc in a move likely to boost supply chains. 

Leaders signed the Regional Comprehensive Economic Partnership (RCEP) over a video link after eight years of negotiations, bringing into force a deal that will encompass 2.2 billion people and 30% of the world’s economic output.

Others countries to sign the deal included Indonesia, Malaysia, Singapore, the Philippines and Thailand.

India was notably absent, fearing the deal would benefit China at the expense of smaller economies, but members left the door open for its future membership, saying it would be “welcome” to join.

RCEP is expected to eliminate a range of tariffs on imports over the next 20 years and establish new rules of origin – which officially define where a product comes from.

While many member states already have free trade agreements (FTAs) with each other, these can be complicated to use and the new RCEP tariff structures are likely to benefit cross-border supply chains.

Currently businesses with global supply chains may face tariffs within an FTA because their products contain components that are made elsewhere, Deborah Elms, founder and executive director at the Asian Trade Centre, told BBC news.

For example a product made in Indonesia containing Australian parts could face tariffs elsewhere in the Asean free trade zone, whereas under RCEP parts from any member nation would be treated equally.

This might provide companies in RCEP countries with an incentive to look within the bloc for suppliers.

Peter Petri and Michael Plummer, of The Brookings Institution think tank, wrote that RCEP would incentivise supply chains across the region.

They said Southeast Asia would benefit by $19bn annually by 2030 but Northeast Asia would benefit more because Asean countries already had free trade agreements with RCEP partners.

“RCEP could improve access to Chinese Belt and Road Initiative funds, enhancing gains from market access by strengthening transport, energy, and communications links. RCEP’s favourable rules of origin will also attract foreign investment,” they wrote.

Lavanya Venkateswaran, an economist at Mizuho Bank’s Asia & Oceania Treasury Department, said in a note that RCEP aimed to “abolish some 92% of traded goods tariffs”.

She said this “would be critical in deepening supply chain linkages, with a reach into the service sector with ambitions of 65% of the service sector being fully open under the RCEP”.

The deal is expected to lead to streamlined customs procedures within the bloc, which will speed the releasing of perishable products from customs to within 6hrs from arrival and submission of documents.

Chinese premier Li Keqiang was quoted by state news agency Xinhua as saying the deal was “a victory of multilateralism and free trade”.

Australia’s prime minister Scott Morrison said it would “open up new doors for Australian farmers, businesses and investors”.

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