The Implementation of The Regional Comprehensive Economic Partnership in International and Indonesia’s Investment Scope
- Introduction
The Regional Comprehensive Economic Partnership (“RCEP”) is one of the trade pacts initiated by ASEAN countries. The RCEP was signed on 15 November 2020 and initiated by Indonesia in 2011 when they became the Chair of ASEAN. This agreement consists of ASEAN’s ten members and 5 of its free trade area (“FTA”) partners—Australia, the People’s Republic of China (“PRC”), Japan, the Republic of Korea, and New Zealand negotiated a deal together under a single roof of economic integration. RCEP was formed as a result of overlapping regulations in the ASEAN and Asia Pacific regions.
Some had seen the establishment of RCEP as a defining moment for Southeast Asian countries since it also formed ASEAN’s centrality in directing the economic integration framework in Asia and the Pacific. By 2021, RCEP had received prominence as a trade agreement capable of revitalizing international trade and economic growth as the coronavirus disease spread.
ASEAN has an active role in increasing international trade, especially in increasing trade among its members. RCEP was formed due to the encouragement of economic dynamics of the ASEAN Economic Community (“AEC”) by ASEAN Countries and the FTA partner countries. RCEP cooperation is believed to be a mega FTA with strong economic power by having its potential to harmonize rules and regulations in various overlapping FTAs in the regions.
While all RCEP country members have agreed to the benefit of market access liberalization measures, they also might face domestic pressure to limit competition in their domestic markets. Since RCEP consists of various countries, whether it is a developed country or developing, there will be some potential that emerges during negotiations. For example, Singapore, which is least concerned with liberalization in terms of the trade of goods, and on the other hand, Indonesia and Thailand are likely to make the realization difficult (Susilo, 2021: 96-97). The RCEP agreement has the purpose of managing regional trade integration through a combined implementation agenda and built-in provisions to achieve greater trade liberalization.
Figure 1: RCEP Members and Other Regional Trade Agreements
*AFTA = ASEAN Free Trade Agreement; CPTPP = Comprehensive and Progressive Agreement for Trans-Pacific Partnership
- Topic Coverage/Scope in RCEP
In terms of coverage and commitment depth, the RCEP Agreement is extensive. The 20 chapters that make up the RCEP Agreement’s coverage contain numerous areas that the ASEAN Plus One FTAs did not previously cover (Summary of the RCEP Agreement, 2020). The RCEP Agreement has specific provisions, such as:
- Trade in goods, that includes: (1) Rules of origin; (2) Customs procedures and trade facilitation; (3) Sanitary and phytosanitary measures; (4) Standards, technical regulations, and conformity assessment procedures; and (5) Trade remedies.
- Trade in services, which includes: (1) Specific provisions on financial services; (2) Telecommunication services; (3) Professional services; and (4) The temporary movement of natural persons.
- Investment
- Intellectual property
- Electronic commerce
- Competition
- Small and medium enterprises (SMEs)
- Economic and technical cooperation
- Government procurement
- Legal and institutional areas including dispute settlement.
The RCEP Agreement updates the coverage of the existing ASEAN Plus One FTAs. It takes into account new and evolving aspects of trade such as including the age of electronic commerce, the potential of micro, small and medium enterprises, the deepening regional value chain, and the complexity of market competition. The RCEP Agreement will complement the World Trade Organization (“WTO”), building on the WTO Agreement in areas where the Parties have agreed to update or go beyond its provisions.
- Investment in RCEP
- Definitions
Under Chapter 10 of the RCEP Agreement, investment means every kind of asset that an investor owns or controls, directly or indirectly, and that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gains or profits, or the assumption of risk (Chapter 10 of RCEP). Investment also consists of shares, stocks, bonds, loans, rights in contracts, and Intellectual Property Rights. - Scope of Investment
Investment in RCEP consisted of four pillars of investment, which are protection, liberalization, promotion, and facilitation. This chapter on investment aims to create an establishment investment environment in the region. The investment under Annex 10A of RCEP (regarding Customary International Law) includes such investment liberalization, including (1) Most Favored Nation (“MFN”) clause, and commitments in the prohibition of performance requirements that go beyond their multilateral obligations under WTO Trade Related Investment Measures (“TRIMS”), (2) schedule of Reservations and Non-Conforming Measures, which provides the country member to use the negative list approach with standstill and ratchet mechanism, (3) providing for improving investment facilitation provisions, which also address the investor aftercare, and (4) a built-in work programme on investor-state dispute settlement provisions.RCEP does not apply to government procurement subsidies or grants; services are supplied in the exercise of governmental authority neither on a commercial basis nor in competition with one or more service suppliers. Moreover, it has no provisions regarding the geographical scope of investment under RCEP.In addition, clauses on denial of benefits under RCEP prevent third-country nationals who own or control the investor from gaining access to protection if their home country is not a Party. In addition, there are prohibitions of performance requirements in investment under RCEP, which includes: (1) local content requirements; (2) trade-balancing requirements; (3) foreign exchange restrictions; (4) export controls; (5) forced transfer of a particular technology, production process, or other proprietary knowledge; and (6) forced adoption of a given rate or amount of royalty under a license contract. Prohibitions (5) and (6) do not apply to Cambodia, the Lao PDR, and Myanmar.Investment protection and transfer of funds on investment under Chapter 10 of RCEP regulate the free transfer of funds relating to a covered investment, in any freely usable currency at the market rate of exchange prevailing at the time of transfer. Exceptions include application laws and regulations relating to (1) bankruptcy, insolvency, or the protection of the rights of creditors including employees, (2) issuing, trading, or dealing in securities, futures, options, or derivatives, and (3) TaxationUnder Annex 10B of RCEP, expropriation covers the direct and indirect expropriation admitted only for a public purpose, in a non-discriminatory manner and on payment of compensation. Non-discriminatory regulatory actions to achieve legitimate public welfare objectives, such as protection of public health, safety, public morals, the environment, and real estate price stabilization, do not constitute indirect expropriation. In relation to the investment promotion and facilitation, there are no compulsory provisions on investment promotion. This also applies to the scope of the social provisions in RCEP. - Dispute Settlement
RCEP regulates a work program establishing that the Parties should enter discussions on the settlement of investment disputes between a Party and an investor of another Party no later than two years after the Agreement’s entry into force. Such discussions should be concluded within three years after they begin.Although Chapter 10 of the RCEP does not outline a specific state-state dispute resolution procedure, Chapter 19 of the RCEP, which deals with dispute resolution, outlines a general procedure by which investors can seek assistance from their home state if they believe a host state has fallen short of meeting its investment chapter obligations. This can eventually lead to a formal claim being made against the host state. An important qualification to this clause is that it does not apply to pre-establishment rights, such as those that pertain to the admission or approval of foreign investment. The investment chapter has been referred to as “A State-to-State WTO Style System for Now” because investor-state dispute settlement is absent and recourse to the state-to-state dispute settlement mechanism is permissible (Ewing-Chow, 2020).
- Definitions
- Implementation and Impacts on Indonesia’s Investment
President Joko Widodo issued Law of the Republic of Indonesia Number 24 Year 2022 regarding the Ratification of the Regional Comprehensive Economic Partnership Agreement (“Law 24/2022”), which comes into effect on 27 September 2022. Through its Paragraph 3 of the Elucidation, the government ratified the RCEP, intending to emphasize the centrality of ASEAN and enhance economic cooperation through modern, comprehensive, high-quality, and mutually beneficial agreements by creating an open trade and investment area while increasing two supply chains and contributing positively to the world economy.
The establishment of RCEP is expected to have an influence on Indonesia’s economy to make an improvement in the investment law system in order to compete in international trade. However, the challenge Indonesia is facing today is how to simplify licensing, investment requirements, ease of doing business, and structuring derivative regulations from Law No. 11 Year 2020 on Jobs Creation (“Omnibus Law”). Turns out, there were many inconsistencies in the substance of Omnibus Law and RCEP that emerged as a new legal problem for Indonesia (Kusuma dan Anisah, 2022: 155).
The ratification of RCEP brought many positive and negative impacts for Indonesia on resolving legal uncertainties. The solution for this problem is by making structural and policy changes. One country must have a strategy for implementing RCEP as it is transferring to emerge as a country for imported products. With Indonesia being the country member of RCEP, it has brought new problems to Indonesia since some of the provisions are not synchronized with Omnibus Law.
First, regarding the Negotiations Principle in Article 3 of the RCEP which include provisions to facilitate trade and investment and to increase transparency in trade and investment relations between participating countries, as well as facilitate the involvement of participating countries in the global and regional trade supply chain. This also includes all forms of investment, such as procedures, laws, regulations, and policies. However, Omnibus Law brought controversies in showing its transparency to the public, causing the burden of investors by delaying FDI inflows. Although stated in Article 96 of Law Number 15 of 2019 concerning Amendments to Law Number 12 of 2011 concerning the Formation of Legislative Regulations (“Law 15/2019”) regulates that in the formation of legislation it is necessary to have public participation. Sadly the preparation process did not involve any public participation, causing various controversies regarding the non-disclosure of information.
Second, regarding the rights of investors. Article 10.1 of RCEP states that the investors have the rights granted in accordance with the laws and regulations of the host Party or contracts, such as concessions, licenses, powers, and permits, including for exploration and exploitation of natural resources. However in Indonesia, the complicated bureaucratic systems and officials in government and state owned entities do not seem to be separated.
Lastly, regarding the investment facilitation provisions, RCEP provides better investment facilitates, involving investor aftercare, such as assistance in resolving complaints and grievances that may arise. RCEP facilities refer to the quality of human resources in Indonesia. Indonesia still has the problem of its labor which is not in accordance with the skills. This resulted in many complaints from the investors but lack of response from the government, since Omnibus Law only focuses on job creation instead of worker productivity while RCEP focuses on investment protection. Thus, Indonesia has the advantage of attracting investors due to the abundance of natural resources and human resources but the complicated national investment regulations did not help to achieve the targets of foreign investors.
- Conclusion
RCEP was formed to harmonize rules and regulations in various overlapping FTAs in the region, thus becoming the basis for a multilateral trading system. This agreement has the aim to strengthen the global and regional supply chains but facilitates and increases the openness of investment and trade relations between member countries.
Under investment liberalization, RCEP provides for MFN and national treatment as well as fair and equitable treatment in FDI. It prohibits performance requirements with regard to the forced transfer of technology and forced adoption of a given rate or amount of royalty under a license contract. However, least-developed countries are exempted from these two prohibitions.
Members of the RCEP may also encounter domestic pressure to reduce competition in their home markets. These pressures were also demonstrated in the ratification of RCEP in Indonesia, where there were many inconsistencies in the substance of Omnibus Law and RCEP that emerged as a new legal problem for Indonesia, including the part of negotiations, rights of the investors, and investment facilitation provisions.
References
Law/Regulations
Summary of the Regional Comprehensive Economic Partnership (“RCEP”) Agreement, 2020
Law of the Republic of Indonesia Number 24 Year 2022 on Ratification of Regional Comprehensive Economic Partnership Agreement (“Law 24/2022”).
Law of the Republic of Indonesia Number 11 Year 2020 on Jobs Creation (“Omnibus Law”)
Journals
Kusuma, Ega Prabandari and Siti Anisah. (2022). The Urgency of RCEP in the Development of Indonesia Investment Law. Journal of Law & Legal Reform, 3(2), 151-184
Susilo, Ignatia Bintang Filia Dei. (2021). Trade Analysis of 10 RCEP Member Countries Plus India: Have They Been Competing?. WELFARE Jurnal Ilmu Ekonomi, 2(2), 94-108.
Article
Ewing-Chow, M. and J.J. Losari. (2020). RCEP Investment Chapter—A State-to-State WTO Style System for Now. Kluwer Arbitration Blog, http://arbitrationblog.kluwerarbitration.com/2020/12/08/the-rcep-investment-chapter-a-state-to-state-wto-style-system-for-now/ (accessed on 18 November 2022).
written by: Hana Salvia (2019) and Desliana Maharani Nur Fitri (2020), Undergraduate Law Student at Universitas Padjadjaran, Jl. Ir. Soekarno KM. 21 Jatinangor, Kab. Sumedang (45363) West Java.
This article is the authors’ personal opinion and does not represent the editorial views of KlikLegal.
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