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.
Second, apparel exports from RCEP members would benefit from the more integrated regional supply chain facilitated by the trade pact, and would be more competitive in the world marketplace.
Take the US and the EU, the world's two largest apparel import markets: implementation of the RCEP will result in an increase in the value of annual US and EU apparel imports from RCEP members by US$1,267.8m and US$837.5m respectively, compared with the base-year level in 2015.
Thanks to the RCEP, market shares of its members will also jump from 65.4% to 66.3% in the United States and from 40.7% to 41.2% in the EU.
Among RCEP members, apparel exports from ASEAN countries to the US and EU will enjoy the largest expansion. Related to this, implementation of the RCEP will also reduce the unit price of apparel exports from ASEAN countries to the US and EU by 1.15% on average, versus only 0.58% for other RCEP members.
The results suggest the RCEP will particularly help ASEAN countries access textile inputs locally made by Asian-based RCEP suppliers such as China, South Korea and Japan, and consequently improve the overall cost competitiveness of ASEAN's apparel exports through a more efficient regional textile and apparel supply chain.
The RCEP may also create some losers
On the one hand, as a trading bloc the RCEP will make it even harder for non-RCEP members to get involved in the regional textile and apparel supply chain in the Asia-Pacific. Because an entire regional T&A supply chain already exists in the Asia-Pacific, 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 discriminatory tariff elimination under the RCEP will put textile and apparel producers that are not members of the agreement at a greater disadvantage.
Not surprisingly, measured by value, only around 21.5% of RCEP members' textile imports will come from outside the area after the implementation of the RCEP, down from the base-year level of 29.9% in 2015. Likewise, the RCEP will make its members source less apparel from outside the region, with the proportion of imports down from 25.1% in 2015 to approximately 17.4%.
On the other hand, Asian apparel suppliers in non-RCEP member countries would also be affected negatively by the implementation of the agreement.
For example, results show that implementation of the RCEP will lead to a decrease in the total value of annual US apparel imports from non-RCEP Asian countries (such as Bangladesh and Sri Lanka) by US$113.8m compared with the base-year level in 2015.
The decline will be US$405.0m in the EU, US$238.2m in Japan and US$119.5m in South Korea.
Apparel exports from these non-RCEP member Asian countries are mostly price-sensitive basic items. Without additional policy support, apparel producers in countries like Bangladesh and Sri Lanka would be vulnerable to the intensified competition from RCEP members that make the similar products and target the same export markets.