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What the Regional Comprehensive Economic Partnership Agreement Means for U.S. and Foreign Companies

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A. What is the Regional Comprehensive Economic Partnership Agreement

The Regional Comprehensive Economic Partnership (RCEP) Agreement is a mega free trade agreement signed on November 15, 2020 by 15 Asia-Pacific countries, including Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam. The 15 countries represent nearly 30 percent of world's GDP and 2.2 billion people. Meanwhile, RCEP brings together China, Japan and South Korea for the first time under a single free trade agreement. The Peterson Institute for International Economics estimates that by 2030, the RCEP could add $186 billion to global national income annually. India originally planned to join RCEP but later pulled out in November 2019.

B. Summary of RCEP

The RCEP Agreement consists of 20 chapters covering a wide range of areas including trade in goods, rules of origin, customs procedures and trade facilitation, sanitary and phytosanitary measures, intellectual property rights, trade in services, E-commerce, and government procurement. Although the RCEP Agreement does not establish unified standards on labor and environmental protection, many scholars and practitioners believe that RCEP will effectively remove some common trade barriers in Asian countries.

Rules of Origin. Under the RCEP Agreement, the rules of origin will be unified for all member states, which means that companies only need to acquire one certificate of origin for trading in all member states. Surprisingly, only 40 percent of RCEP regional value of content is required for goods to meet the rules of origin requirement.

Trade in Goods. The chapter addressing trade in goods consists of key clauses that implement the member states' goods-related commitments, including granting national treatment to other member states; reduction or elimination of customs duties, and duty-free temporary admission of goods. For example, tariffs likely will be eliminated on 86 percent of industrial goods exported from Japan to China. Overall, under RCEP the total number of zero-tariff products in trade in goods exceeds 90 percent of total products.

Investment. The chapter addressing investment includes several investment protection standards commonly used in other trade and investment treaties such as most-favored-nation treatment, fair and equitable treatment, and just compensation. Additionally, RCEP stipulates the rules for expropriation and covers both direct and indirect expropriation. In order to rise to the level of indirect expropriation, several factors must be exercised including the economic impact of government actions; whether the government actions violate its prior binding written commitments to the investor; and the nature of the government actions.

E-Commerce. Considering the digitalization of the trade and commerce among the member states, the chapter focused on e-commerce aims to promote e-commerce among the member states and use of e-commerce globally. This chapter requires all member states to adopt legal mechanisms to create a conducive environment for e-commerce transactions and development, including protection of personal data and information, and cross-border information transfer. In addition, all member states are required to maintain the current practice of not imposing duties for electronic transmissions.

C. What U.S. and Foreign Companies Can Expect

Lenient Rules of Origin. For U.S. and foreign companies doing business and operating in ASEAN, China, and other Asia Pacific region, RCEP probably offers the most lenient rules of origin compared to other major free trade agreements. As discussed above, the basic value of content rule of 40 percent RCEP content is surprisingly low and is favorable to many U.S. and foreign companies. For example, a U.S. company may manufacture a product with 60 percent U.S. content and then export the product to Indonesia where the remaining 40 percent of content (from any other RCEP member) is added. Once the U.S. company establishes the 40 percent RCEP content, it can label the products as "Made in Indonesia," and export the products to any RCEP member state, including China, and enjoy low or zero tariffs.

Supply Chain and End Market. In response to the worsening U.S. – China trade relationship, many U.S. companies have started to optimize and diversify their global supply chains throughout Southeast Asia. Because RCEP lowers tariffs, reduces non-tariff trade barriers, and improves market access for goods and services in the region, investment in Southeast Asia becomes even more attractive and economically feasible for those companies looking to sell their products or services in the region. For example, for many U.S. companies, buying Chinese components and/or selling products in China can be an expensive proposition due to the many tariffs and non-tariff barriers that exist between the countries. However, U.S. companies now have an opportunity to avoid these burdens by importing parts from China and completing the manufacturing process in a RCEP member state and then selling the final products to China's huge market while taking advantage of the benefits of RCEP.

How Member States and U.S. Companies May Benefit

RCEP will benefit its member states by reducing trade and investment barriers and increasing the economic integration among the members. U.S. companies may also benefit by reconfiguring their global supply chains to include more trade and investment in the region which will allow these companies to avoid many of the currently high tariffs and regulatory burdens that they currently experience.

For more information please contact Frank Xue, John Scannapieco, or any member of Baker Donelson's Global Business team.

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