- Signed by 15 countries including China and 10 ASEAN member states in November 2020, the Regional Comprehensive Economic Partnership (RCEP) is the world’s biggest free trade agreement.
- Companies – whether they be local or foreign-invested – in the GBA stand to benefit hugely from the intensification of cooperation between China and the ASEAN region.
In light of the trade and investment liberalization, the plethora of opportunities arising from the RCEP for overseas companies may seem obvious from the outset. Businesses operating in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) are, however, ahead of the pack when it comes to capturing the various opportunities. Companies – whether they be local or foreign-invested – in the GBA stand to benefit hugely from the intensification of cooperation between China and the ASEAN region. The special tripartite partnership between ASEAN, the GBA and Hong Kong, whose role as an entrepôt and international business center is key to connecting the former two, will be explored in more depth.
One easy-to-navigate set of rules
First and foremost, the RCEP provides an overarching unified framework. Free trade agreements between individual member states already exist, but because these have been negotiated separately on different terms, the disparities between each agreement must be studied and scrutinized, compared and contrasted – which is often a very time-consuming and convoluted process. The RCEP seeks to harmonize the inconsistencies between each agreement with rules and requirements condensed into a single, user-friendly authoritative source.
Content and structure of the RCEP agreement
The RCEP agreement itself is composed of 20 chapters spanning across 510 pages; many of the areas covered are typical of a free trade agreement. Although a detailed study of each and every chapter is beyond the scope of this article, the significance of particular chapters is worth briefly teasing out, since it allows for a better understanding of the overall objectives of the agreement.
Rules of origin as a key trade-liberalizing instrument
Perhaps most noteworthy is Chapter 3 – Rules of Origin that determines which goods are deemed to be of RCEP origin, thereby benefitting from zero or preferential tariff treatment. As rules of origin have important implications for the import and export of goods, they form the backbone of a free trade agreement and are, therefore, unsurprisingly one of the most extensive sections in the RCEP agreement. The chapter consists of two sections: Section A delineates the substantive requirements to qualify as an originating good under the RCEP; Section B delineates the procedural requirements regarding the proof of origin and related administrative procedures. The rules of origin contained in the ASEAN + 1 agreements and other preferential trade agreements are brought together and consolidated into one set of rules. A concept to be fleshed out later on, the RCEP allows for the cumulation of more inputs and a single “Made in RCEP” origin.
Improving the business environment
In keeping with the spirit to facilitate trade and investment, the RCEP also includes measures to improve the business environment. For example, a higher level of importance is ascribed to the safeguarding of intellectual property rights than in the ASEAN + 1 agreements and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. The RCEP raises the bar in respect of IP protection and enforcement as well as shifting towards a more balanced approach to rights and obligations. In addition to the protection of trademarks in a conventional sense, Chapter 11 – Intellectual Property addresses the protection of non-traditional trademarks, such as sound marks, geographical indications and a broader range of industrial designs. Furthermore, the RCEP stipulates that member states ratify or accede to key multilateral agreements to which they are not yet party, including the Paris Convention, the Berne Convention and the Patent Cooperation Treaty.
Support for SMEs
Also of great significance is the fact that a complete chapter is devoted to the provision of support for small and medium enterprises (SMEs). Article 14.1 at the beginning of Chapter 14 – Small and Medium Enterprises neatly encapsulates the central role played by SMEs under the RCEP:
The Parties recognise that small and medium enterprises, including micro enterprises, contribute significantly to economic growth, employment, and innovation, and therefore seek to promote information sharing and cooperation in increasing the ability of small and medium enterprises to utilise and benefit from the opportunities created by this Agreement.
SMEs tapping into the opportunities offered by the RCEP will be well supported in their endeavors, as member states are obligated to facilitate SMEs’ access to markets and participation in global value chains. Pursuant to Article 14.2, there shall be ample information made available on trade- and investment-related laws and additional business-related information tailored to SMEs, including the sharing of best practices to enhance their capabilities and competitiveness.
“Made in RCEP”: the new global manufacturing hub
The RCEP’s impact on regional industrial development will be transformative. A steep growth in industrial production in the region has been the general trend, which has seen more than a threefold increase in the last two decades. Currently, manufactured goods are the most traded goods by RCEP economies, accounting for nearly 50% of the world’s manufacturing output. Exports of manufactured goods, machinery and transport equipment top the list with more than half of all exports falling into these categories. Electronics, in particular, constitute the largest share among RCEP members, making up approximately 31% of exports and 27% of imports by the RCEP. China is undoubtedly the world’s biggest electronics manufacturer, producing around 54% of RCEP’s electronics destined for export in 2020. RCEP members with more advanced economies, such as Japan, Singapore and South Korea, are key producers of high-end semiconductors and other components. Vietnam has become a rising star in the export of some electronics (around 10% of RCEP electronics), owing to a boom in assembly-line production of mobile phones and related goods by foreign-invested enterprises in the country.
But the exponential growth in manufacturing has brought with it challenges. The usual practice has been for manufacturers in lower-cost locations in China and other Southeast Asian countries to import constituent parts, machinery and equipment from Japan, the US and Europe. China’s ever-evolving higher value-added production geared towards technologically advanced products requires the import of raw materials and intermediate goods, a sizeable proportion of which is produced by local or foreign enterprises based in Southeast Asia. The emerging stumbling block is, however, rising production costs on the mainland, thereby necessitating a shift in the division of labor in the region. Prior to the RCEP’s advent, many companies had already started relocating their manufacturing activities to other lower-cost sites in the region, for example, in Cambodia, Thailand and Vietnam. The RCEP is expected to further accelerate this structural reconfiguration of the industrial landscape and consolidate member states’ respective comparative advantages.
Better access to regional value chains
The RCEP will also expedite intra-regional supply chain integration by allowing raw materials and intermediate goods to move freely – thanks to the removal or minimization of tariff and non-tariff barriers – within the bloc. First of all, more than 92% of tariffs on imported goods between the signatories shall be abolished over the next 20 years, most of which will be abolished immediately or within 10 years of the RCEP agreement taking effect. While some member states such as Australia, New Zealand and Singapore have adopted a single timetable for tariff reduction, others such as China, Indonesia and South Korea have opted for separate timetables for different fellow member states.
Although there are currently more than 30 free trade agreements in place in the region, there is a major caveat in that the rules of origin differ from agreement to agreement. The practical implications are far-reaching for the smooth integration of supply chains: tariffs may still be imposed on goods produced in one country but with inputs from others, which ultimately undermines the free movement of goods and production efficiency. Take, for example, a laser manufactured in South Korea with components originating in Japan. In the absence of the RCEP agreement, the components would be subject to a preferential rate of duty of 8% when imported from Japan to South Korea. Upon export from South Korea to China, the finished product would be subject to a further duty of 2.4%. With the RCEP in place, no duties would be imposed so long as rules of origin and other relevant requirements are met.
To remedy the bottlenecks in the system, and to enable a more seamless flow of raw materials and intermediate goods between upstream and downstream players in the supply chain, inputs from all member states shall be treated equally for the purpose of determining origin under the RCEP. In accordance with the concept of regional value content (RVC), the good must contain an RVC, i.e., originate in an RCEP member state, of no less than 40% to be deemed an originating good. Additionally, the RCEP provides generous scope for cumulation, which means that inputs from one member state that are used as materials in the production of another good in another member state can be considered as originating in the latter member state.
The common rules of origin and the increased transparency will facilitate business activities by creating a more predictable and stable environment. Companies will only require one certificate of origin when engaging in intra-regional trade, as well as benefit from the streamlining and simplification of customs procedures. In addition, having a single set of rules and procedures will improve accessibility to regional value chains. Companies can leverage the respective comparative advantages of member states when considering where to set up their operations.
Even closer ties between ASEAN and GBA
A closer and more interdependent trading relationship between ASEAN and the GBA is to be anticipated with the arrival of the RCEP. Since 2009, China has been ASEAN’s largest trading partner, eclipsing the US and Europe; and in 2019, ASEAN overtook the EU to become China’s largest trading partner, making up approximately 15% of China’s total trade in 2020. Guangdong province, in particular, has an especially thriving trading relationship with ASEAN. In 2020, the total trade value between Guangdong and ASEAN accounted for nearly 23% of China’s total trade with ASEAN and around one-fifth of China’s exports to ASEAN, making ASEAN Guangdong’s most important trading partner.
In light of the realignment of regional supply chains due to rising production costs on the mainland as mentioned in the previous section, many companies based in the GBA have relocated their more labor-intensive manufacturing and sourcing operations to lower-cost locations in ASEAN, while their local operations move increasingly towards higher value-added activities and automation. According to a survey conducted by the Hong Kong Trade Development Council (HKTDC) in 2019, 76% of companies who responded expressed interest in “going out” or expanding into overseas markets in the next one to three years. 66% of these respondents indicated that they would wish to tap into opportunities in Southeast Asia, including 10 ASEAN countries. Furthermore, the findings of another survey conducted by the HKTDC in 2021 affirmed the role of ASEAN as an important sales market for GBA businesses. More than 80% of respondents were selling to the ASEAN countries in which they were operating, except Cambodia and Myanmar. With the RCEP, which will facilitate the expansion of supply chains and entry into burgeoning consumer markets, GBA companies are likely to ramp up their “going out” efforts.
The RCEP-GBA-Hong Kong nexus
Hong Kong is not yet an official member of the RCEP, although it has recently lodged an application. So, in what ways can the city add value to the partnership between the RCEP and the GBA? Hong Kong’s strength lies not so much in its role as a producer or a consumer – it is too small for that – but as a “super-connector” bridging between the GBA as well as the rest of mainland China and a giant manufacturer and end consumer. Benefitting from its first-class connectivity to the rest of Southeast Asia and beyond, Hong Kong has a unique role to play as an international trading, shipping and financial hub, a conduit for investment and a launchpad for GBA enterprises wishing to tap into RCEP opportunities. According to a recent survey conducted by the HKTDC relating to trade and investment between the GBA and ASEAN, an average score of 7.33 out of 10 was given by mainland Chinese enterprises when they were asked to rate the importance of Hong Kong in facilitating their trade and investment activities in ASEAN, with nearly half of the respondents giving a score between 8 and 10. In respect of Hong Kong’s connectivity with ASEAN countries, an average of 7.18 was given when respondents were asked whether they considered Hong Kong having a wide business network in ASEAN, with around 45% giving a score between 8 and 10.
Hong Kong: a major re-export hub
How does Hong Kong’s function as a major facilitator in trade play out in practice? The city’s indispensable role as an important re-export hub should not be underestimated. As trade between China and ASEAN continued to flourish, the proportion of mainland Chinese goods earmarked for ASEAN markets that was re-exported via Hong Kong increased from less than 8% prior to 2014 to nearly 10% in 2020, totalling US$25.2 billion. Around 60% of these re-exports were capital goods; 30% were raw materials and semi-manufactures; consumer goods and food products made up the remaining 10%. Likewise, Hong Kong is considered a key gateway to mainland China by ASEAN countries. Goods from ASEAN re-exported via Hong Kong have been on an upward trajectory, rising at an average annual rate of approximately 6% in the last decade. 80% of these re-exports were destined for the mainland Chinese market. With the arrival of the RCEP, the growth in the volume of goods being re-exported via Hong Kong is only likely to accelerate, especially given the tighter coupling of regional supply chains.
It is important to note that the Free Trade Agreement Transhipment Facilitation Scheme launched by Hong Kong Customs has been in place since 2015, which again reinforces Hong Kong’s role as a trade entrepôt. The scheme provides that consignments passing through Hong Kong can enjoy tariff reduction under the free trade agreements signed by China. The FTAs stipulate that consignments are generally required to be shipped directly between mainland China and the FTA signatories in order to qualify for preferential tariff treatment. Under the Transhipment Facilitation Scheme, Hong Kong Customs can issue a certificate of non-manipulation to certify that the goods have been kept under customs supervision and have not undergone further processing in Hong Kong, thereby enabling traders to apply for tariff reduction.
Hong Kong: a premier business hub
As a high-end financial and professional services center, Hong Kong is poised to become the go-to hub for mainland Chinese companies wishing to do business in RCEP member states – and equally for RCEP member states wishing to do business in the GBA and beyond – effectively facilitating two-way access. Under the RCEP, Hong Kong will continue to build on its strength in providing world-class professional services, helping companies address and mitigate a range of risks in respect of legal, intellectual property, financial, credit and policy matters that are characteristic of cross-border businesses. In addition, according to the findings of a recent survey conducted by the HKTDC, around 43% of mainland GBA enterprises who have yet to enter the ASEAN market were inclined to use Hong Kong’s sales and marketing services more often.
Despite Hong Kong’s connectivity with both the GBA and RCEP member states, there is room for improvement when it comes to amalgamating the knowledge of both markets before Hong Kong can fully lend itself to its role as a “super-connector” between the two. Around 34% of respondents to the above HKTDC survey, when asked to comment on the problems encountered in the course of doing business in ASEAN via Hong Kong, considered the difficulty to find the right talents – who could understand both the GBA and ASEAN markets – one of the most significant challenges. It is, therefore, imperative for Hong Kong not to rest on its laurels and step up its game in broadening its pool of talent and knowledge in this regard.
Chow Tai Fook
Chow Tai Fook is a renowned Hong Kong-based jewellery retailer, who is currently already operating in 10 out of the 15 RCEP member states. For the company, the key attraction of the RCEP lies in its wealth of new opportunities, access to ample labor supply and reduction in costs thanks to the removal or minimization of tariffs. It has set its sights on the remaining RCEP member states in which they have no presence at the moment. In light of China’s accelerating transformation into a knowledge-based economy, Chow Tai Fook has run into difficulties when hiring skilled low-cost labor. Mr Cheng, Executive Director, Finance and Information at Chow Tai Fook observes that the fine craftsmanship involved in making jewellery by highly skilled labor cannot be superseded by automation in the near future; therefore, well-trained labor is still highly sought after. Vietnam and Indonesia, in particular, are regarded as favorable prospective production sites, whereas Singapore and Malaysia are designated ideal regional service centers by Chow Tai Fook.
Crystal International Group Limited
Based in Hong Kong, Crystal International Group Limited manufactures garments for international brands. In the past, they had factories in Dongguan and Zhongshan as well as tens of thousands of employees in mainland China, but operations have been wound down and relocated to Southeast Asia due to cost concerns. After exploring different ASEAN countries, the company settled on Vietnam and employed more than 40,000 workers there. According to Mr Li, CFO of the company, Vietnam – when compared with its regional counterparts – offers better political stability, infrastructure and development. Furthermore, Vietnam bears a resemblance to China 15 years ago, which gives Hong Kong companies a sense of familiarity. Recently, Vietnam has been investing heavily in its logistics and power infrastructure as well as transport network, which confers a competitive advantage over other ASEAN countries. In addition, Mr Li commented that the RCEP will usher in more consistency and predictability, since goods will be subject to a unified tariff regime.
While the RCEP will be a game changer for trade and investment as well value chains in the region, it is worth sounding a gentle note of caution – the removal of all tariffs across the board will certainly not be pulled out of a hat overnight. Integration on this epic scale will be a mammoth task and a gradual process – and indeed “integration” is the keyword here. The ultimate aim of both the RCEP and the GBA is economic integration. If the synergies between the two can be effectively harnessed, the opportunities arising from the merging of these two giant economies will truly be plentiful. In facilitating the linkage, Hong Kong will reprise its role as a “super-connector”.