The Regional Comprehensive Economic Partnership (RCEP) came into force for the Philippines in June. The RCEP is a trading bloc comprising the members of the Association of Southeast Asian Nations (ASEAN) and ASEAN Plus One Free Trade Agreement (FTA) partners Japan, China, South Korea, Australia, and New Zealand. According to the RCEP text, one of the agreement’s objectives is to “establish a modern, comprehensive, high-quality, and mutually beneficial economic partnership framework to facilitate the expansion of regional trade and investment and contribute to global economic growth and development…”
This is the fourth article in a supply chain series that looks at reimagining the integrated supply chain. This article will discuss how the RCEP may impact supply chains in the ASEAN.
RCEP builds on and updates the existing ASEAN Plus One FTAs and considers important trade realities, such as competition and the interdependency of value chains. It covers areas not previously included in the individual ASEAN Plus One FTAs, such as intellectual property, e-commerce, competition, small- and medium-sized enterprises (SMEs), and government procurement.
RCEP also recognizes the diversity of its members in terms of development level and provides technical cooperation and capacity building to support the implementation of the Agreement, with the intent to make it more beneficial for all entities involved. In addition, RCEP is seen as a high-quality agreement as it eases market access through trade and investment rules and supports global and regional supply chains.
RCEP AND SUPPLY CHAINS
RCEP has the potential to support and ease regional and global value chains. The updated trade deal further lowered tariff rates or accelerated the reduction thereof. Furthermore, it commits the members to a single set of Rules of Origin (ROO), the criteria to determine the national source of a product. ROOs determine whether products are eligible for preferential treatment under trade agreements, much like a passport indicates the nationality of a visitor and, therefore, whether the holder is eligible to enter a country visa-free by treaty rules.
A significant provision is cumulation, which allows an RCEP firm to count inputs or goods from other RCEP partners as local content to meet ROO requirements. The regional value content (RVC) is closely related to ROOs because it helps determine the minimum percentage of regional value a product must have to qualify for preferential trade treatment. For example, if the RVC is set at 40% of the free-on-board price, an RCEP firm can include inputs from other RCEP partners to fulfill this requirement. Meeting the requirement allows the firm to enjoy preferential tariff rates when exporting to other RCEP countries. Otherwise, higher most-favored-nation (MFN) rates will apply.
According to figures from the Philippine Statistics Authority, the Philippines sources about 70% of its imports from and ships half of its exports to the rest of the RCEP membership. This suggests that the new trading bloc is both a source of materials and a market for produce at the same time.
Accounting for nearly a third of the global population and output, the new trading bloc is now the largest in the world. Furthermore, RCEP is also the first FTA that jointly covers China, Japan, and South Korea. For firms along regional supply chains, savings come in the form of zero or substantially lower tariff rates when importing inputs from and exporting produce to the RCEP.
Firms intending to benefit from RCEP’s preferential tariff rates should consult issuances of various national customs bodies. Some ancillary documents may be required, covering direct consignment, third-country invoicing, and back-to-back certificates of origin. Firms should consider the administrative costs of compliance and compare them with the incremental benefits arising from the difference between MFN and preferential rates.
RCEP IN THE PHILIPPINES
Overall, RCEP could have developmental implications for the Philippines. When large exporting firms partner with SMEs at the enterprise level, the latter are also effectively participating in and benefiting from regional supply chains.
At the macroeconomic level, RCEP can help stimulate growth. RCEP’s effectivity coincides with significant structural reforms like the Corporate Recovery and Tax Incentives for Enterprises, which lowered the corporate income tax rate, and the amendments to the Public Service Act, Foreign Investment Act, and Retail Trade Liberalization Act, which further liberalized the economy. The government is also pursuing an infrastructure program that amounts to 5-6% of GDP. These bode well for investment-led growth.
Continuous infrastructure investment and development can strengthen the Philippine link to regional and global supply chains. In the 2023 edition of the World Bank’s Logistics Performance Index, the Philippines scored 3.3 out of 5, up from 2.9 in 2018. This improvement may be attributed to the increase in the infrastructure score from 2.73 in 2018 to 3.2 in 2023.
Altogether, structural reforms, infrastructure programs, and improved regional market access provided by RCEP can help the country bid for more export-driven growth.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Lester Jeff D. Pawid is a Strategy and Transactions (SaT) Senior Manager and Mary Andrea T. Bacani is a Supply Chain and Operations (SCO) Senior Manager of SGV & Co.