Of RCEP, business, and a less messy bowl of noodles

Written by Wong Meng Yew, Deloitte Southeast Asia and Singapore global trade advisory leader, Alexander Goh, Deloitte Singapore tax manager, and Gerald Mui, Deloitte Singapore tax associate. The below are their personal views and may not represent the views of Deloitte.

As published in The Business Times on 9 February 2021.

In Budget 2020, Singapore's Market Readiness Assistance scheme was enhanced to include FTA consultancy services to help SMEs navigate the network of rules involved.

The Regional Comprehensive Economic Partnership (RCEP) was signed on Nov 15, 2020, at the virtually held 37th Asean Summit under the watchful eye of the international media. This came after an eight-year rollercoaster ride of negotiations, including the withdrawal of India—one of Asia's major economies and original RCEP negotiating parties—at the eleventh hour.

RCEP is the world's largest Free Trade Agreement (FTA) to date, comprising about 30 per cent of global gross domestic product and covering countries that add up to close to a third of the world's population.

Singapore is no stranger to the benefits of FTAs. Singapore's FTAs have brought actual tariff savings of over S$700 million and over S$1.1 billion in 2009 and 2010 respectively for Singapore-based companies, and there has been a clear positive impact on the domestic export of goods.

Paradoxical effect

Singapore has an open economy that is heavily driven by trade in goods and services and it is imperative for the country to participate in such agreements to keep its competitiveness on the world stage. To date, Singapore has negotiated and signed 27 agreements (including RCEP) with its trading partners since its independence.

While FTAs aim to reduce barriers to trade between participating countries, the implementation of multiple bilateral and regional FTAs present a paradoxical "spaghetti bowl effect", or in a term that is closer to home, "noodle bowl effect".

There are different administrative requirements that need to be implemented and when different FTAs start to overlap, the sheer complexity of these "noodles" become a barrier in themselves and may hinder efforts to utilise them.

This complex noodle bowl affects utilisation of FTAs for small and medium enterprises (SMEs), which may not have the resources to fully understand and fit the usage of FTAs into their supply chain.

The Singapore government has rolled out initiatives to minimise this noodle bowl effect. The Market Readiness Assistance (MRA) scheme was introduced in 2013 to support SMEs that are looking to expand overseas. In the Singapore Budget 2020 announcement, the MRA scheme was enhanced to include FTA consultancy services as part of the grant's scope of supported activities, allowing SMEs to navigate the increasing network of FTAs that Singapore is party to with the help of external advisers.

RCEP was conceived by the Asean regional grouping as far back as 2006, to consolidate the rules present in the various Asean+1 FTAs—that is, the FTAs between Asean and Asia Pacific countries Australia, China, Japan, New Zealand, and South Korea. From a trade-in-goods perspective, the main benefits of RCEP would be firstly, the elimination of tariffs for at least 92 per cent of goods.

Secondly, it will provide better market access for exports, since the agreement's regional cumulation provisions would allow businesses to include the use of raw materials and parts sourced from the other 14 RCEP markets. It will also expedite the flow of goods, as customs authorities have committed to the clearance of express consignments and perishable goods within six hours of arrival, among others.

In the services sector, at least 65 per cent of services will be fully opened with increased foreign shareholding limits, including in areas such as professional services, telecommunication services, financial services, computer related services, and the distribution and logistics sector. Based on the comfort level of each of the parties, some have agreed to use a more liberal "negative-list" approach.

This will encourage more service suppliers who have seen market saturation in their home country to venture out into overseas markets, encouraged by regulatory changes that will formally allow market entry into the desired areas. This will further result in greater trade connectivity and integration of businesses operating within the 15 member countries of the RCEP.

Trade-offs expected

Similarly, the relevant sectors committed to opening under the investment chapters are likely to see increased overseas investments, whether via direct equity shareholding or joint ventures with domestic partners. Commitments around freer capital flows will also provide the assurance for companies to venture abroad into the markets of the other member countries.

With increased tariff reductions among the Asia Pacific economies, it is inevitable that certain trade-offs will be expected. One area would be the erosion of competitive advantage that Asean exporters currently enjoy in some foreign markets. Even though Asean currently has FTAs with each of the other five RCEP partners, Japan has yet to have any FTA with China and South Korea.

As such, this reduction of tariffs under the RCEP may generate new trade flows between Japan, China and South Korea, with a knock-on effect of diverting current flows from Asean.

Although it is inevitable that there will be some realignment of supply chains with the ratification of the agreement, the increase in market activity between China, Japan, and South Korea would present new opportunities to the Asean region. In fact, Singapore's economy has progressed to what it is today with the advent of globalisation.

As a small open economy reliant on trade in goods and services, it is advantageous for Singapore to promote open trade, not just with, but also among its trading partners. This is especially important with the increase in protectionist measures taken by various countries in recent years. Multilateral FTAs such as RCEP are a clear pathway to achieve the end goal of open global trade and increased globalisation.

Ultimately, RCEP, with its 20 chapters, encompasses both economic and political needs and wants. Understanding the provisions and incorporating these into the supply chains of businesses will take time. While complex, once companies get past the complexity of the agreement, RCEP may well be a stepping stone to bolster existing trade channels and relationships, while establishing new ones.

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