RCEP: A game changer for trade in Asia – Textile and apparel supply chains are key beneficiaries
20 November 2020
The RCEP is the largest plurilateral trade agreement in the world, comprising about a third of the world’s population and global GDP. By eliminating tariffs on at least 92% of goods traded and opening up at least 65% of services sectors, the RCEP will certainly encourage more cross-border trade, investment and flows of people across the Asia-Pacific region, thus expediting economic and trade integration in the region. The RCEP will create a unified set of trade rules for the Asia-Pacific region to replace the multiple ‘ASEAN-plus-one’ trade deals, which will also solve the ‘spaghetti bowl’ problem of the ASEAN becoming entangled with a bunch of FTAs and different rules for each trading partner. This marks a big step towards forming an integrated trading region in Asia, like North America and Europe, which have had integrated trading arrangements for over 20 years.
The RCEP not only harmonizes the different rules of origin of its member countries, but also sets generous regional-content requirements for a lot of products. For example, once a company can prove that a pair of shoes it produced reaches an RCEP regional value content level of 40%, it can export the shoes to any of the 15 RCEP countries and enjoy preferential access, and this 40% regional value can come from any of the 15 RCEP members.
RCEP’s unified rules of origin and regional cumulation provisions will make it significantly easier for products made in its member countries to qualify for preferential access when entering other markets in the region. This will encourage companies to source inputs and intermediate goods from other members within the trade bloc, further strengthening the regional supply chains in the Asia-Pacific region. Businesses will also be able to enjoy more flexibility and lower costs through effective orchestration of their supply chains in the region.
1. Negotiations and conclusion
After eight years of negotiations, 15 Asia-Pacific countries signed the Regional Comprehensive Economic Partnership (RCEP) in a virtual ceremony in Hanoi, Vietnam on 15 November (see exhibit 1 below). The RCEP involves the 10 Association of Southeast Asian Nations (ASEAN) member countries1 as well as China, Japan, South Korea, Australia and New Zealand. The RCEP will come into force 60 days after a minimum of six ASEAN members and three non-ASEAN partners have ratified the deal, which is expected sometime next year.
2. Objective and coverage of RCEP
The RCEP’s objective is to establish ‘a modern, comprehensive, high-quality, and mutually beneficial economic partnership that will facilitate the expansion of regional trade and investment and contribute to global economic growth and development’.2 The RCEP has 20 chapters covering trade, market access and economic cooperation, among others.
In addition, the RCEP also covers customs procedures and trade facilitation; sanitary and phytosanitary measures; standards, technical regulations, and conformity assessment procedures; trade remedies; temporary movement of natural persons; investment; intellectual property; e-commerce; competition policy; small and medium enterprises; economic and technical cooperation; government procurement; and dispute settlement.
3. Benefits of RCEP
It is forecast that the RCEP will raise global GDP in 2030 by an annual US$209 billion. These benefits will go mainly to China, Japan and South Korea, with GDP gains of US$100 billion, US$46 billion and US$23 billion respectively. In terms of percentage increase in the GDP, the largest beneficiaries will be South Korea, Japan and Malaysia (see exhibit 3).
Both the RCEP and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) are multilateral free trade agreements (FTAs) dominated by AsiaPacific countries. However, the two trade deals differ in composition of members and scale (see exhibit 4 & 5).
Besides, the two trade deals have different focus and aspirations, which also have implications for the accession of other countries to the deal. First, the RCEP focuses more on traditional aspects of FTAs such as trade in goods (and more on manufactured goods and less on agricultural produce), aiming largely to reduce tariffs and harmonize rules of origin. Meanwhile, the CPTPP has been billed as a 21st -century trade agreement, setting high standards in the protection of labour rights, the environment and intellectual property, as well as introducing WTO-plus and WTOextra rules5 on state-owned enterprises, digital trade and government procurement. Even in trade in goods, the RCEP is less ambitious than the CPTPP, eliminating only 92% of tariffs, compared with tariff elimination of 98% among CPTPP members.
Second, in addition to its less rigorous requirements in liberalization measures, the RCEP provides differential treatment (such as gradual tariff cut and longer transition period) for developing economies, while the CPTPP applies the same high-standard rules for both developed and developing countries. This could make it easier for interested economies to join the RCEP but not the CPTPP. The relatively easy and open accession to the RCEP also manifests the ‘open regionalism’ the trade bloc pursues.
Through tariff liberalization and trade facilitation, the RCEP, once implemented, is expected to boost intra-regional trade of textiles and apparel and deepen supply chain integration in the region. In 2018, the 15 RCEP member countries together accounted for 46.8% of the world textile and apparel exports and 16.2% of the world textile and apparel imports, according to the World Trade Organization database.
From a supply chain perspective, an interdependent textile and apparel production network has been forming and developing within the RCEP trade bloc. China, Japan and South Korea have played as major suppliers of textile inputs (such as manmade fibres, fabrics, yarn and trims), while China and some less developed ASEAN countries, such as Cambodia, Vietnam, Indonesia and Myanmar, are leading producers of garments and home textiles, with the final products mostly shipped to the US and Europe and, to a lesser extent, to regional consumer markets such as Japan, South Korea, Australia, New Zealand and China. Meanwhile, Australia has served as a major supplier of raw cotton and wool for the region.
On top of the tariff reduction already realized by existing FTAs among the 15 RCEP member countries, tariffs on textiles and apparel will be further reduced or eliminated under the newly signed RCEP. For instance, according to each party’s schedule of tariff commitments6 released:
Another significant benefit brought about by the RCEP is the harmonization of rules of origin and customs procedures, streamlining overlapping and tangled rules (known as the ‘spaghetti bowl effect’) under existing FTAs implemented by RCEP countries. Once the trade pact takes into effect, a unique and standardized certificate of origin is sufficient to ship the same products to all RCEP member countries. Thus, transaction costs within the bloc will be substantially reduced and a simpler and more stable environment for trade will be created. Specifically, the rules of origin under the RCEP are liberal and based on specific product traded. For textiles and apparel, manufacturers in the RCEP trade bloc can source textile inputs from anywhere in the world, and the finished products may still be eligible for preferential market access to RCEP countries.
All in all, we expect that the RCEP, once ratified and implemented, will boost intraregional trade of textiles and apparel and strengthen the regional textile and apparel supply chains. Particularly:
1) By liberalizing tariffs and harmonizing rules of origin, the trade pact is expected to further lower the cost of trade within the trade bloc, boost intra-regional trade and benefit the 2.2 billion consumers living in the region.
2) It is expected to deepen the international division of labour and form a more integrated regional supply chain for the textile and apparel industry, with each RCEP country consolidating its competitive advantage (such as labour cost, skills, technology, capital and resources of raw materials, etc.) along the textile and apparel supply chain.
3) Brands and retailers serving the RCEP markets will probably re-balance their sourcing strategies, by sourcing more textile inputs from the bloc and placing more production within the region to benefit through the trade pact.
From a global perspective, the successful conclusion of RCEP sends a strong signal to the world: A large bloc of Asia-Pacific countries remains committed to free trade, interconnected supply chains and rules-based world order at a time when some other countries have turned to protectionism and unilateral moves.
For China and other Asian countries, the RCEP deal allows them to play a key role in setting rules and standards for regional trade. Currently, both the RCEP and CPTPP – the two mega trade deals in the Asia-pacific region – are without US participation. In the absence of the US from the two trading blocs, Asian countries will have the opportunities to write regional trade rules on their own.
The RCEP will promote intra-Asian integration around the ASEAN and China. With trade flows in intermediate goods between the ASEAN and China expected to increase, the supply chains of the two economies will be more interconnected than ever and the two economies are likely to form an expanded version of the ‘world’s factory’ – a ‘China + ASEAN’ world’s factory. As such, the notion of de-Sinicization of global supply chains will become even more unrealistic and impossible.
For Hong Kong, it can still benefit from the deal even though it is not yet an RCEP member. First, the expected growth in regional trade will create new opportunities for companies in the maritime and trade sectors, given Hong Kong’s status as a premier international shipping hub and trading centre. Second, Hong Kong businesses with manufacturing operations in the Chinese Mainland will enjoy preferential access to other markets in the region. Lastly, Hong Kong could join the RCEP to fully reap the benefits of the trade deal and could even strive for assuming the role of the RCEP secretariat. In fact, Hong Kong has already shown its interest in joining the RCEP.
For Hong Kong sourcing businesses, their role as the world’s foremost global supply chain orchestrator will surely gain them opportunities. As the regional supply chains in the Asia-Pacific region continue to evolve under the RCEP, Hong Kong sourcing companies can play an important orchestration role in rebalancing and restructuring regional supply chains. In particular, businesses with a strong supplier network and deep relationships with suppliers in the region will be in the best position to fully tap the opportunities arising from increasingly integrated regional supply chains in the Asia Pacific region.
Article tags