The Regional Comprehensive Economic Partnership (RCEP), the world’s largest trade deal, officially took effect on January 1, 2022, targeting a market of 2.2 billion consumers.
Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement (FTA) among 10 ASEAN member countries and an additional 5 countries: Australia, China, Japan, South Korea, and New Zealand. RCEP was signed in Hanoi, Vietnam on November 15, 2020, aiming to form the East Asia Free Trade Agreement (EAFTA) and the Comprehensive Economic Partnership in East Asia (CEPEA).
The 15 members of RCEP accounts for 30% of the world’s population (2.2 billion people) and 30% of the global GDP (26.2 trillion USD), forming the largest trade bloc in history. RCEP is the first free trade agreement between China, Japan, and South Korea, three of Asia’s four largest economies.
As of November 2, 2021, 6 ASEAN countries and 4 of the partner countries, including China, Japan, Australia, and New Zealand, sent their ratification of the RCEP Agreement to the General Secretary of ASEAN. On this basis, the RCEP Agreement officially took effect starting January 1, 2022. RCEP has two major changes compared to previous FTAs: consolidated Rules of Origin (ROO) and tariff reductions. Both will have positive impacts on trade within the region and will likely attract multinational corporations into the bloc.
Enhance Trade with Accumulative Rules of Origin
The agreement’s accumulative ROO is the RCEP agreement’s biggest accomplishment. A good will be considered to meet the ROO requirement if it meets just one of the following three conditions: the good is wholly obtained in a member country; the good is produced solely from materials originating in one or more member countries; the good is produced from non-originating materials that meet the requirements of the Item Specific Rules. For example, cotton from China processed in Vietnam, under the new cumulative ROO, will be deemed to have originated in Vietnam when Vietnam exports the final product to another RCEP country. In general, the RCEP brings together all the original rules of origin outlined in the ASEAN-Plus-one and other bilateral preferential trade arrangements (PTAs). Thus, businesses will only need one ROO when trading within the bloc.
Accordingly, the RCEP creates huge benefits to some key export industries of its members, for example, Vietnam’s textile and garment industry. The previous FTAs which Vietnam had signed with Japan: VJFTA and AJCEP, both required two-step rules of origin: the fabric had to be produced in the ASEAN country or in Japan to be eligible to receive tariff preferences. With the new RCEP Agreement, Vietnam manufacturers can import fabrics from anywhere; as long as the fabric is then cut and sewn in Vietnam, tax incentives will be implemented when exporting to Japan. Vietnamese exports to any of the member countries of the agreements will now be more time- and cost-efficient. Other industries such as footwear, automobiles, agriculture, fisheries, and telecommunications will also enjoy similar advantages with the new RCEP.
Overall, the relaxed, consolidated ROO will reduce costs and enhance global value chain activities for any company that has supply chains spanning in Asia. Multinational companies that would like to move parts of their production to Asia will also find it easier to establish supply chains in the region.
Benefits for China with Tariff Abolition and Reduction
The RCEP will eliminate tariffs and quotas on more than 65% of traded goods, improving market access. The member countries agree to reduce or eliminate customs duties imposed on goods by approximately 92% over 20 years. Some tariffs will be eliminated immediately, while others will be phased out gradually over 20 years. However, this does not necessarily imply extensive tariff abolition for all member countries, as more favourable trade agreements already exist between some of the member countries.
Among the countries, China is the one that will benefit greatly from this agreement. RCEP members are all important partners of China. In the first nine months of 2020, trade turnover between China and its member countries amounted to 1.055 billion USD, accounting for about one-third of the country’s total foreign trade turnover. With RCEP, 85% of Chinese goods will enjoy zero tariffs when exported to RCEP countries. Further on, a total of 98.2% of Chinese products will be granted zero Australian tariffs in the long run. Overall, the share of trade with free trade partners is expected to increase from 27% to 35%, and China will have a total of 19 free trade agreements with 26 partners.
Thanks to RCEP, China can also establish its first free trade agreement with Japan. During the first three decades after China’s reform and opening, Japanese investment in China was mainly in the form of “re-exports”, meaning that Japan invested in manufacturing in China, to then export those products to other countries. With RCEP, preferential tariffs will be immediately applied to 57% of Chinese goods exported to the Japanese market. Therefore, Japanese investors who are eager to switch from re-export investment to investment focused on the China market can promote this strategy further with RCEP.
In general, global partners and investors can benefit from a bigger market, more flexible supply chains, lower transaction costs in RCEP countries with this new partnership.