Evaluating the RCEP Agreement

On 15 November 2020, ministers from the ten Association of South East Asian Nations (ASEAN) states and their five major trade partners — Australia, China, Japan, New Zealand, and South Korea — signed the Regional Comprehensive Economic Partnership Agreement (RCEP). The agreement, which has been in force since 1 January 2022, is regarded as the biggest free trade agreement (FTA) in the world. Once implemented by its 15 members, it will create a market of 2.2 billion customers, equivalent to 30 percent of the world’s population, with a total GDP of nearly 27,000 billion US dollars, equivalent to 30 percent of global GDP.

In fact, Australia, China, Japan, New Zealand, and South Korea have already adopted economic agreements with ASEAN (ASEAN+1 FTAs). Additionally, all RCEP participants are members of the WTO. This merits the question of why there seems to be a need for an additional supranational agreement.

However, RCEP provisions are not simple reproductions of the WTO’s or ASEAN+1 FTAs’ commitments. The RCEP agreement contains not only WTO+ provisions, provisions regulating issued covered by WTO law that result in deeper commitments, but also WTO-X provisions regulating issues not covered by WTO law.[1] Typical WTO-X provisions can be found in chapters 13, which focuses on competition, and 14, which focuses on small and medium enterprises of the RCEP agreement. Typical WTO+ provisions can be found in chapters 10 on investment[2] and 7 on trade remedies.[3]

The RCEP agreement also contains provisions that cover issues not regulated by ASEAN+1 FTAs. For example, Chapter 10 includes rules related to financial services such as, the obligation to promote regulatory transparency in financial services,[4] automatic most favoured nation (MFN) treatment, and a ratchet clause. All those provisions contribute to a further liberalization of trade and investment among the RCEP countries. Therefore, for its members, the signing of the RCEP can be considered a step forward towards trade liberalization. However, it may imply a step back from the perspective of labour rights and environmental protection.

From a social perspective, with 15 participants and their comprehensive commitments, the RCEP will “impact a greater number of people than any previously signed FTA”. However, while trade and investment liberalization promises to create jobs and improve people’s lives, many risk suffering caused by heightened trade competition and job losses, limited access to healthcare facilities, and land grabs. From an environmental perspective, trade liberalization may speed up economic development, but the mass production favoured by trade and investment liberalization may cause environmental degradation and exhaustion of natural resources, while trans-border transport of goods may harm the environment.[5]

To maintain a balance between trade liberalization and non-trade interests, new-generation FTAs often contain provisions to protect labour rights and the environment, in order to prevent a race-to-the-bottom between their participants. The European Union – Vietnam Free Trade Agreement (EVFTA), for instance, includes a chapter titled “Trade and Sustainable Development”, while the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) agreement contains an environment chapter and a labour chapter.

So what is there in the RCEP agreement for the protection of labour rights and the environment? In order to answer this question, we examine the general principles/objectives of the agreement, as well as specific provisions addressing labour rights and environmental concerns.

General Principles and Objectives

The general principles and objectives of an agreement indicate the will of its members, their intentions, and attitudes. They are important because they offer context for interpreting the rights and obligations of parties prescribed in specific provisions of the agreement.

In the RCEP agreement, general principles and objectives related to labour rights and environmental concerns can be found in the guiding principles and objectives for negotiating the RCEP, in the Preamble, Chapter 1 (“Initial Provisions”), and Chapter 20 (“Final Provisions”). Yet, those who are pro-environmental and pro-labour rights protection may feel discouraged by an examination of these provisions.

Reference to sustainable development can be found only once in the preamble of the agreement, which briefly mentions the interdependence of the three pillars of sustainable development briefly: “Recognizing that the three pillars of sustainable development are interdependent and mutually reinforcing.”

When reading the guiding principles and objectives for negotiating the RCEP, it is easy to see that social and environmental issues were not a high priority for the negotiators. The objectives of negotiation are purely economic,[6] and the principles for negotiating focus on trade and investment liberalization.[7] In the same vein, neither Chapter 1 nor Chapter 20 contain any provisions related to social and environmental concerns.

Specific Provisions on Labour Rights and the Environment

Specific provisions addressing labour rights and environmental concerns can be found in different chapters of the RCEP agreement. However, special attention should be drawn to Chapter 10 (“Investment”) because it is often argued that investment liberalization creates higher risk of human rights abuses and environmental damage. It is therefore interesting to see how the RCEP negotiators attempt to limit this risk. We will also analyse Chapter 17 (“General Provisions and Exceptions”), because exceptions may offer governments freedom to manage social and environmental interests in the context of trade and investment liberalization.

In Chapter 10 on investment, at least six elements offer opportunities for governments to establish and implement human rights and environmental protection measures:

1. This chapter “shall not apply to (a) government procurement; (b) subsidies or grants provided by a Party; (c) services supplied in the exercise of governmental authority by the relevant body or authority of a Party”. This limited scope accords governments more freedom to procure goods and services, subsidize companies, and supply services in fields necessary to protect social and environmental interests.
2. Furthermore, Chapter 10 provides for exceptions to the rule concerning the prohibition of performance requirement. These exceptions give governments the freedom to apply measures in order to require investment in certain fields, promote training and employment of workers, research and development, and facilitate protection of public health.
3. Chapter 10 gives the host state some opportunities to influence the composition of the board of directors at foreign companies.
4. Exceptions to the rules related to expropriation enable governments to apply measures to protect public interest, in particular public health.
5. The most favoured nation treatment clause “does not encompass any international dispute resolution procedures or mechanisms under other existing or future international agreements”. This provision will prevent investors from bringing cases against governments and members of the RCEP, using investor-state dispute settlement (ISDS) mechanisms prescribed in other international investment agreements of which they are members.
6. It is interesting to note that Chapter 10 does not yet impose an ISDS mechanism. It is provided that this mechanism will be considered during discussions organized “no later than 2 years after the date of entry into force of this Agreement”. This gives opportunities for the public to apply pressure and for governments to calculate the pros and cons of integrating an ISDS mechanism to the RCEP. The absence of the ISDS mechanism, which is considered as a factor that undermines human rights and should be excluded from trade agreements, accords governments some freedom to establish and apply measures in order to protect public interests.

In short, Chapter 10 gives governments some freedoms while elaborating and applying measures to protect public interest. However, this freedom is not new in comparison with that provided for in FTAs such as the CPTPP and the EVFTA. Moreover, nothing in this chapter directly mentions the protection of labour rights and the environment, while the CPTPP and EVFTA contain entire chapters on labour (Chapter 19 of the CPTPP), environment (Chapter 20 of the CPTPP), and trade and sustainable development (Chapter 13 of the EVFTA).

The most remarkable point of Chapter 10 is undoubtedly the absence of the ISDS mechanism in the RCEP agreement. This freedom is reinforced by Article 17.11 (“General Provisions and Exceptions”), which excludes the application of dispute settlement mechanisms to government approval or admission of foreign investment proposals. This enables governments to refuse foreign investment proposals which are in conflict with social or environmental interests.

Chapter 17 on general provisions and exceptions comprises some clauses related to environmental and human rights protection: Article 17.10 reaffirms the rights of parties and responsibilities under the Convention of Biological Diversity, Article 17.12 states that the WTO general exceptions provisions are “incorporated into and made part of this agreement”, and Article 17.13 enables governments to take any action they consider necessary for the protection of their essential security interests. These actions include those taken to protect critical public infrastructure and those taken in time of national emergency. Therefore, it gives governments opportunities to implement security exceptions for public interests. However, in general, provisions in Chapter 17 are similar to, or less ambitious that those in the CPTPP and in the EVFTA.

To sum up, the RCEP agreement is a “newer” FTA in comparison with the CPTPP or the EVFTA. However, in comparison with the CPTPP or the EVFTA, the RCEP is often criticized because “there is not a single provision or mention of environmental or labor-rights protections linked to trade in the entire 20-chapter document”, while the other two agreements have entire chapters on these issues.

Several factors explain this lack of interest in environmental and human rights protection. First, the agreement is criticized for the absence of a democratic negotiation process: for example, it is alleged that the negotiations for RCEP “occurred in secret, without any consultation with unions or community groups”, while governments were unwilling to make the RCEP negotiating text and all the relevant information public. Second, the different levels of development of RCEP members and their diverse perspectives make it difficult for them to take a common position in non-trade sensitive areas such as human rights and environmental protection.

This absence of provisions related to environmental and human rights protection is regrettable, especially considering the temporal context of its creation. The RCEP was signed during the COVID-19 crisis, which requires a re-imagination of trade models to create new models that offer sufficient policy space to governments in order to deal with crises as well as to take care of community interests. However, the agreement’s text does not reflect the global challenges exposed by COVID-19, nor does it facilitate measures for states to face these challenges.

Implications of the RCEP Agreement

For Vietnam, participation in the RCEP enables access to a huge market and helps it to integrate more deeply into regional value chains. In particular, according to the RCEP’s cumulative rules of origin, as long as a producer in a member country processes materials originating from other RCEP states, the materials are regarded as originating in the processing country. Consequently, goods can enjoy the preferential tariff in Vietnam, more easily bringing down costs. This will be beneficial for Vietnam, which imports high amounts of raw materials from China, as well as for China, because its exports will become more attractive to the RCEP.

It is reasonable to argue that participation in the RCEP will not create a substantial legal burden for Vietnam. In general, Vietnam’s trade liberalization commitments in the RCEP do not exceed those in the CPTPP and the EVFTA. Labour rights and environmental protection commitments in the RCEP are much lower than those in the CPTPP and the EVFTA. When participating to the CPTPP and the EVFTA, Vietnam had to amend its Labour Code and environmental protection laws. This is not the case with the RCEP. Therefore, in the short term, Vietnam can benefit from market access to RCEP members at a relatively low legal cost.

However, from an economic perspective, participation in the RCEP may still entail a cost for Vietnam. After the amendment of Vietnam’s labour and environmental protection laws, thanks to the participation in the CPTPP and the EVFTA, Vietnamese enterprises are bound by more rigorous labour rights and environmental standards. They face competition from RCEP member companies, some of which are subjected to much less stringent labour rights and environmental standards.

Vietnamese branches of production will have to face more competition from RCEP members, who also benefit from the cumulative rules of origin. Vietnam will also need to select and manage foreign investment projects, while harmonizing investment promotion and public interest protection.

In the long term, RCEP may be disadvantageous for the achievement of Vietnam’s sustainable development goals. Some argue that participation in high-quality FTAs contributes to political reforms in Vietnam. Signing agreements with provisions related to human rights and environmental protection may help to raise awareness about sustainable development. However, participating in the RCEP — a step backwards from environmental and human rights protection — may send confusing messages to both companies and society.

For third countries, the implementation of the RCEP agreement may foster discrimination against their goods, services, and service providers. This is because members of RCEP will give more favours and benefits to goods, services, and service providers from member countries over those from non-RCEP countries.

RCEP also presents a challenge to the ideology and approach of the European Union. The EU–ASEAN FTA project failed because of disagreements on sustainable development issues. However, the signing of the RCEP agreement will offer China and its Belt and Road Initiative a position of great influence in the region. One could ask whether the EU should be more “flexible” when talking about sustainable development in FTA negotiations with ASEAN in order to have more influence in Southeast Asia.

From our perspective, the EU should continue with its choice. In Southeast Asia, four countries (Brunei, Malaysia, Singapore, and Vietnam) accepted the labour rights and environmental protection clauses in the CPTPP. Two countries (Vietnam and Singapore) adopted the sustainable development clauses in FTAs with the EU, while Thailand and Malaysia are currently in negotiations. We believe that there are still opportunities for the remaining ASEAN countries to accept these clauses. The RCEP agreement should not be a precedent. In the coming years, the world needs more new-generation FTAs oriented towards a better balance between protecting environmental and human rights and trade liberalization.