An Overview


The Regional Comprehensive Economic Partnership (RCEP) Agreement signed on 15 November 2020 and came into force on 1 January 2022 comprises of fifteen Contracting Parties i.e., all ten ASEAN Members plus Australia, China, Japan, New Zealand, and South Korea. This largest regional free trade agreement (FTA) concludes at a time when the world is strenuously striving in containing COVID 19 and economic recovery, and against the backdrop of rising protectionism and the intensification of the China-US trade war, would be, as some commentators called it, a “game changer”.It is envisaged that the RCEP framework should give rise to tremendous investment and trade opportunities and encourages FDI within and into the region. The removal of obstacles to business establishment and operation, e.g., the ground breaking changes to consolidate the rules of origin of Contracting Parties into one single ROO, i.e., the “Cumulation Rule” would render strategic planning for business operators in their manufacturing and sales operation within or beyond the region much more efficient.


As mentioned above, the RCEP is by far the world’s largest regional FTA by GDP, encompassing around 28.7 of the world’s economic activity as of 2019 figures. It is the  second largest in terms of overall merchandise trade (only after the European Union), comprising 27.8% of global merchandise trade, and ranks number one in term of population (30% of the world’s population and more than 5 times that of the European Union).A key opportunity of the RCEP framework lies in the diversity of its Contracting Parties which includes six largest economies in the region, China, Japan, South Korea, Australia, Indonesia and several mid-sized countries, Malaysia, Thailand, Singapore, Vietnam, New Zealand, and the Philippines. Brunei, and the three LDCs, Laos, Cambodia and Myanmar are relatively smaller economies. Amongst the Contracting Parties, the share of export ranges from less than 10% to more than one third, and FDI stock ranges from less than 5% to a multiple of GDP.


Such diversity in economic size, per capita income, resources endowments and stages of development may enhance investment opportunities within the region through complementary location advantages amongst the Contracting Parties, as well as catch-up development potential for the lower income economies yet to fully integrate in the trade and investment networks. UNCTAD is of the view that the provisions in the Agreement related to trade in goods and services, intellectual property and e-commerce will increase investment flow in the short term by facilitating the import and export of goods and services, and lowering the transaction costs of business whereas the provisions pertaining to investment could increase investment opportunities in the long term.


Many commentators expect that multinational companies within and outside the region will invest more capital into the RCEP region to exploit the attractive opportunities created by growing economic integration and the efficiencies resulting from increased competition. China would benefit from the Agreement as it might lower its losses from the China-US trade war. If the tensions between China and the US continue, the benefits of RCEP will probably be higher due to an even stronger emphasis China will place on the Asian market which may consequentially lead to even more efficient supply chains within Asia. It is envisaged that RCEP will replace some of the trade that has been affected by the China-US trade war. The European Union is of the view that trade will mainly grow between RCEP members whereas trade with non-RCEP countries will decline, and that closer economic integration of Asia might increase world real income by around USD209 billion annually by 2030, of which China alone would gain around USD100 billion annually.


RCEP Investment Framework


The RCEP Agreement contains 20 chapters and four annexes addressing different categories of topics in relation to the liberalization and facilitation of trade, services and investment ordinarily found in modern trade agreements.It could arguably be termed as an “integrated code” as the Agreement predominately consolidates and unifies the provisions in 27 FTAs and 44 bilateral investment treaties currently in existence amongst the Contracting Parties, the so-called “noodle bowl”


The objectives of the RCEP framework, as set out in Article 1.3 of the Agreement, are to “establish a modern, comprehensive, high-quality, and mutually beneficial economic partnership framework to facilitate the expansion of regional trade and investment”; “progressively liberalise and facilitate trade in goods…through progressive elimination of tariff and non-tariff barriers to achieve substantial elimination of restrictions and discriminatory measures with respect to trade…”; “progressively liberalise trade in services…with substantial sectoral coverage to achieve substantial restrictions and discriminatory measures with respect to trade in services…”; “create a liberal, facilitative, and competitive investment environment in the region, that will enhance investment opportunities, and the promotion, protection, facilitation and liberalization of investment…”.


The Investment Chapter


The framework provided in Chapter 10 of the Agreement comprises of, in board terms, the aspects relating to: (1) covered investments; (2) market Access; (3) investment protection; and (4) expropriation. Our general observation on each of these aspects is as follows:


(1) Covered investments


In order to be considered as a “covered investment” under the Agreement, the investment must be (a) made by an investor of a Contracting Party in the territory of the host Contracting Party; (b) be admitted by the host Contracting Party (where applicable); and

(c) in existence as at the date of the Agreement or thereafter (Article 10.1(a)).


The RCEP adopted an asset based criteria in defining an investment under the Agreement and a board range of items are considered as ‘investment” for such purpose. These items include: (i) shares, stocks and other forms of equity participation; (ii) bonds, debentures, loans, and other debt instruments; (iii) rights under contracts; (iv) intellectual property rights and goodwill; (v) claims to money or to any contractual performance related to a business and having financial value; (vi) concessions, licenses, authorizations, and permits conferred by the host Contracting Party, including those for the exploration and exploitation of natural resources; and (vii) movable and immovable property and other property rights. The aforesaid items must have the characteristics of an investment such as the commitment of capital or other resources, the expectation of gains or profits or the assumption.


(2) Market Access


In relation to market access, the RCEP adopts a “negative list” approach for investment entry and also a framework for future liberalization efforts. The framework also provides for investment facilitation by ensuring transparency and streamlining administrative procedures for investors. In keeping with best practice, the framework accords to investors of another Contracting Party and to covered investments national treatment and most favoured nation treatment, albeit qualifying them to be accorded only in “like circumstances”, which according to the footnote to these two provisions means “whether the treatment is accorded in “like circumstances” in this Article depends on the totality of the circumstances, including whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives”.


(3) Investment Protection


Investment protection measures under the framework, in addition to above-mentioned national treatment and most favoured nation treatment mentioned above, include:


Prohibition of Performance Requirements: measures imposing or enforcing as a condition for the establishment and operation of an investment other than those set out in List A or List B of a Contracting Party in its Schedule in Annex III (Schedule of Reservations and Non-Conforming Measures for Services and Investment) of the Agreement are prohibited. Such conditions include (a) quantitative requirement for export; (b) achievement of a given level of domestic content; (c) purchase, use of or preference accord to goods produced in the territory of the host Contracting Party; (d) correlation between the import value or export volume and the amount of foreign exchange inflows associated with investment of that investor; (e) restriction on sales in the territory by relating such sales to the export volume or value or foreign exchange gains; (f) compulsorily transfer a particular technology, production process or proprietary knowhow to a person in the territory of the host Contracting Party; (g) exclusive supply of goods to a specific regional market or to the world; (h) adoption of a given rate or amount of royalty under an existing or future licensing contract in a manner that constitutes direct interference with that licensing contract by an exercise of non-judicial government authority of the imposing or enforcing Contracting Party;


Treatment of Investments: Article 10.5 the Agreement mandates that the host Contracting Party shall accord fair and equitable treatment, and full protection and security to covered investments. As a matter of international trade law practice, unqualified fair and equitable treatment clause have been generously interpreted by arbitral tribunals to the detriment of the host country. The RCEP investment framework qualifies the concept of fair and equitable treatment to mean each Contracting Party is required “not to deny justice in any legal or administrative proceedings”, and that the concept of full protection and security is likewise qualified to mean each Contracting Party is required “to take such measures as may be reasonably necessary to ensure the physical protection and security of the covered investment”. Further, the above concepts do not require treatment to be accorded to covered investments “in addition to or beyond that which is required under the customary international law minimum standard of treatment of aliens, and do not create additional substantive rights.”. This Article relating to treatment of investment shall be interpreted in accordance with Annex 10A (Customary International Law).


The Agreement set out certain conditions in which benefit under the Investment Chapter may be denied. Under the denial of benefits clause in the Agreement (which is commonly found in contemporary FTAs), a Party may deny the benefit of the Investment Chapter to an investor that is a juridical person of another Party and to investments of that investors in two instances (i) where such juridical person is owned or controlled by a person of a non-Party or of the denying Party; (ii) if it has no substantial business activities in the territory of any Party other than the denying Party. Thailand and the

Philippines have country specific provisions in the denial of benefit clause.


(4) Expropriation


Except for a public purpose and acting in a non-discriminatory manner in accordance with due process of law, and with compensation paid in a manner specified in the Agreement, Article 10.13 prohibits Contracting Parties expropriating or nationalizing a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization.


On the issue of indirect expropriation through measures, it is a bit surprising to find that the text have not followed the growing best practice in international investment agreements of adopting a criterion as to what would constitute indirect expropriation for the purpose of the Agreement. However, the text do intentionally craved out compulsory licenses in relation to intellectual property rights from the application of Article 13.One other exception relates to measures concerning expropriation of land, which shall be defined in the existing laws and regulations of the expropriating Contracting Party and that compensation shall be paid in accordance with such laws and regulations.


Effectively realizable and freely transferable compensation equivalent to the fair market value of the expropriated investment either at the time when the expropriation was publicly announced, or when the expropriation occurred, whichever is the earlier, shall be paid without delay. In the event of delay in payment, the compensation shall include an appropriate interest in accordance with the laws, regulations and policy of the expropriating Contracting Party.


Article 10.13 shall be read in conjunction with Annex 10B of the Agreement which provides that “an action or a series of related action by a Party cannot constitute an expropriation unless it interferes with a tangible or intangible property or property interest in a covered investment.” The Annex further clarifies the term direct expropriation by providing that direct expropriation may happen in two situations, where

(1) expropriation through formal transfer of title or outright seizure; and (2) an action or a series of related actions has an effect equivalent to direct expropriation through actions specified in the aforesaid situation (1).


The Annex further provides that whether an action or a series of actions constitutes an expropriation referred to in the above-mentioned situation (2) shall be determined on a case by case, fact-based inquiry basis taking into consideration, inter alia, (a) the economic impact of the government action, however, adverse economic effect on a standing alone basis is not sufficient to establish that an expropriation has occurred; and (b)  whether the government  is in  breach  of its prior binding written commitment to the investor.


Although the Agreement does not provide a mechanism for investor-state dispute settlement, yet it effectively confers an international contractual obligation on the government of Contracting Parties to act in accordance with such obligation. As such, it could serve as a basis for aggrieved investors to urge the expropriating Contracting Party to consider the issue of compensation in accordance with this particular provision of the Agreement in order to comply with its international obligation. Obviously, aggrieved investors also have an option to convince their home State to bring a claim against the host State in a manner set out in the Dispute Settlement Chapter of the Agreement.


One encouraging sign is that the Contracting Parties have not ruled out the possibility of including investor-state dispute settlement mechanism in the future. Under Article 10.18, the Contracting Parties commit themselves to a work program to enter into negotiation on the issue of inclusion of investor-state dispute settlement, as well as the application of the expropriation provision to taxation measures that constitute expropriation, within two years after the Agreement came into force.


This article which only focuses on the Investment Chapter of the Agreement is the first of a series of articles introducing the RCEP framework to be published by us. Please free feel to contact us should you require additional information or advice on all other aspects of the RCEP Agreement not covered in this article.