This article first appeared in The Edge Malaysia Weekly on March 1, 2021 - March 7, 2021

EVEN though it may take time for the Regional Comprehensive Economic Partnership (RCEP) agreement, which was signed on Nov 15 last year, to come into full force, Malaysian companies should strike when the iron is hot to prepare themselves for its implementation.

Asia-Pacific business expansion specialist Tricor Group in its 2021 Asia Pacific Trade Report says that as Malaysian businesses assess the long-term implications of RCEP and the impact it will have on business decisions, there are some immediate steps they can take now to stay ahead of the curve.

“By reviewing all of their current commercial relationships, companies can identify impending gaps and better understand where the greatest potential lies to create new ties and tap some of the world’s fastest-growing consumer markets — many of which are now joined together in the RCEP,” the group says in its report.

Tricor Services (Malaysia) Sdn Bhd non-executive chairman Dr Veerinderjeet Singh believes that the RCEP will be beneficial for Malaysian companies, as it will counter any protectionism sentiments that have risen in certain countries due to the US-China trade war and the Covid-19 pandemic.

“I think the point to note about RCEP is that it’s a very good initiative that Malaysia chose to be a part of, because it becomes a counterweight to the emerging trade protectionism that now seems to be accelerating because a number of countries are looking inwards. So the very fact that you have RCEP, which allows that kind of free trade in the region, actually is an interesting dynamic.

“For Malaysia, this will help us to reenergise, reactivate and rebuild our supply chains, as companies can decide if they want to reshore or nearshore their supply chains,” he tells The Edge.

A total of 15 countries — which make up about 30% of the world’s population — are part of the RCEP trading bloc, namely Australia, Brunei, Cambodia, Indonesia, Japan, Laos, mainland China, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand and Vietnam.

“The sheer market size of the RCEP, with 30% of the global population as your market, is a great opportunity for Malaysian companies to promote their products. It all boils down to what your ambition is; if it is to go regional, then you have to be prepared to set aside funds for reinvestment.

“In short, I would say the RCEP advantage to Malaysian companies is that it provides a wider market base, as you have a pathway to connect with the other member countries. The other point is the RCEP allows us to connect with three big trading nations — China, South Korea and Japan — which are heavyweights in certain sectors such as electronics, automotive, textile and more,” says Veerinderjeet.

Small and medium enterprises (SMEs) could also benefit from the RCEP, as it would give them the impetus to focus on digitisation and smart manufacturing, he adds.

“There is still some time before the RCEP is fully activated, and so it means that right now, the objective for companies, both the larger ones and SMEs, is to prepare themselves and assess all these changes that are coming about, and identify their potential gains and gaps as well, and close any gaps that their businesses may have.

“For example, compliance requirements. Some countries may have different compliance requirements, so study that and make sure you are prepared for them when you move your business to that particular jurisdiction. Compliance requirements include tax and incorporation of companies and so forth. This gives you a chance to study the intellectual property provisions in other countries under the RCEP that you are interested in. It also gives you a chance to look at the labour rights, digital economy and so on,” Veerinderjeet explains.

The RCEP also marks a positive in attracting foreign direct investments (FDIs) into Malaysia, says Veerinderjeet.

“The very fact that the country is part of a larger regional grouping — first as a member of Asean and now as a part of the RCEP — indicates the country’s openness to trade, and potential foreign investors would get the impression that they can do business with the whole region, not just with Malaysia. This would be easier compared with them having to go to each country and investing separately at different times.

“And also, if you look at the RCEP, it’s a very comprehensive document with 20 chapters, 17 annexes and 54 schedules of commitments. It [provides] comprehensive coverage and establishes what I consider parameters for market access, economic support and technical cooperation. I’m not saying that it is complete in every sense, but far more complete than what you see in bilateral free trade agreements,” he says.

The RCEP, he adds, creates a framework for basically a Pan-Asian standard of trade.

“Some say it even surpasses the terms provided by the World Trade Organization — in terms of details and coverage. In that sense, this is a positive for any foreign investor looking to invest into any RCEP country, including Malaysia,” says Veerinderjeet.

One of the most crucial benefits of the RCEP is tariff reductions, which is expected to be reduced between 90% and 93% of tariff lines. However, there will be carve-outs for agricultural products.

“Protectionism for local agricultural products will always be there, but overall tariff reductions are a positive. Another positive is in the creation of the common rules of origin, which allows companies to ship their products between the RCEP countries with a single certificate of origin. This eliminates the need for having multiple certificates from different jurisdictions and will certainly help to lower costs and incentivise regional supply chains,” says Veerinderjeet.

The digital copyright and intellectual property rules in the RCEP are also expected to be stronger, going beyond what is included in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which is a free trade agreement between Canada, Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

“As for key limitations of the agreement, taking the point of view of developed nations, they would say the focus on environmental and labour issues in the RCEP is not very strong; it does not include chapters on these areas. So perhaps this could be work for the future. Also some may say that the tariff reductions are not complete and would like to see more, perhaps 99%, reductions. And the fact that there are carve-outs for agricultural products, the developed world may call it a limitation, but for developing countries, this is needed to protect some of our local sectors.

“The other thing that is perhaps a missed opportunity in the RCEP is e-commerce, and that is a limitation given the rising importance of e-commerce particularly right now in the Covid-19 era. Perhaps more could have been done in terms of looking at various rules on electronic transmissions and electronic data flows.”

From a tax perspective for Malaysia, Veerinderjeet says at present, the only items being touched on in the RCEP are tariffs, for example import duties. It does not cover income tax rules or Sales and Service Tax (SST), which comes under the purview of the Royal Malaysian Customs Department.

“If you look at it from Malaysia’s point of view, we already have double taxation agreements with various countries (some of which are in the RCEP), and this helps to take care of income tax issues and allows us to minimise our exposure and perhaps the withholding tax exposure.”

Nonetheless, he highlights that the authorities should look at direct and indirect taxes in the long run to promote international trade and the trade bloc effectively.

“For example, we could look at giving preferential sales tax rates to imports from RCEP countries, and similarly when we have any payments across RCEP countries, we could think about preferential withholding tax rates compared with our normal rates in a double taxation agreement.”

These kinds of measures would really increase the attractiveness of the RCEP, but some quarters may not agree due to the loss of revenue or sovereignty issues, he adds.

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