Juita Mohamad was quoted in Business in Action @ FMM report.
by Business in Action @ FMM
What the formation of the world’s biggest trade bloc means for Malaysia
Towards the end of 2020 as the world reeled from the effects of the global COVID-19 pandemic, a piece of exciting news hit headlines as a landmark agreement was signed.
Leaders from 15 Asia-Pacific nations signed the Regional Comprehensive Economic Partnership (RCEP) agreement, nearly eight years from when negotiations began for the trade and investment accord.
The momentous occasion took place virtually on November 15, 2020, during an RCEP Leaders’ Summit that coincided with the 37th ASEAN Summit.
The 15 countries involved include the 10 Association of Southeast Asian Nations (ASEAN) member countries as well as five of their free trade agreement (FTA) partners – Australia, China, Japan, New Zealand, and the Republic of Korea.
Representing the largest trading bloc to date, RCEP represents 30% of the global population, 26% of global exports, 25% of global imports and 29% of global gross domestic product (GDP) in 2019.
The agreement aims at producing an integrated market that will ease the provision of goods and services by each member nation zeroing in on trade, investment, intellectual property, e-commerce, small and medium enterprises (SMEs) and economic cooperation.
A comprehensive agreement, the RCEP spans 20 chapters and covers many areas not included in the existing FTAs between ASEAN countries and its dialogue partners, and it intends to boost competition in a way that drives productivity.
It primarily aims to eliminate a range of tariffs on imports, specifically for goods that already qualify for duty-free treatment under existing FTAs. Countries however are permitted to retain tariffs for imports in sectors that are considered as important or sensitive.
The agreement also lays out common standards for goods to be included under the RCEP for preferential tariff treatment. Its advantage over the many existing bilateral FTAs is that the RCEP allows manufacturers to source for parts from participating parties while adhering to the rules of origin without incurring tariffs under a bilateral FTA.
It aims at becoming a unifying set of rules to help facilitate the development of regional supply chains among parties, and will enter into force 60 days after six ASEAN member states and three non-ASEAN member states have ratified the agreement.
The Federation of Malaysian Manufacturers (FMM) applauded the signing, noting that apart from the lowering of trade barriers, it will help attract foreign companies keen on entering an integrated ASEAN market.
FMM President Tan Sri Dato’ Soh Thian Lai said the RCEP will greatly contribute to the country’s post-pandemic recovery by creating resilient supply chains.
“FMM is a strong advocate of the RCEP agreement. We have always maintained that RCEP will contribute significantly to Malaysian companies to improve market access, participate in new value chains, increase economic activities, and strengthen supply chain links across Asia.
“Although Malaysia has implemented regional FTAs with China, South Korea, Japan, Australia and New Zealand through ASEAN, RCEP will see the integration of the ASEAN Plus One FTAs into a single and more cohesive trade and investment architecture in the region.
He added that the November 15, 2020 signing of the agreement was very timely for Malaysian businesses, as under the RCEP, the existing ASEAN Plus One FTAs will be streamlined and greater market access commitments will be made while gaps in the existing agreements will be reduced to create a highly competitive economic area.
“This agreement will enhance transparency in trade and investment. The trade pact will also facilitate technical cooperation with advanced industrialised countries like Japan, South Korea, New Zealand and Australia which will assist Malaysian small and medium enterprises (SMEs) in developing better and more competitive products to enable their greater inclusion in global and regional supply chains.
“With the unprecedented challenges posed by COVID-19, it is imperative to stabilise manufacturing production while sustaining and diversifying supply chain connectivity within the region.
“FMM believes the RCEP will greatly contribute to the country’s post- pandemic recovery by creating resilient supply chains,” he said, urging ASEAN members to ensure ratification by all its signatories to ensure that the RCEP comes into full force at the earliest possible time.
A POSITIVE OUTLOOK ON THE FUTURE
According to Dr Juita Mohamad, a Fellow in the Economics, Trade and Regional Integration (ETRI) Division of Institute of Strategic and International Studies (ISIS) Malaysia, the manufacturing sector may be able to capture a bigger market share beyond Malaysia’s borders, through the RCEP.
“The 15 RCEP member countries have an estimated GDP of US$25.8 trillion (RM10.43 trillion), accounting for about 29% of world GDP and making up 30% of the world’s population. This makes RCEP the largest trading bloc in the world by GDP size,” said Dr Juita, in an interview with BIA.
“With such a large market, the manufacturing sector may be able to capture a bigger market share beyond Malaysia’s borders. The manufacturing sector may also benefit from the lowered tariffs and the elimination of non-tariff barriers, making importing intermediaries or raw materials much easier at a lower cost.”
Many are hopeful that the RCEP will help drive regional economic integration as countries slowly begin offsetting inward-looking policies in the midst of curbing the spread of the virus.
“With the rise of protectionism and trade tensions in the past few years compounded by the spread of the pandemic, the finalisation and signing of RCEP was a strong signal by member countries to continue their commitments towards further regional integration and trade reforms in the Asia-Pacific region,” she opined.
While the ratification process is still underway, Dr Juita foresees some bumps in the road ahead for some countries.
“The ratification process might be challenging for different countries as new and upgraded bills and laws need to be passed at the national level. This process might be hindered by the change in government and its priorities down the line,” she opined.
“There is also the pressure to ratify the agreement for member countries. This is because the first movers will reap bigger welfare gains compared to late-comers. This was true for the CPTPP.”
Close to home, the process of ensuring that the RCEP proves beneficial to all parties lies in part with the Malaysian government.
“The government needs to ensure that there is a level playing field between the bigger firms and the SMEs. If the SMEs cannot take part in the global value chains then the RCEP’s benefits will not trickle down to the grassroots level,” said Dr Juita.
The signing of the RCEP is indicative of a greater need for regional integration and will pave the way for ASEAN to have more of a voice on the global stage.
“RCEP has signalled that ASEAN still believes in regional cooperation and small and middle economies are able to come together to cooperate even during the pandemic. It signals that you do not have to be big, to be winners,” added Dr Juita.
Long term, the RCEP has great potential to impact the global economy positively.
“In the long run, I hope that the RCEP will be upgraded in its depth of commitment to include other non-traditional provisions such as environment, labour and the like. Only when such a comprehensive trade deal is created can we have growth with minimal impact to our environment while safeguarding our workers at home and abroad,” said Dr Juita.
The integration of regional economies under the RCEP is expected to lead to increased foreign investment amongst its participants and from companies based outside the trade bloc hoping to take advantage of the RCEP to increase their presence in the region.
It also includes investment-friendly provisions such as investor aftercare (which includes dispute resolution) and intellectual property protection provisions.
This article was first published in Business in Action @ FMM report.
