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On 2 November 2021, Australia and New Zealand ratified the Regional Comprehensive Economic Partnership Agreement (RCEP) – the world's largest free trade agreement to date – joining various Indo-Pacific neighbours and paving the way for the agreement to enter into force on 1 January 2022.
What is the RCEP?
The RCEP is a comprehensive free trade agreement signed by 15 countries in the Indo-Pacific region in November 2020. The countries include the 10 members of the Association of Southeast Asian Nations (ASEAN) and five of their largest trading partners China, Japan, South Korea, Australia and New Zealand – almost a third of the world's population and GDP.
So the RCEP brings together nine of Australia’s top 15 trading partners into a single economic framework that, in aggregate, accounts for nearly 60% of Australia's trade and approximately two-thirds of its global exports. The agreement signals a commitment by the 15 signatories to open up new trade and investment opportunities, as well as support for rules-based trading arrangements – all of which remain especially important in the face of challenges stemming from the COVID-19 pandemic and ongoing global trade tensions, especially between Australia and China. In particular, for Australia, the agreement is set to deliver various outcomes in relation to trade in goods, trade in services, investment, economic and technical cooperation, and offer new rules for electronic commerce, intellectual property, government procurement, competition, and small and medium sized enterprises.
Trade groupings involving Indo-Pacific nations
The RCEP will sit alongside other Indo-Pacific regional partnerships such as ASEAN and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The RCEP also comes off the back of other recent developments in international trade, including:
- Australia's entry into a trilateral security pact with the United Kingdom and the United States on 15 September 2021 (AUKUS), whereby the United Kingdom and United States will help Australia acquire nuclear-powered submarines for use in the Indo-Pacific region; and
- China's formal submission to join the CPTPP, which occurred just hours after AUKUS was announced.
What the ratification of the RCEP means for Australia
The RCEP will come into force 60 days from the date on which at least six ASEAN states and at least three non-ASEAN states ratified the agreement. This milestone was reached on 2 November 2021, when Australia and New Zealand joined Brunei, Cambodia, Laos, Singapore, Thailand, Vietnam, China and Japan in ratifying the agreement into their domestic law. This means that the RCEP will enter into force on 1 January 2022.
Australia's ratification of the RCEP demonstrates its continued drive for economic growth and adherence to the Federal Government's 2017 Foreign Policy White Paper. Two main priorities underpinning the White Paper were Australia's commitment to upholding a rules-based international order and ensuring stability in the Indo-Pacific region. The ratification of the RCEP highlights the value placed on maintaining such priorities as well as being a step forward to ensuring trade liberalisation in the Indo-Pacific region.
Benefits of the RCEP for Australian businesses
The RCEP is set to deliver greater integration of value chains and more common rules of origin, simplifying the way businesses and investors operate throughout the Indo-Pacific region. Currently, Australian traders are required to choose between 10 different fair trade agreements to do business between the countries of the Indo-Pacific region, each with its own rules and procedures. The RCEP will reduce compliance burdens by providing a single set of rules and procedures, meaning Australian businesses trading with multiple RCEP parties will only need to be across (and comply) with one set of rules and procedures.
In addition, by locking in market access and addressing non-tariff barriers, the RCEP is set to create significant new trade and investment opportunities for Australia, ultimately creating more jobs and stimulating economic growth and integration, while also building business confidence in our region. The introduction of the RCEP could not come at more opportune time as, in 2020 alone, Australia suffered approximately a 48% drop in foreign direct investment, with Chinese investment down around 61%.
Australia's participation in the RCEP negotiations allowed Australia to influence the rules incorporated in the RCEP, translating to a range of improvements over Australia's existing FTAs with RCEP partners. These improvements will be most prominent in areas where other partners' economies have the greatest growth potential, such as services, investment and digital trade. The RCEP also allows for additional economies to join in the future, creating the opportunity for the RCEP to grow its significance over time.
For more information on the anticipated outcomes of the RCEP, please see our summary here and the Australian Government's fact sheet here.
Next steps for Australian businesses in the lead up to 1 January 2022
Once in force, the RCEP will have significant implications for Australian business and will open up various opportunities that will be worth taking advantage of. As a result, Australian businesses should consider these opportunities now, and start planning strategies in light of them.