The year that has passed since the Regional Comprehensive Economic Partnership (RCEP) entered into force has been marred by disruptions in global supply chains. During this rocky period for international trade, RCEP has been a rare bright spot – which bodes well for the region as well as for economies looking to join the pact. 

RCEP is the world’s largest free trade agreement (FTA), bringing together China, Japan, South Korea, the 10 ASEAN members, Australia and New Zealand, creating a trade bloc that accounts for 30% of world population and 30% of global GDP. 

RCEP aims to liberalize trade in goods among its members, making it easier for companies in the region to do business with one another. And do business they have: In the first 11 months of 2022, China’s trade with other RCEP members grew by 7.9% year-on-year, while Thailand’s grew by 7.1% for the full year. 

Asia sits at the heart of the global supply-chain network. Because of its centrality, it is also particularly sensitive to global shocks. In its recent forecast, the World Trade Organization anticipates a slowdown in trade growth for 2023. 

While RCEP is far from a cure-all, its trade-liberalization measures, especially its generous rules-of-origin provisions, go some way to counter the headwinds. 

RCEP stipulates that only 40% of a product’s content must be sourced from within RCEP to qualify for trade preferences, a low threshold compared to other FTAs – and this facilitation of Asian supply chains for Asian trade is of particular interest to corporates in the region. According to a recent HSBC survey, Asia corporates are looking to base more than half (53%) of their supply network in Asia, up by nearly 6% from 2020. 

In its first year, RCEP has galvanized regional supply chains, laying a solid foundation for further trade integration in the region. Its second year looks set to bring forth even greater benefits. Under the terms of the agreement, any customs territory can join RCEP 18 months after it enters into force, and Hong Kong – which submitted its application to become a member in February last year – is likely to be the first. 

The special administrative region already carries out 70% of its goods trade with RCEP members, and before the pandemic RCEP members accounted for over 50% of Hong Kong’s foreign direct investment outflows. Hong Kong’s entry into RCEP will drive greater investment by Hong Kong companies into other members. Opportunities abound for Hong Kong’s logistics sector to handle the burgeoning intra-RCEP trade. 

The potential benefits are tremendous for businesses in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) as well. RCEP is intensifying cooperation between China and Southeast Asia, and the addition of Hong Kong will tighten the connectivity of these two behemoth economies, providing a fillip to the going-out activities of GBA companies. 

But it is not only Asia that stands to benefit. Foreign companies also see RCEP as an opportunity to boost business with the region. According to another HSBC survey – this time of nearly 1,500 companies mostly headquartered in North America and Europe – more than half intend to leverage RCEP to expand in China, while nearly 40% plan to use it to grow in Japan. South Korea and Singapore (both 28%) round out the top four. 

RCEP is helping to standardize trade within a region that is already seeing strong growth. In the past, businesses had to navigate numerous bilateral agreements with varying trade preferences and different rules-of-origin frameworks. Under RCEP, this process is being streamlined, giving companies increased sourcing options and helping them move closer to their customers. 

As quarantine-free travel resumes, RCEP’s entry into force, as well as its potential expansion, offers a ray of light for businesses in the region. With economists estimating that that RCEP's share of global exports will amount to 34% in 2040 – well ahead of the share of exports from the European Union – companies that can position their supply chains to capitalize on the comparative advantages offered by RCEP will not only thrive in difficult times, but future-proof themselves for success in the years to come.

Frank Fang, General Manager, Head of Commercial Banking, Hong Kong and Macau, HSBC