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RCEP and its potential impact on textile and apparel trade

The Regional Comprehensive Economic Partnership (RCEP) has the potential to be one of the most significant mega-FTAs in the world, both economically and politically. And as Dr Sheng Lu, assistant professor at the Department of Fashion and Apparel Studies at the University of Delaware explains, the implications for the textile and apparel trade are enormous.

The RCEP is an ambitious free trade agreement (FTA) currently under negotiation between ten member states of the Association of Southeast Asian Nations (ASEAN) – Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar and Vietnam – and six other large economies in the Asia-Pacific region (Australia, China, India, Japan, South Korea, and New Zealand).

In 2015, the group of 16 RCEP members, which comprised more than 3 billion people, had a combined Gross Domestic Product (GDP) of about US$22.7 trillion and accounted for nearly 30% of the world trade volume.

As a modern FTA, the RCEP deals not only with traditional trade policies such as tariff and non-tariff barriers, but also some 21st-century trade agendas that most existing FTAs in the region have never addressed, such as e-commerce, competition policy and trade facilitation.

In addition, regarded as China's strategic move in response to the pivot to Asia strategy proposed by the United States, the RCEP has profound geopolitical implications for the future peace, prosperity, and development of the Asia-Pacific region.

Textiles and apparel (T&A) is a critical sector under the RCEP negotiation. In 2015, the sixteen RCEP members together exported US$405bn worth of T&A (54% of the world share) and imported US$115bn (31% of the world share).

Notably, many of these products are made through a collaborative supply chain in the Asia-Pacific region. For example, clothing labelled 'Made in Vietnam' often contains fabrics made in China from yarns spun in Japan. Because the RCEP intends to eliminate existing trade barriers, especially tariffs, between its members, implementation of the agreement has the potential to significantly shift the current pattern of T&A trade in the Asia-Pacific region, creating both winners and losers.

Patterns of textile and apparel trade in the RCEP region

The regional supply chain is a distinct pattern of textiles and apparel trade in the Asia-Pacific, particularly among RCEP members located in East and Southeast Asia.

Within this regional supply chain, more economically advanced Asian countries (such as Japan, South Korea and China) supply textile raw materials to the less economically developed countries in the region. Based on relatively lower wages, the less developed countries typically undertake the most labour-intensive processes of apparel manufacturing and then export finished apparel to major consumption markets around the world.

Data from the World Trade Organization also indicates the existence of this unique regional T&A supply chain among RCEP members. For example:

  • As much as 80.3% of textiles imported by ASEAN members, 39.9% in China, 75.2% in India, 86.5% in Japan and 77.7% in South Korea came from other RCEP members in 2015 measured by value.

  • Similarly, as much as 81.0% of ASEAN members' apparel imports, 40.6% in India, 88.5% in Japan and 78.3% in South Korea also came from RCEP members in 2015 measured by value.

  • Moreover, 65.4% and 53.1% of textile exports from Japan and South Korea went to other RCEP members in 2015, respectively

  • Meanwhile, apparel made by RCEP members is both consumed within the region and exported to other key consumption markets in the world, particularly the United States and the EU.

Because of the particular stage of development and size of the country, mega emerging economies in the RCEP region such as China may produce some textile and apparel products primarily based on its domestic supply chain.

Nevertheless, as a developing country, China still had to import US$2.3bn and US$1.8bn worth of textiles from Japan and South Korea respectively in 2015 for some high-quality or technologically-advanced products it could not produce domestically.

Potential impact of the RCEP

If the tariff rates on textile and apparel traded between RCEP members are completely removed, based on the Global Trade Analysis Project (GTAP) model, the following changes could take place.

First, the RCEP could lead to a more integrated regional textile and apparel supply chain among its members.

Results show that after the implementation of the agreement, up to 78.5% of RCEP members' textile imports measured by value will come from within the RCEP area, up from 70.0% in 2015.

In particular, the RCEP will strengthen the role of Japan, South Korea, and China as the primary textile suppliers in the regional T&A supply chain. Measured by value, approximately 65.8% of textiles imported by RCEP members will come from these three countries, up from 56.4% in 2015.

The RCEP will also enlarge the role of ASEAN, India, and China as the leading apparel producers in the region. Measured by value, approximately 68.1% of apparel imported by RCEP members will come from these three members, up from 61.0% in 2015.

Considering the positive impacts of expanded investment and other trade facilitation provisions of the agreement, we can expect a further integration of the regional textile and apparel supply chain among RCEP members in the long-term.