The verdict on the world’s largest free trade deal

The Regional Comprehensive Economic Partnership covers 50 per cent of global textile and apparel exports.

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It took eight years to negotiate, but the world’s biggest free trade agreement finally crossed the line on 15 November. Cue a scramble to digest the implications, for fashion and textiles as much as any other sector.

The Regional Comprehensive Economic Partnership (RCEP) brings together 15 APAC countries, including China, Japan and South Korea. It covers 28 per cent of global trade and 50 per cent of textile and apparel exports, valued at $374 billion. Now the RCEP awaits ratification by at least six ASEAN member states and three non-ASEAN member states.

RCEP’s main provisions aim at further integrating trade in the region, reducing tariffs and non-tariff trade barriers among members; promoting investment and e-commerce development; and establishing a single rule of origin for goods, which simplifies their movement among member states.

Tariffs among some states are already low — RCEP includes 10 ASEAN members and over 70 per cent of trade within ASEAN is conducted with zero tariffs. But the further reduction of tariff rates to zero for most textile and apparel traded between RCEP members will have a ripple effect for both RCEP and non-RCEP members, says Sheng Lu, associate professor at the Department of Fashion and Apparel Studies at the University of Delaware. “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.”

Specifically, the trade deal is likely to incentivise the use of textiles from member suppliers like Japan, South Korea and China to the detriment of textile exports from the EU or the US. According to estimates published in 2018, RCEP members’ textile imports from the US and the EU will drop from 9.4 per cent to 6.5 per cent after the implementation of the agreement.

Garments manufactured through an integrated supply chain subject to zero tariffs under the RCEP umbrella will also be more price competitive. Lu believes that, once the deal is implemented, garment exports to the US and Europe from RCEP members will surge. Lu predicts that apparel supplier countries that are outside the agreement, such as Bangladesh, could see a decline in market share, ranging from a drop of 0.5 per cent towards the US and up to 3 per cent to South Korea.

The lowering of non-tariff barriers, such as custom clearance, is expected to reduce the time products spend in transit, making garments from RCEP members competitive from a time-to-market perspective too. “The shorter days of supply can bring tremendous advantages to the fashion firms in the region,” says Di Fan, assistant professor of fashion retail at The Hong Kong Polytechnic University. “If a fast fashion [brand] needs 14 days to put a design on the shelf, a saving of four days in custom clearance can boost the speed to the market by around 30 per cent.”

These advantages will certainly encourage international brands to build supply chains in the RCEP region, but views on how non-RCEP manufacturing countries in the region will be affected vary. “As a manufacturer, Bangladesh may be disadvantageous in competing with Vietnam or other ASEAN countries in becoming the local manufacturers for international brands,” says Fred Burke, partner at Baker McKenzie Vietnam. “However, such disadvantage, to a certain extent, has already existed since ASEAN countries concluded FTAs with regional trading partners.”

For Gareth Leather, senior Asia economist at Capital Economics, labour costs rather than tariffs will continue to be the main consideration for companies determining where to locate production. “Factories tend to migrate to the cheapest areas,” he says. “I can’t see Bangladesh factories being especially worried by this deal.”

A China win?

While economists may disagree on the impact that the deal will have on member states, they agree that it consolidates an ongoing geopolitical and economic shift from West to East, with China at its centre. India, which had the economic and political clout to balance China’s dominance in the deal, withdrew from the agreement in 2019.

Significantly, the RCEP follows the withdrawal of the US from the Trans-Pacific Partnership (TPP), another regional trade agreement, in 2017. President-elect Biden has not committed to rejoining the TPP (now renamed Comprehensive and Progressive Agreement for Trans-Pacific Partnership), but the RCEP might push the new administration to rethink, seeking to strengthen its economic relationships with Asian nations to counteract China’s dominance. Pressure might build for a renegotiated TPP with strong labour protection clauses that would garner essential support from US Congress. China is clearly a major winner from the new trade deal. “The RCEP allows China to cast itself as a champion of globalisation and multilateral cooperation. It also puts China in a better position to determine the rules governing regional trade,” writes Gareth Leather in a note.