Asia's Free Trade Agreements in Focus: CPTPP, RCEP and IPEF

published on 12 September 2023 | approx. reading time 5 minutes

With growing economic prosperity in the countries of East and Southeast Asia and the related rapid growth in trade, several significant economic agreements have emerged in the recent past, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Regional Comprehensive Economic Partnership (RCEP) or the Indo-Pacific Economic Framework (IPEF).

These agreements aim to remove trade barriers and promote reciprocal investment, for example by creating tariff facilitation and harmonization in environmental and labor protection standards. Other agreements are in preparation and are currently being negotiated by potential signatories. These trade agreements are influenced both by the prominent economic position of China and Japan in the region and globally, as well as by the trade conflict between the USA and China and the European vision of a harmonized market. In the following, we will explain the CPTPP, RCEP and IPEF in more detail.

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)»
Regional Comprehensive Economic Partnership (RCEP)»
Indo-Pacific Economic Framework (IPEF)»

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

The CPTPP is a free trade agreement that currently comprises 11 countries in the Asia-Pacific region: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The USA, under then-President Donald Trump, dropped out of negotiations for the predecessor agreement, the Trans-Pacific Partnership (TPP), in January 2017. The remaining 11 countries in the original TPP continued negotiations and devised the CPTPP, which was signed in Chile in March 2018 and entered into force in late December 2018. The USA withdrawal from TPP and its non-participation in the successor CPTPP had a significant impact due to the economic power of the USA, as this reduced the global income of member countries by about 70 per cent. Despite this, the CPTPP remains one of the largest global free trade areas, with member states accounting for about 13.5 to 14.5 per cent of global GDP.

In early 2021, the United Kingdom became the first non-founding country to apply for accession to the CPTPP. The accession process is well advanced and CPTPP members have already agreed to the UK's accession. Therefore, accession is expected to take effect in late 2023 or early 2024 with ratification of the Agreement in London.

Other countries that have already applied for accession are Costa Rica, Ecuador, Ukraine and Uruguay. South Korea and Thailand are also expressing interest in becoming members.

Taiwan and the People's Republic of China have also lodged applications for membership. However, complex issues arise in this regard. Taiwan submitted its application under the name „Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu”, but one week after China submitted its application. China will most likely insist on joining first, thus excluding Taiwan. Moreover, Taiwan's biggest supporter, the USA, is not among the CPTPP's member states. However, there are also significant obstacles to China's accession, particularly in the areas of labor, the environment, state-owned enterprises, and digital commerce. The gap between Chinese policies and CPTPP standards is significant and could be difficult to bridge. Significant changes in Chinese policies would likely need to be made, which would mean long transition periods for implementing CPTPP standards or exemptions from some standards. Therefore, it is difficult to imagine China's membership application being approved at this time.

The CPTPP stipulates stricter rules in many areas, such as labor conditions and environmental protection, than previously existed in many member states. It is likely that many local companies will have to adapt their standards. In this context, European companies with local direct investments could have an advantage, as many of their subsidiaries already have high standards in terms of labor rights and environmental protection and, accordingly, there is less need to adapt to the CPTPP standards. Local companies could also benefit from the increased compliance in supply chains that has been and will be created by CPTPP regulations. In addition, tariff relief could have a cost-reducing effect on companies' supply chains.

Regional Comprehensive Economic Partnership (RCEP)

The RCEP is a free trade agreement between the ten member states of the Association of Southeast Asian Nations (ASEAN) (Brunei, Indonesia, Cambodia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) and their five free trade partners (Australia, China, Japan, New Zealand, and the Republic of Korea). RCEP thus currently includes 15 countries, of which 7 countries are in turn concurrent members of CPTPP. RCEP builds on the existing ASEAN+1 Free Trade Agreements to strengthen economic ties and promote trade and investment-related activities, as well as to help narrow the development gap among member states. Initially, India also participated in the negotiations, but then decided not to participate in RCEP. RCEP is also one of the few major agreements in place between China and Japan.

RCEP is the largest free trade agreement in the world and comprises about 30 per cent of the world's GDP. About one third of the world's population lives in RCEP member states. The agreement sets a new framework for trade between member states. Over the next 20 years after the agreement enters into force, most tariffs on goods traded between members are scheduled to be eliminated, although there will be no harmonization of customs regulations. Furthermore, RCEP aims to promote investment and the transfer of technology between members. To this end, uniform provisions will be adopted to protect investors and investments. In addition, the agreement contains mechanisms for settling trade disputes. However, in general, the RCEP agreement also contains a large number of exemption provisions for individual members and is far less comprehensive with lower standards compared to CPTPP.

The focus of the RCEP agreement is clearly on trade in goods and includes regulations related to country of origin (i.e., if a product meets RCEP origin criteria, it applies in all 15 member countries), standards, technical regulations and conformity assessment procedures, intellectual property protection, competition law regulations, and more.

Enhanced trade conditions can also benefit European and German companies with direct investments in RCEP signatory states. More permeable trade borders will expand the market and increase competition. This will likely increase production efficiency and create positive economies of scale that could lower the import price of European and German products. Companies can also benefit from the agreement's tariff relief by using strategically well-designed supply chains. The Agreement is expected to have a positive long-term impact on economic growth and the prosperity of the region's population. European companies can take advantage of this by adapting their business strategy and bringing high-quality products to market to meet the expected demand of a growing middle class.

Indo-Pacific Economic Framework (IPEF)

IPEF is a (proposed) agreement between the United States and 13 other countries in the Asian region, including Australia, Brunei Darussalam, Fiji, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam. The agreement is currently still under negotiation and has not yet been finalized. The last round of negotiations took place in Busan, Korea, in July 2023. It remains to be seen to what extent further and more stringent measures will be included in the agreement. However, there are already doubts as to whether the agreement will be effective, as it does not contain the traditional features of a free trade agreement, in particular tariff facilitation.

IPEF addresses several areas, including the digital economy, supply chain security and resilience, clean energy, and anti-corruption measures. The agreement is designed to allow participating countries to join individual initiatives without having to participate in all of them. This is likely due to the desire of many Asian countries to avoid having to choose between the USA and China and to act independently while countering China's growing influence. However, the IPEF does currently not provide a sufficiently long-term perspective and stability for trade relations.

Due to the ongoing negotiations, it is currently too early to assess the agreement and its potential impact, in particular opportunities, on German companies. We will continue to follow developments and keep you up to date on this agreement.