Significance of RCEP to foreign investment, M&A in China

By Ni Xudong and Grace Lo, East & Concord Partners
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This year’s entry into force of the Regional Comprehensive Economic Partnership (RCEP) on 1 January 2022 creates the largest free trade agreement in history, embracing China, Japan, South Korea, Australia, New Zealand and 10 Asean member states.

This historic free trade agreement will have significant influence on investors seeking investment and M&A opportunities in China, a leading member, opening the door for import and export at unprecedented levels, and also signalling a long-term development trend for enterprises and individual investors.

Influence

Ni Xudong, East & Concord Partners
Ni Xudong
M&A and Compliance Expert
East & Concord Partners

Unlike other bilateral and trilateral regional trade agreements in which China participates, the RCEP is its first multilateral regional trade agreement. Most significantly, the GDP of RCEP member states accounts for about 30% of global GDP (USD26.2 trillion) and total population, creating the world’s largest free trade zone.

Research indicates that by 2030, trade liberalisation will increase GDP of the RCEP’s 15 member states by a total of USD174 billion, with China taking the largest slice at USD85 billion. According to the General Administration of Customs, the 1Q value of trade between China and other RCEP countries accounts for 30.4% of its total value of foreign trade, reaching RMB2.86 trillion (USD424 billion). Even in the RCEP’s early stage, it is clear that China is reaping considerable rewards.

Tariff reduction is a key part of the RECP, and chapter I clearly provides for the elimination of tariff and non-tariff barriers among contracting states, with the purpose of achieving and facilitating trade liberalisation. Chapter II also sets out detailed rules on tax reduction. Tariffs on 92% of agreed goods will be phased out in the next 20 years. Import tariffs on 954 products provided in the 2022 Tariff Adjustment Plan issued by China will be reduced.

In this sense, trade barriers between China and other countries will gradually break down and prices of raw materials will fall, thus making it easier for foreign investors, acquirers and traders from all sectors to enter the substantial Chinese market.

To some extent, this compensates for the damage caused by the Sino-US trade war to enterprises and individual investors on both sides.

Facilitation

Grace Lo, East & Concord Partners
Grace Lo
Intern
East & Concord Partners

The RCEP reduces non-tariff barriers by using a common set of rules of origin. Under the new rules, only one certificate of origin is required for investors trading in the region, thus bypassing the cumbersome process of verifying and adjusting states’ specific rules of origin and greatly reducing relevant costs, which account for 1.4% to 5.9% of the transaction amount.

For investors in China, especially those trading between RCEP states, the favourable policy serves as the ideal trade catalyst, which further attracts more potential investors and, in turn, promotes the diversification of supply chains.

Also simplified are processes required for investors to enter the market or conduct operations and business expansion in the contracting states. The RCEP explicitly prohibits further restrictive measures, which means that foreign investors will undergo a less cumbersome process when entering the Chinese market.

It also provides an investment and trade dispute settlement mechanism that can be initiated by the contracting states, further easing concerns of individual investors and enabling them to focus entirely on investments and M&A.

Trends

The RCEP stipulates new rules on protection of intellectual property (IP) and promotion of e-commerce, which is also in line with the future development of contracting states. China has made remarkable progress in IP protection and is riding high in the field of e-commerce. Under RCEP guidance, with further opening of market access and strengthening of IP protection, e-commerce will remain a key target of investment and M&A for foreign investors.

IP is of great significance for enterprises, and sound IP protection motivates the investment of time and energy into developing new products and craftsmanship. Importantly, IP protection under the RCEP far exceeds the scope of traditional copyright and trademark protection. According to its detailed interpretations, it also protects non-traditional trademarks, such as audio trademarks, broader forms of industrial design and digital copyright.

This expanded IP protection scope sets the stage for innovation, production and investment as prelude to substantial development. Among the RCEP members, China plays an exceptionally active role in the implementation of regional IP protection rules.

Legal scholars point out that the RCEP highlights China’s experience, with its terms of malicious trademarks and electronic registration in the IP chapter a reflection of the defining status of China’s practice in this field for international IP rules.

China’s participation in the RCEP also indicates strong commitment of its government to IP protection, and enhances the confidence of foreign investors in their IP protection under Chinese law.

In addition to expanding the IP protection scope, the standardisation of development of the e-commerce industry also warrants attention. The RCEP content reflects that rapid development of the digital economy is closely related to cybersecurity, personal privacy and national security.

For example, by formulating rules on electronic authentication, electronic signature and online consumer protection, the RCEP creates a supportive legal, regulatory and policy environment for e-commerce while promoting its development, reducing import and export costs, better integrating the industrial chain and value chain of the region, and creating more business opportunities for small and medium-sized enterprises.

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China’s remarkable economic achievements in the past 40 years of reform and opening up, stable political environment, well-established infrastructure, complete industrial chains, highly qualified labour resources, and especially extensive and diverse market demand, have proved attractive to many investors.

Since the RCEP took effect, further elimination of import and export tariffs for the purpose of lifting investment restrictions and facilitating trade – coupled with wide application of infotech and high-tech – will accord China far greater production efficiency compared with other emerging economies, and attract more investors to China’s M&A landscape.

As for existing direct foreign investment, the RCEP firmly anchors them in the Chinese market, while further prompting desire for expansion and M&A.

Ni Xudong is an M&A and compliance expert and Grace Lo is an intern at East & Concord Partners

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