The Comprehensive Economic Partnership (RCEP) for the East Asian Region, which japan, China, South Korea, and the ASEAN are members of, came into effect on January 1, 2022, giving birth to a huge economic circle that accounts for about 30% of the world's gross domestic product (GDP). For Japan, the first free trade agreement (FTA) signed with China and South Korea, is estimated to boost Japan's exports to the region by more than 5 percent compared to 2019.
The 10 countries that had been entrusted to the ASEAN Secretariat for domestic procedures, including ratification as of November 2, had entered into force in 10 countries, including Thailand, Vietnam, Brunei, Cambodia and Laos. South Korea will take effect on February 1, 2022. The remaining Indonesia, Malaysia, the Philippines and Myanmar will also expedite the completion of domestic procedures.
RCEP began negotiations in November 2012. India withdrew halfway through negotiations, which had stalled but was signed in November 2020. The tariff removal rate by category is 91 percent, down from 99 percent of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), but the Japanese government estimates that the increase in GDP is about 15 trillion yen, twice as high as the CPTPP.
The reason for the greater economic benefit of RCEP is that countries with higher average tariff rates participate in large numbers. According to the World Trade Organization (WTO), South Korea (13.6%), China (7.5%), Vietnam (9.5%) and Indonesia (8.1%) are at high levels in terms of average tariff rates, including agricultural and industrial products.
For Japan, it is the first free trade agreement signed with China, the largest trading partner, and South Korea, the third largest partner. According to Mizuho Research & Technologies, the immediate cancellation rate, including current tariff-free categories, is 25% in China and 41.1% in South Korea. Although there are not many categories that become tariff-free at the time of entry into force, after about 10 years, Japan and China and South Korea will eliminate tariffs on about 70% of the categories.
Estimates from the United Nations Conference on Trade and Development (UNCTAD) suggest that intraregional trade in RCEP will expand by 2 percent, adding about $42 billion. Among them, the effect of regional countries that have become competitively favorable due to tariff cuts is $25 billion in extracting export demand from countries outside the region, and the effect of trade expansion due to tariff reduction is $17 billion.
By country, Japan benefited the most, with exports to the region set to increase by 5.5% over 2019 and by about $20 billion by amount. China and South Korea are also expected to achieve export growth of around 2 percent. On the other hand, countries such as Indonesia and Vietnam will be stripped of export demand by other countries in the region, and exports will decrease. Exports to RCEP from countries outside the region such as the United States, the European Union (EU) and India are also expected to decline.
In terms of promoting the export of Japanese products, it is particularly expected in the automotive sector. A portion of the tariff rate on china-oriented water pumps for car engines was 3 percent at the time of the talks but would be eliminated when it came into effect. Much of the engine components were previously subject to tariffs of up to 8.4 percent, but would be eliminated before year 11 or 16. In South Korea, the 8% tariff on automotive electronic components and airbags will be lowered in phases before the 10th or 15th year.
Exports of Japanese agriculture, forestry and aquatic products have also brought about a strong wind. There is a 10% tax rate on packaged rice and scallops, which are popular in China, but will be reduced in phases in the future. If the tariff rate on Japanese sake and shochu is lowered, exports are expected to increase.
Judging from the categories with large imports from Japan, the removal of tariffs is expected to bring about a price decline. Tariffs on clothing will be eliminated by the 16th year at the latest. With regard to agricultural products, tariffs on brussels sprouts and avocados will be eliminated immediately, in addition, China's Shaoxing wine, South Korea's rice wine, etc. will be eliminated in phases before the 21st year. On the other hand, five important categories, such as rice, beef, and pork, which are strongly opposed by Japanese producers, have been excluded from the tariff reduction.
Become an opportunity to adjust the supply chain
The entry into force of the Regional Comprehensive Economic Partnership (RCEP) in East Asia has the potential to be an opportunity for companies to adjust their supply chains in the region. Tariff cuts also include parts for pure electric vehicles (EVs) such as lithium-ion batteries, which could have an impact on strategies focused on next-generation products.
The RCEP sets up the "Rules of Origin for the Accumulation of Rules of Origin" to grant tariff preferences even if processing and assembly is carried out in multiple countries, as long as it is within the agreed region. For example, after the removal of tariffs is completed, auto parts can be imported from China to Thailand, and then exported to Australia on tariff-free terms.
Due to the expansion of the new crown epidemic, factory operations in Southeast Asia have been restricted, and the supply of parts has stagnated, and many automakers such as Toyota have had to cut production. With the RCEP coming into effect, flexible adjustments to the supply chain become possible, and the options for businesses will increase with it.
Junichi Sugahara, principal investigator of Mizuho Research Technology, pointed out that "The effect of China, South Korea and Southeast Asia being included in the same legal framework is obvious." Many enterprises are also expected to benefit from the acceleration of customs clearance and the simplification of customs procedures.
In order to enjoy the tariff reduction of exported goods, enterprises will speed up the preparation of "certificates of origin" that prove that products are produced domestically. As for countries where Japan has signed a free trade agreement, it can respond with the available information, but the procedures for China and South Korea will be prepared for the first time by companies. Japan's Ministry of Economy, Trade and Industry (METI) is urging companies to comply with the retention period of certificates of origin set out in the agreement as "minimum 3 years" in response to inquiries from the customs authorities of partner countries.
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