Regional Comprehensive Economic Partnership (RCEP) and Textiles and Apparel

What is RCEP?

The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement between ten member states of the Association of Southeast Asian Nations (ASEAN)* and five other large economies in the Asia-Pacific region (China, Japan, South Korea, New Zealand, and Australia). RCEP was reached on November 15, 2020, after nearly eight years of tough negotiation. (Note: ASEAN members include Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. India was an original RCEP member but decided to quit in late 2019 due to concerns about competing with Chinese products, including textiles and apparel.)

So far, RCEP is the world’s largest trading bloc. As of 2019, RCEP members accounted for nearly 26.2% of world GDP, 29.5% of world merchandise exports, and 25.9% of world merchandise imports.

Hopefully, RCEP will enter into force as early as late 2021 or early 2022. Officially, RCEP will enter into force 60 days after at least six members approved the agreement through their respective domestic legislature; However, these six members must include three ASEAN members and three non-ASEAN members.

Why RCEP matters to the textile and apparel industry?

RCEP matters significantly for the textile and apparel (T&A) sector. According to statistics from the United Nations, in 2019, the fifteen RCEP members altogether exported US$374 billion worth of T&A (or 50% of the world share) and imported US$139 billion (or 20% of the world share).

In particular, RCEP members serve as critical apparel-sourcing bases for many US and EU fashion brands. For example, in 2019, close to 60% of US apparel imports came from RCEP members, up from 45% in 2005. Likewise, in 2019, 32% of EU apparel imports also came from RCEP members, up from 28.1% in 2005.

Notably, RCEP members have been developing and forming a regional textile and apparel supply chain. More economically advanced RCEP members (such as Japan, South Korea, and China) supply textile raw materials to the less economically developed countries in the region within this regional supply chain. Based on relatively lower wages, the less developed countries typically undertake the most labor-intensive processes of apparel manufacturing and then export finished apparel to major consumption markets worldwide.

As a reflection of an ever more integrated regional supply chain, in 2019, as much as 72.8% of RCEP members’ textile imports came from other RCEP members, a substantial increase from only 57.6% in 2005. Nearly 40% of RCEP members’ textile exports also went to other RCEP members in 2019, up from 31.9% in 2005.

What are the key provisions in RCEP related to textiles and apparel?

First, RCEP members have committed to reducing the tariff rates to zero for most textile and apparel traded between RCEP members on day one after the agreement enters into force. That being said, the detailed tariff phaseout schedule for textile and apparel products under RCEP is very complicated. Each RCEP member sets their own tariff phaseout schedule, which can last more than 20 years (for example, 34 years for South Korea and 21 years for Japan.) Also, different from U.S. or EU-based free trade agreements, the RCEP phaseout schedule is country-specific. For example, South Korea sets different tariff phaseout schedules for textile and apparel products from ASEAN, China, Australia, Japan, and New Zealand. Japan’s tariff cut for apparel products is more generous toward ASEAN members and less so for China and South Korea (see the graph above). Companies interested in taking advantage of the duty-free benefits under RCEP need to study the “rules of the game” in detail.

Second, in general, RCEP adopts very liberal rules of origin for apparel products. It only requires that all non-originating materials used in the production of the good have undergone a tariff shift at the 2-digit HS code level (say a change from any chapters from chapters 50-60 to chapter 61). In other words, RCEP members are allowed to source yarns and fabrics from anywhere in the world, and the finished garments will still qualify for duty-free benefits.  Most garment factories in RCEP member countries can immediately enjoy the RCEP benefits without adjusting their current supply chains.

What are the potential economic impacts of RCEP on the textile and apparel sector?

On the one hand, the implementation of RCEP is likely to further strengthen the regional textile and apparel supply chain among RCEP members. Particularly, RCEP will likely strengthen Japan, South Korea, and China as the primary textile suppliers for the regional T&A supply chain. Meanwhile, RCEP will also enlarge the role of ASEAN as the leading apparel producer in the region.

On the other hand, as a trading bloc, RCEP could make it even harder for non-RCEP members to get involved in the regional textile and apparel supply chain formed by RCEP members. Because an entire regional textile and apparel supply chain already exists among RCEP members, plus the factor of speed to market, few incentives are out there for RCEP members to partner with suppliers from outside the region in textile and apparel production. The tariff elimination under the RCEP will put textile and apparel producers that are not members of the agreement at a more significant disadvantage in the competition. Not surprisingly, according to a recent study, measured by value, only around 21.5% of RCEP members’ textile imports will come from outside the area after the implementation of the agreement, down from the base-year level of 29.9% in 2015.

Further, the reaching of RCEP could accelerate the negotiation of other trade agreements in the Asia-Pacific region, such as the China-South Korea-Japan Free Trade Agreement. Many also say RCEP may create new pressure for the new Biden administration to strengthen the US economic ties with countries in the Asia-Pacific region, such as joining the CPTPP or negotiating new bilateral trade agreements. 

By Sheng Lu

Further reading

Author: Sheng Lu

Professor @ University of Delaware

7 thoughts on “Regional Comprehensive Economic Partnership (RCEP) and Textiles and Apparel”

  1. We should not overestimate the impact of RCEP. I have checked some tariff reduction schemes e.g. from CN to JP and they are very very long. Good are the rules of origin-hopefully a benchmark for the US and EU to liberalize their rules of the 1970s. In general there will be a trend to more regionalism. There will be more production for the RCEP markets, especially CN. US and EU markets will lose their actual priority for suppliers.

  2. I think that although the implementation of RCEP will strengthen the supply chain among other countries involved with RCEP, it does make it significantly more difficult for other countries not part of RCEP to get involved. These countries are at a disadvantage because all the countries involved with RCEP are trading with each other due to the special advantages and benefits only offered to those involved. Is there an opportunity for countries that are not members of the RCEP to join? Are countries not involved with RCEP benefiting in any way from RCEP?

  3. This post introduced RCEP and the influence of RCEP on the textile and apparel sector in detail. Regional Comprehensive Economic Partnership (RCEP) is significant to the textile and apparel supply chain in Asia, including 10 members of the Association of Southeast Asian Nations (ASEAN) and 5 ASEAN’s partners Australia, China, Japan, New Zealand, and South Korea. RCEP is the world’s largest trading bloc. As of 2019, RCEP members accounted for nearly 26.2% of the world GDP. From the post, l learned that RCEP is beneficial for the textile and apparel sector globally. One of the crucial reasons is that RCEP members not only trade each other and have their own regional textile and apparel supply chain, but they also serve as critical apparel-sourcing bases for many US and EU fashion brands. However, for non-RCEP members, the textile and apparel industry could be hard to get involved in the regional textile and apparel supply chain formed by RCEP members. For example, as I learned before in the FASH455, India can be the biggest loser as they pulled out of the deal so that it’s textile and apparel sourcing and manufacturing sector have less competitive than intra-Asian supply chain links that remain within RCEP.

  4. The RCEP has several implications for the textile and apparel sector. Primarily, the RCEP is going to further strengthen the regional textile and apparel supply chain within the RCEP members (Australia, China, Indonesia, Japan, and South Korea). More importantly it strengthens our main competitors which are Japan, South Korea, and China. This then further promotes the ASEAN to be the top apparel producer within that region. Consequentially, the RCEP will make it even harder for the US and other non RCEP members to get involved within the regional textile and apparel supply chain that is formed by the RCEP members. This is a result of speed to market, and the tariff elimination under the RCEP. As a result of the tariff elimination for RCEP members, non-members are put at a significant disadvantage. Lastly, I feel as this will further promote the mediation and negotiation of other trade agreements within the Asia-Pacific region. This may then add pressure for the new Biden ministration to strengthen its ties with countries in the Asia-Pacific region in order to ensure that the US does not suffer drastic consequences from the RCEP agreement.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s