Australia and 14 Other Countries Agree to a Massive New Free Trade Agreement – But Without India, Will it Have an Impact?

November 12, 2019

Everything you need to know about the new RCEP agreement.

PERTH WA, 06 November 2019: The Regional Comprehensive Economic Partnership is a proposed free trade agreement between Australia, China, Japan, Korea, Indonesia and 10 other countries that will cover over 65% of Australia’s trade. However, with India pulling out of the agreement at the last minute, the impact of RCEP for Australia is significantly reduced.

What is RCEP

RCEP is a free trade agreement that has been in the negotiation stages for 7 years. Its members are China, Japan, Korea, Australia, New Zealand and the ASEAN countries (Brunei, Cambodia, Indonesia, Lao, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam). The negotiations included India but at the last moment India decided not to commit to signing the agreement. Rather than allow further time for India to negotiate, the 15 other countries decided to proceed without India.

The agreement acts to lower customs tariffs on trade between member countries, increase cross border trade in services, generally remove barriers to trade and set commitments regarding trade issues such as intellectual property rights.

The loss of India

Over the many years it has been negotiated, a key benefit of RCEP has been the expectation of India being a member. India was the one RCEP member with whom Australia did not have an existing FTA. Australia is negotiating its own FTA with India but negotiations are not progressing well.

Australian trade in goods with India is not particular high. However, with its massive population and growing GDP, India would be seen as a growth target for Australian exporters.

An FTA with India would have facilitated this growing trade. Further, joining RCEP would have been a reversal of India’s current protectionists stance under which it is actually increasing tariffs.

The RCEP door is not closed for India. However, it will be up to India to commit to RCEP’s requirements rather than RCEP being negotiated to accommodate India.

Trade benefits of RCEP

The primary trade benefits for Australia will be simpler free trade with the counties with whom it has existing agreement. There will be one set of rules relating to rules of origin and certification of origin. Further, when determining what goods will qualify, content from all 15 countries will be qualify. For instance, a jacket made from Australian leather, lined with New Zealand wool, manufactured in China and stored in a Malaysian distribution centre, will qualify for RCEP.

RCEP may also see duty rates fall for some Australian exports to RCEP members. The scope of any reduced duty rates will be known in February 2020 when the agreement is published.

Outside of trade in goods, RCEP is likely to create opportunities for service providers. This is an area where some of Australia’s older FTAs with RCEP members could be improved. However, it may also cause some to question whether the key effect of RCEP will be to open up Australia to further foreign labour without any real trade gains.

More generally, the agreement represents an endorsement of the global trading system at a time when it is under intense pressure from the US.

When will RCEP come into effect

A realistic prediction for RCEP becoming law and applying to Australian imports and exports is late 2020 or early 2021. At the moment the 15 parties are finalising the legal text of the agreement for signing in February 2020. Once signed, the wording of the agreement will be made public and it will go through each countries’ domestic law making process. In Australia that means the two houses of parliament and review by the Joint Standing Committee on Treaties.

RCEP may not become effective for all countries at the same time. While concurrent commencement is possible, it is probable that a smaller group of countries will form the initial implementation and others will come on board as they complete the ratification process. For example, with the Trans-Pacific Partnership, currently only 7 of the 11 member countries have ratified the agreement.

Worsening the FTA Noodle bowl or a possible solutions?

Once RCEP comes into force, Australia will have 2 FTAs with at least each RCEP member and 4 FTAs with New Zealand, Malaysia and Singapore. Each of these multiple FTAs has its own requirements concerning what goods qualify, what documentation is required and what is the reduced rate of duty. The variance is more significant for Australian exports than imports.

On the face of it, RCEP make this multiplication of free trade agreement even worse. However, it also provides a solution. As RCEP duplicates the large majority of FTAs between its 15 members, it may become the default agreement for those countries. Rather than exporters needing to compare the multiple agreements that apply, if RCEP provides deep tariff cuts, it may become the FTA of choice and the existence of the noodle bowl become irrelevant.

Customs brokers, importers and exporters will now have approximately 12 months to prepare for the implementation of RCEP. The next milestone will be February 2020 when we find out the precise benefits of the agreement and the technical qualification requirements.

References
https://www.linkedin.com/pulse/rcep-australia-14-other-countries-agree-massive-new-russell-wiese

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