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Gearing up for the Regional Comprehensive Economic Partnership (RCEP)

Gearing up for the Regional Comprehensive Economic Partnership (RCEP)

  • 1 May 2022
  • By OCBC Business Banking
  • 5 mins read

On 18 March 2022, Malaysia officially became the 12th member state of the Regional Comprehensive Economic Partnership (RCEP) agreement, a free trade agreement (FTA) aimed at liberalising trade and integrating the economies of East Asia.

Considered as the world’s largest FTA, the RCEP trade agreement comprises 15 member countries with a total population exceeding 2.2 billion; its negotiations are focused on trade in goods and services, investment, intellectual property, e-commerce, SMEs, dispute settlement and economic cooperation.

The Ministry of International Trade and Industry (MITI) stated that RCEP would position the Asia-Pacific region as the new centre for global commerce, increasing intraregional trade by about USD42 billion. According to a report by the United Nations Conference on Trade and Development, Malaysia is expected to be the largest ASEAN beneficiary of RCEP in terms of export gains, with a projected USD200 million increase. While the Malaysian government is committed to nurturing the growth of local businesses through policies and programmes, and supporting the venture of local businesses into new industries and markets, SMEs should also act fast and embrace RCEP to seize the opportunities.

Understanding the RCEP

The first thing SMEs should do is to fully understand the RCEP components and its legal context to have a clearer picture of its business implications, restrictions and procedures, as well as to identify areas to capitalise on. For example, the RCEP adopts the concept of product-specific rules of origin and regional value content, and SMEs would need to conform to these rules in order to enjoy the preferential tariffs from RCEP. The complete RCEP agreement and its summary can be found on both the RCEP and MITI websites.

Deputy MITI minister Datuk Lim Ban Hong encourages businesses to explore the capacity building programmes available in the RCEP framework, which sets up the development and expansion of supply chains among RCEP member countries. These programmes ensure that economies at different levels of development and businesses of different sizes have the opportunity to maximise the benefits from participating in RCEP. By playing a part in developing RCEP and obtaining a comprehensive understanding of all initiatives outlined, businesses can further develop a more effective strategy to reap the benefits of this agreement.

Businesses should also look into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which is another FTA that is currently pending ratification. Business owners can have a better gauge on the future business prospects in the Asia-Pacific region, as CPTPP may complement or compete with RCEP in the future, and this information may help with longer term planning and development of contingencies.

Review and Research

With the opening up of markets and tariff reductions, SMEs can look towards imports and exports against other RCEP member countries. Businesses should review their current supply chain and conduct international market research on factors related to their industry. Factors to consider include the major industries of RCEP members, economic advantage of neighbouring countries (e.g., cheaper labour, major resources), and the demand and supply of raw materials, intermediate goods and final goods. This information can help businesses to compare markets and to better position their exports and imports, as well as maximise access to other RCEP member countries. With the market access offered by RCEP, SMEs can also utilise trade financing to export their products, and eventually grow bigger within the global supply chain to better realise economies of scale.

While SMEs can source for more competitively-priced materials from a wider market, this also means that local businesses now face increased competition from businesses from other countries. SMEs should also conduct an internal assessment on cost leadership and product differentiation, which can give them a clearer understanding on their market positioning. This provides the mechanism for feedback to SMEs so they can improve their business, and make periodic assessments when the economic integration begins.

Increasing Competitiveness

SMEs will need to formulate a strategy to face a higher level of competition before participating in the RCEP. SMEs should optimise their financials, product offerings, development of talents, and implement branding and marketing strategies that are effective in multiple markets. Deputy MITI Minister Datuk Lim advises Malaysian businesses to comply with international requirements, standards and certifications to compete at the global level. He also emphasised the importance of incorporating Environmental, Social, and Governance elements into business processes or models in order to boost Malaysia's standing in the global trade.

SMEs should focus on the adoption of technology and digitalisation to be more competitive as e-commerce and digital platforms are among the main components of the RCEP. Businesses should also look at setting up capabilities to be well-equipped for technology transfers from more developed RCEP members. SMEs will need to rise to meet the potential demand of 2.2 billion people, and it is never a bad time to improve the qualities of their products and services, as the future CPTPP agreement has set higher standard trade rules that are more applicable for advanced economies.

The reality is this – this is an opportunity that must not be missed. The 15 RCEP member countries have an estimated total GDP of USD25.8 trillion, accounting for approximately 29% of the world GDP. This establishes RCEP as the largest trading bloc worldwide by GDP size, even larger than the size of the European Union and CPTPP combined. As RCEP strengthens existing networks and creates new regional supply chains, domestic businesses can boost their growth through the global trading ecosystem. In a nutshell, this is why SMEs should go beyond the borders of our relatively small domestic market to explore the vast opportunities presented by this mega-trade agreement. As success is where preparation and opportunity meet, businesses should gear up to be competition-ready in order to prosper alongside RCEP.


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