Regional Comprehensive Economic Partnership

Using RCEP: Swimsuits and Textile Trade

Using RCEP: Swimsuits and Textile Trade

The upcoming entry into force of the Regional Comprehensive Economic Partnership (RCEP) should be helpful to the textile and apparel sectors. It will make it considerably easier to make fabrics and clothing in Asia and distribute them across the region with lower tariff rates or even duty-free treatment. Most important, the rules of origin will be consistent around the region. Given the highly integrated supply chains for these products that span multiple RCEP economies, having rules that better fit existing footprints will be especially helpful. To see how this works, think about a women’s swimsuit. It needs to be able to handle chlorinated and salt water, fit snuggly but not uncomfortably, and have sufficient flexibility in movement to allow swimming, surfing, diving and other water activities. A swimsuit requires high performance fabrics and sophisticated sewing abilities to make a final product that fits a range of body types and is attractive to buyers. As a result of these demands, the supply chain for swimsuits often includes the purchase of specialized fabrics from Japan or South Korea, nylon fabrics from Australia or Korea, and sewing skills from China or Vietnam. The global market for swimsuits (disrupted, as with so many things, by the pandemic in 2020) is still expected to reach US$27 billion by 2027, with growth of just over 5% annually. Existing MFN tariff rates on swimsuits (HS6112) can be quite high across Asia. Australia charges 10% on women’s swimsuits. China’s tariffs are 17.5% for synthetic materials and 16% for other fabrics. Japan has six different categories for swimsuits with base tariffs ranging from 10.9% to 8.4%. Korea levies 13% tariffs. Vietnam charges 20%.

RCEP: A First Look at the Texts

RCEP: A First Look at the Texts

The 15 countries in the Regional Comprehensive Economic Partnership (RCEP) held an elegant virtual signing ceremony on November 15, 2020. The Asian Trade Centre will be delving more deeply into the specific details and producing a series of materials to help companies get ready to use the agreement. For now, here are our first quick technical assessments of the agreement. Note that this early look should not be taken as the definitive guide, as an agreement with 20 chapters and thousands of pages of associated schedules will take some time to unravel. To get a sense of the task ahead, the Korean tariff schedules alone run to 2743 pages. Compounding the difficulties of making a quick assessment: governments can be quite creative in burying important details inside of different provisions. Flexibilities and exceptions are going to be tough to note, understand and unravel. RCEP will, of course, have important implications for trade in the region, for economic integration and for the future of trade policy. This post, however, will focus on the details of the agreement itself. The basic structure includes 20 chapters, making RCEP a comprehensive trade agreement that includes commitments in areas like goods, services, investment, intellectual property rights, competition, trade remedies, standards, e-commerce and dispute settlement. Many of these chapters were not included in the underlying ASEAN+1 agreements that formed the original core of RCEP. Getting these negotiated took significant time, which is partly why RCEP has taken 8 years to reach conclusion. Overall, RCEP represents a significant achievement. The 15 countries involved (Australia, Brunei, Cambodia, China, Indonesia, Japan, Lao PDR, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Thailand, and Vietnam) are very diverse in nearly every imaginable dimension. Getting an agreement that could successfully navigate the domestic constraints and starting points in all 15 countries is an important accomplishment. RCEP also represents the first time that many members have engaged in this sort of trade arrangements: especially between China, Japan and South Korea. As expected, this created additional friction as officials grappled with managing outcomes.

Bright Spots for Trade in Asia

Bright Spots for Trade in Asia

Two other important groupings have important milestones in August. The members of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) are meeting on August 5. The CPTPP, which still has no Secretariat to manage this sprawling and complex trade agreement, is instead driven by a series of meetings across the year by government officials working on various aspects of the deal. The primary mechanism for oversight is the CPTPP Commission, which will be held virtually under Mexico’s chairmanship this year. The Commission meeting should be notable for a few reasons. First, it is an opportunity to celebrate the achievements of the agreement after more than 18 months in operation. While trade flows remain depressed under the pandemic, governments like Vietnam have taken advantage of the opportunity to expand knowledge. Vietnam held 577 seminars and workshops in 2019 alone to encourage the proper utilization of the CPTPP by firms of all sizes across the country. Second, the Commission will review any issues that have emerged in implementation. An agreement that runs to nearly 600 pages with thousands of country-specific commitments is bound to have a few issues. As a simple example, a typo in one of the letters mentioned yams instead of yarn.

Using RCEP: Creating Products for Asia

Using RCEP: Creating Products for Asia

Under RCEP, however, the shampoo company can make shampoo safe in the knowledge that—as long as the content in the bottle comes from anywhere in the 15 markets in Asia meeting the ROOs for RCEP—it can be shipped to any of the 15 markets in Asia without any changes in formulation.  Given the size and diversity of these markets, this is a significant advantage to all Asia-based firms.  Even better, under RCEP, firms will need to fill out only one sheet of paper to prove that their products “qualify” for origin.  The new RCEP certificate of origin (CO) should reduce costs and time for companies.  The extent of the benefits, ie, the lower tariffs on offer, will vary in RCEP.  In some instances, the gap between the MFN rate or existing FTA benefits and new RCEP rates may be small.  But the ability to ship products, like shampoo, across all of Asia without change in formulation, is still extremely significant.  It means that firms will be competitive in markets that they may never have considered in the past. This apparently small element of RCEP is likely to be game changing.  Companies should start preparing now to use this trade agreement.

The Titanic Has Hit the Iceberg: Global Trade in Profound Trouble

The Titanic Has Hit the Iceberg: Global Trade in Profound Trouble

We have not seen this sort of global trade system in a very long time, so it is not possible to imagine fully what it will look like.  But to return to the Titanic discussion, if the main boat is sinking, what will happen?  Everyone will be desperately looking for any way possible to avoid drowning. The ideal scenario is to have another luxurious cruise ship nearby to pick you up.  For some countries, this trade option is available.  The European Union fits the bill for some lucky passengers.  Slightly less fancy, but still desirable, will be the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which gives members significant benefits from being inside a new luxury liner. A bigger boat is much better in a wide ocean than smaller boats.  The Regional Comprehensive Economic Partnership (RCEP) with 15 members in Asia is slightly less well-appointed than the CPTPP, but will do quite nicely for most Asian countries.  Some countries will be looking for any lifeboat, including tiny rowboats made from lashing together bilateral deals with key trading partners.  Some will get stuck trying to straddle a bunch of smaller boat options. Finally, some members will have no true options and are facing the freezing waters.  One of the main purposes of the multilateral trading system, in fact, has been to help smaller, poorer countries navigate a world of bigger, more powerful countries.  Once the Titanic sinks, this safety net is no longer available.  Drowning is a real risk.