RCEP - The World`s Largest Free Trade Agreement and Energy

 In November 2020 the Regional Comprehensive Economic Partnership Agreement (RCEP) has been concluded. The world`s larget free trade agreement covers an area accounting for 30% of the world population (more than 2 billion people). While the conclusion of the RCEP went largely unnoticed in most western countries it has huge implications for the future of international trade. This blogpost explains the background of the negotiations that led to the RCEP and then scrutinizes its content with particular focus on energy and the environment.

Historical Background and Negotiations

The RCEP has been concluded between 10 Member States of the Association of Southeast Asian Nations (ASEAN) as well as South Korea, China, Japan, Australia and New Zealand. According to article 20.6 (2) the RCEP enters into force 60 days after at least six signatory States which are Member States of ASEAN and three signatory States other than Member States of ASEAN ratified it. The USA are not party to RCEP. Back in 2016 the Obama-administration helped to design the so called Trans-Pacific Partnership (TPP), which never entered into force, mainly due to the withdrawal of the US signature by the Trump-administration in January 2017. TPP was deliberately designed to create an Asia-US trade bloc to which China was not invited.

After the end of the TPP China saw an opportunity and accelerated negotiations on the RCEP that started already back in 2012. While western commentators focussed on a comparison with the proposed TPP and found that tariff-cuts and other free-trade tools were pretty much represnting the standard set of instruments, comparable little attention was paid to the fact that the RCEP is the biggest free trade agreement in the world and the first of this size to be signed over the last decades. It is also the first time that China actually signed up to a regional multilateral trade deal (while there already are several bilateral agreements with Chinese involvement in place). While India was also part of the negotiations, it pulled out in November 2019 over concerns about the impacts of lower tariffs on its local producers. India feared that Chinese interests would feature too prominently and that the country`s trade deficit with China, already amounting to 48 billion Euros, would become even bigger. The effect of India`s absence, however, is of course an even bigger influence of China on the RCEP, now left as the only country in the trade deal with more than 1 billion inhabitants.

Content: General, Energy, the Environment and Dispute Settlement Arrangements

The RCEP features the `normal´ repertoire that is known from other free trade agreements, such as trade in goods (chapter 2), Sanitary and Phytosanitary Measures (chapter 6), trade remedies (chapter 7), trade in services (chapter 8) and an investment chapter (chapter 20) as well as the usual protection standards such as the national treatment standard (e.g. article 8.4), market access (e.g. article 8.5), the most-favoured nations clause (e.g. article 8.6). A special feature is chapter 3 concerning the rules on origin. It eliminates a major issues that businesses with global supply chains are facing: while some parts of their products might come from the Free Trade Area, others might not. For instance a product containing parts made in New Zealand might face tariffs in ASEAN countries. Articles 3.2 - 3.4 RCEP now make clear that parts originating from any RCEP country are treated equally, providing an incentive to RCEP Member-States to look for suppliers within the trading bloc.

Energy, climate and environmental issues are rather side-lined or, in the case of the climate, simply not  subject of interest to the RCEP. Electrical energy is defined as a good in Annex 3A Section V Chapter 27 Item 27.16. This puts to rest a general debate known from most multilateral trade agreements, namely whether electrical energy is a good or a service. The legal categorization, thus, follows the one in the Energy Charter Treaty (ECT), where article 1 (4) ECT refers to Annex EM of the ECT and in there item 27.16 defines electrical energy as a good that can be traded like any other good. The same now applies under the RCEP.

Oil, gas, coal, petroleum and petroleum products are comprehensively covered in the same Annex 3A in chapter 27 on mineral fuels and mineral oils. Nuclear reactors and parts of nuclear reactors are covered by chapter 84 of Annex 3A. The environment features in the form of `business environment´and `enforcement in the digital environment´ in the RCEP. However, this is in line with other free-trade agreements where the environment also does not feature and neither do climate concerns. The General Agreement on Tariffs and Trade (GATT/WTO 1994) at least features article XX, where one possible exception from the free trade regime pertains to (g) exhaustible natural resources. The RCEP`s chapter 27 on `General Provisions and Exceptions` makes these exceptions applicable mutatis mutandis to the RCEP, according to article 17.12 and the RCEP also features security exceptions in article 17.13.

While environmental concerns, on the one hand, do not feature prominently in the RCEP, it is interesting, on the other hand, to see that the dispute settlement mechanism provided for in chapter 19 RCEP does not provide for Investor State Dispute Settlement (ISDS). ISDS is one of the most controversial tools in international free trade agreements that allows companies to sue states in front of international tribunals under particular circumstances, if they are increasing their environmental protection measures. Such an ISDS provision is absent from the RCEP and it only features State-to- State dispute settlement in chapter 19. While parties are free, under article 19.5 and certain additional circumstances, to select the forum, private companies are not eligible to launch dispute settlement procedures. The dispute rules of the International Centre for Settlement of Investment Disputes (ICSID), the main specialist rules for ISDS, do accordingly not play a significant role under the RCEP. This is remarkable, considering that this renders ICSID, otherwise a well-known authority in dispute settlement procedures, not highly relevant for the world`s biggest free trade agreement.

Result

Thus, ambiguous and  interesting provisions can be found in the RCEP but with a view to energy, the environment and climate protection it remains to be seen how the RCEP will be implemented in practice. Given that other free trade agreements like the GATT/WTO 1994 did not initially pay much attention to energy-related issues but these became more and more important as years went by, there is a possibility that energy disputes might in the future also be brought forward under the RCEP. Considering the RCEP`s sheer size as well as the fact that some of the major energy players of the world (China, Australia) are signatories of the RCEP, this agrement is one that has to follow as relevant to future energy disputes - despite its modest wording.