BGA Brainstorm: How RCEP Benefits US Companies in Asia

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How RCEP Benefits US Companies in Asia

The Regional Comprehensive Economic Partnership Agreement (RCEP) — a free trade agreement (FTA) signed by 15 Asian countries on November 15, 2020, and accounting for 30 percent of world trade — is a significant pact that will strengthen regional supply chains in Asia by cutting tariffs on trade among the parties. BGA is closely monitoring the ratification process and implementation of the pact and what it may mean for U.S. companies.

The RCEP members include the 10 ASEAN countries plus Australia, China, Japan, New Zealand and South Korea and will go into effect 60 days after six ASEAN countries and three of the other partners ratify the agreement. While the United States is not a member, U.S. companies can take advantage of the RCEP’s provisions — including tariff reductions and common rules of origin — if they have existing operations in one of the 15 Asian markets or are planning on expanding into the region through local manufacturing.

Signing of the RCEP agreement last November (Photo Credit: ASEAN Secretariat)

In particular, the agreement will benefit companies with supply chains that reach across multiple markets in Asia and whose products and components face existing tariffs. How exactly companies take advantage of the RCEP will vary significantly given the complexity of the agreement — not just in terms of the uniqueness of the markets involved but also how provisions will affect individual sectors and products in practice over the next few years.

Companies with operations in the RCEP markets will benefit greatly from harmonized rules of origin as intermediate goods can be sourced across any of the 15 RCEP countries. Only 40 percent of RCEP’s regional value of content is required for goods to meet rules of origin requirements. In some cases, companies can cumulate content from any RCEP country to meet requirements.

As uncertainty increases over U.S.-China trade relations, the RCEP’s common rules of origin and low tariffs will encourage companies to diversify supply chains and manufacturing operations to Southeast Asia to take advantage of the preferential access. U.S. companies will be able to use the RCEP to circumvent tariffs and possibly the export controls China imposed late last year on inputs for biotechnology, construction and telecommunications.

The manufacturing sectors in which RCEP parties have existing tariff barriers — particularly electrical machinery, industrial machinery, telecommunications equipment and autos — will be the biggest beneficiaries of the agreement. For China, Japan and South Korea, two-thirds of new trade attributable to RCEP will consist of advanced manufacturing, which depends on multi-country supply chains.

The RCEP marks the first time that China, Japan and South Korea have entered together into a single FTA. These countries will be the largest beneficiaries as exports are estimated to increase by $248 billion for China, $128 billion for Japan and $63 billion for South Korea by 2030. The agreement is estimated to add $186 billion to the world economy. Other significant beneficiaries include Indonesia, Malaysia, Thailand and Vietnam.

The agreement eliminates up to 90 percent of tariff lines over a phased 20-year period. Until reductions are fully phased in, import tariffs may differ depending on the originating RCEP country and the destination RCEP market.

BGA will be keeping an eye on the ongoing consequences of RCEP and how they affect U.S. companies. These include general geopolitical effects as well as more specific implications for industries and sectors in certain markets in the Indo-Pacific region.