What can RCEP add to Vietnam’s FTA collection?

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On January 1, the Regional Comprehensive Economic Partnership (RCEP) came online. The free trade agreement (FTA) includes the ten members of ASEAN, Australia, New Zealand, China, Japan, and South Korea. 

These 15 nations account for roughly 30% of the world’s population and 30% of global GDP, making RCEP the largest-ever trade bloc. 

As of this writing, however, Myanmar, Indonesia, and the Philippines have yet to ratify the agreement.

It also adds to Vietnam’s long list of FTAs, which range from other huge deals such as the CPTPP down to bilateral agreements between one other country. The country is currently part of 13 such agreements, including seven signed as part of ASEAN and six as an independent party. 

According to the Hanoi Times, Vietnam is already heavily integrated with RCEP members: in 2020, trade turnover with the bloc accounted for 55% of the country’s total revenue in 2020, while 41% of exports went to RCEP members, and 71% of imports came from them. 

This trade deficit within the FTA is a concern, but the deficit to total bilateral trade value has actually improved slightly over the last few years, and researchers at HSC argue that “it is rational to expect that trading with the RCEP bloc will result in an improved trade balance relative to total trade volumes.”

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At the same time, the lowering or eventual elimination of tariffs between RCEP members could allow Vietnamese companies to diversify their sources of production inputs. This would, in theory, reduce reliance on China, which accounts for nearly 40% of imports for Vietnam’s lucrative electronics and machinery industries. 

HSC forecasts that exports from Vietnam to RCEP nations could grow across the board, and especially to Japan and South Korea. 

While large-scale trade expansion isn’t expected given the existing FTAs with RCEP members, one unique aspect of the agreement is its ‘cumulation rule’ when it comes to rules of origin (ROOs). 

Every FTA has its own ROOs which must be met in order for a country to enjoy preferential tariffs, and RCEP allows goods from one member to be used as input for production in another member while being designated as ‘made in’ the country where the final manufacturing takes place. 

This could benefit Vietnam’s textile and garment products being shipped to Japan, for example. Prior to RCEP, strict Japanese ROOs stated that fabrics had to originate from ASEAN, whereas Vietnam imports most of its fabrics from China.

Now that both China and Japan are part of RCEP, Vietnam can import material from the former and, by 2038, enjoy a 0% export tax rate on shipments to Japan.

“RCEP may also help Vietnam businesses import raw materials and intermediatory or semi-finished inputs for production at a lower price than the pre-RCEP period as most of the imported materials are being used to produce export items,” Dr. Erhan Atay, RMIT Senior Lecturer of International Business, told RMIT’s news site.

However, not everyone believes that the FTA will accomplish much. 

“RCEP will have little short-term benefit for our business,” Simon Pugh, president of AusCham Vietnam, said. “It is a high-level intergovernmental hand-shaking opportunity with 20-year windows on meaningful issues such as tariff reduction.” 

Standard Chartered, meanwhile, sees Vietnam as a key beneficiary in the long run, with RCEP potentially forming the basis for a new regional supply chain that the country would play a key role in. 

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This possibility comes as severe global supply chain issues continue to plague many industries, while the Vietnamese government aims for export growth of 6-7% annually until 2030. 

There are broader criticisms of RCEP as well, particularly around the lack of provisions on labor and environmental standards or state-owned enterprises – which are extremely important issues in most of the member countries.

But the economic benefits will likely come to fruition, with the Asia Development Bank estimating that if the agreement is effectively implemented, it could add US$245 billion in annual income to members while also adding up 2.8 million jobs by 2030.

As countries emerge from the Covid-19 pandemic at varying levels of economic health, every bit will help. 

Writing credit Michael Tatarski

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