How Is RCEP Likely To Impact On China’s Belt And Road Initiative?

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Chile, Costa Rica, Georgia, Maldives, Mauritius, Mongolia, Pakistan, Peru & Turkey all have reasons to be looking at their RCEP nations Free Trade Agreements

By Chris Devonshire-Ellis

The Regional Comprehensive Economic Partnership (RCEP), the world’s largest regional free trade agreement covering the world’s largest population, became effective on January 1, 2022. The RCEP trade bloc is the world’s largest, both in terms of population and GDP, roughly accounting for 30 percent of the global total for each. The RCEP member countries are Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Thailand, and Vietnam. This equates to a market value of close to US$25 trillion and a total consumer base of about 2.5 billion, of whom an estimated one billion are middle-class consumers. That is roughly the equivalent of 3 x the United States.

What does RCEP do for regional trade?

In line with the general concepts of free trade, the RCEP agreement eases customs clearance protocols among all member countries, reducing to within 48 hours clearance, and expediting of the shipment of, and especially perishable goods within 6 hours after arriving at ports. This is extremely important for seafood markets such as Japan where the quality of produce has to be super-fresh. Overall, it will eliminate delays and in doing so reduce costs and provide faster turn-around times.

In terms of cross-border eCommerce, all members have committed to paperless trade, recognizing mutual digital signatures, and establishing multilateral digital protocols to secure digital trade across the RCEP region.

These innovations will undoubtedly set the standard for trade ties beyond RCEP, with this being especially true of China, who will begin to export and encourage the use of digital trade signatures across the Belt and Road Initiative and the countries it trades with. As 142 countries have BRI agreements with China, the development impact will be significant. That has already manifested itself in trade with BRI signature nations, which as at the first half of 2021 had increased by 38%, accounting for 29.6% of China’s total global trade. Significantly, China’s imports from countries along the BRI increased by 66.6%, underlining one of the key pillars of the BRI – that it exists partially to keep China supplied – great news for exporters in BRI nations.

China also continued to invest overseas in 2021, with its outbound investment now the world’s largest.

RCEP will expand regional manufacturing supply chains

Manufacturers within RCEP are no longer confined to producing in one country to obtain preferential tariff status. Manufacturers can now produce and establish supply chains across the RCEP region, with zero-tariffs applying to 92% of goods implemented progressively over the next 20 years, in accordance with each party’s Schedule of Tariff Commitments, on all products that are produced within the RCEP bloc. This enables a deeply integrated supply chain and production chain within the RCEP region, however the ripple effects of this can be felt – and taken advantage of by other countries along the BRI.

This is because access to RCEP can be obtained through smart investments carried out by businesses of countries not part of this bloc by establishing a manufacturing or production facility in one of the RCEP nations. Providing the non-member country has a Free Trade Agreement of its own with an RCEP member, this can be leveraged, if in compliance with rules of origin criteria, to access the entire bloc.

Sourcing from within RCEP nations, for example from Cambodia or Vietnam, where products are less expensive, or where finishing techniques can be carried out, can be matched with permitted non-RCEP manufactured components, with the combined mix being worked into a finished product assembled for example in Australia, China, or South Korea. Attention to detail needs to be paid on structuring such supply and production chains, however access to a market the size of RCEP – and elsewhere – is a significant prize. Clever sourcing and application of RCEP rules may provide both larger profit margins and consumer market access to invested businesses willing to examine the issue.

RCEP will expand ​global services supply chains

Under RCEP, at least 65% of the services sectors will be fully open to foreign investors, with commitments to raise the ceiling for foreign shareholding limits in various industries, such as professional services, telecommunications, financial services, computer services, and distribution and logistics services.

Access to RCEP services sectors can be obtained through investments carried out by businesses of countries not part of this bloc also by establishing a manufacturing or production facility in one of the RCEP nations. Providing the non-member country has a Double Tax Agreement of its own with an RCEP member, this can also be leveraged, if applicable, to access all RCEP. A list of BRI countries that have a DTA with China can be found below.

What does RCEP mean for China?

As mentioned, China’s trade with the RCEP members accounts for about 30% of China’s total current trade. ASEAN, Japan, and Korea are China’s largest, 4th, and 5th largest trading partners. China is well-positioned in the middle to the upper-middle tier of the regional industrial supply chain, meaning BRI investors in textiles, auto parts, electronics and others from China will benefit from their unique competitive positions in the regional supply chain, conducive to China’s wider exports. RCEP will further facilitate regional direct investment into China due to its industrial supply chains and labor efficiency.

China’s 2021 trade trends

China’s 2021 trade in goods is expected to have reached U$6 trillion, representing a 20% growth. Both imports and exports appear to have grown by U$1.3 trillion over the past year, representing the highest growth volume China has seen in a decade. As at Q3, 2021, China accounted for 15% of the global export and 12.1% of global imports. It remains the world’s largest exporter and the second-largest importer.

New emerging trade partners

China’s trade with emerging markets along the BRI continued to expand in 2021, representing a new growth impetus in China’s trade. Emerging markets accounted for 49.5% of China’s exports as of November 2021. The impact of the BRI can be felt by noting that Central and Western China’s trade levels – those more integrated with Central Asia and Russa – grew faster than the traditionally busy East Coast regions. Central and Western China’s export grew by 34.9% as of November last year.

Accessing RCEP

Accessing RCEP from the BRI requires attention to detail of pertinent trade agreements between a BRI signatory nation and any of the RCEP members. Here are the BRI players that may take advantage:

Chile (FTA with Australia)

Costa Rica (FTA with China)

Georgia (FTA with China)

Maldives (FTA with China)

Mauritius (FTA with China)

Mongolia (FTA with Japan)

Pakistan (FTA with China)

Peru (FTA with Australia)

Turkey (FTA with Malaysia)

Access to RCEP services industry sectors requires attention to the pertinent Double Tax Treaties, between the BRI member nation and respective RCEP states, these are more numerous than can be listed here. Suffice to say that most BRI members will have some form of DTA, and especially with China. These do require professional advice to examine potential benefits and access points – they all tend to differ from one, so this evaluation is vital. A business case needs to be made to verify the extent of their reach. Lawyers, tax advisors and businesses may contact our firm to assist at silkroad@dezshira.com

Other big winners are likely to be African nations – their own African Continental Free Trade Agreement (AfCFTA) kicked in twelve months ago, and there will be benefits in examining how AfCFTA and RCEP may be able to dovetail.

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About Us

Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates. The firm assists British and Foreign Investment into Asia and has 28 offices throughout China, India, the ASEAN nations and Russia. For strategic and business intelligence concerning China’s Belt & Road Initiative please email silkroad@dezshira.com or visit us at www.dezshira.com

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