Under RCEP, with 16 member countries involved, making a chicken pie should be quite easy with content inside members. The ROO threshold could be quite high without unduly hampering the ability of firms to comply with the rules. Of course, not every product is a chicken pie. This is why RCEP negotiators are working off what are called product-specific ROOs to ensure that the ROOs make sense for different types of products. The rules for chemicals should be different than the rules for textiles which should be different than the rules for pies. But all should ultimately be crafted to allow firms to source across the 16 member states without too much hassle. The point of the agreement is to facilitate trade in the region. It should help unlock new opportunities for companies to make pies or juice or plastics. These rules should work for large and small firms by avoiding cumulation rules that add unnecessary complexity by asking companies to calculate value addition by stops in the supply chain. The ROOs are an important element in getting the final RCEP agreement to do what it is meant to do—facilitate trade better across the 16 members.
Since NAFTA 2.0 builds on the base of the original NAFTA, the new deal had some advantages over the TPP. For example, tariffs between the parties are already set at zero. This remains, although do note that there are very complicated tariff rate quotas in place in NAFTA 2.0 that were not scrapped. Indeed, the level of genuinely new market access granted to partners that have known and worked with one another for decades is vanishingly small. While much focus, as an example, has been on Canada’s new market access for dairy, the total amount given amounts to barely 0.4%. And the United States, in return, has an equally complex system of barriers in place to protect its own dairy industry from competition (as well as sugar, oranges, and others). The deeply problematic bits of the agreement can be found buried in the texts. For instance, the rules of origin (ROO) are incredibly complicated. Given that tariffs are zero, the only way to keep out goods is to craft ROOs that are impossible to follow. Clearly, for many products, this objective has been met. The level of NAFTA content required in fairly large swaths of products is extremely high. Commentators keep focusing on the insane requirements for auto production, but note that for a wide range of goods, new NAFTA content rules require 50% or more content. To make matters worse, in many products, these rules tighten after 3 years, rising to as much as 70% local (ie NAFTA) content.
The Brexit debate has given rise to many bewildered discussions about the apparent difficulties of negotiating trade agreements. After all, as at least one commentator said, if we can put a man on the moon, surely the UK can negotiate a few trade agreements? Of course. Compared to putting a person on the moon, many things seem easy. But the complexity of negotiating trade is not to be underestimated either. To illustrate why this is so challenging, just consider the following example of orange juice.
Companies will only use trade agreements like RCEP if they include a range of interlocking requirements that solve multiple problems at once.
Shanghai—Participants from more than 250 of the largest textile and garment manufacturing firms and industry associations in the world gathered in Shanghai this week as part of the 2016 China and Asia Textile Forum. The overall economic picture for textile and apparel is decidedly mixed as overall economic growth is slowing, retail sales are off, yet many important apparel markets continue to show rising sales, including new markets within Asia.
One important panel session covered the benefits for textile and apparel producers coming in the Trans-Pacific Partnership (TPP). [Assuming, of course, that US Congress does the right thing and approves the deal—but that is a post for next week after critical primary elections in Florida and Ohio. Keep the calls coming into Congress in the meantime.]
While the TPP does provide significant benefits for many textile and apparel firms in the form of lower tariffs, the complexity of navigating the agreement is substantial. It will provide job security for many, many consultants and legal firms for a long time to come as firms wrestle with new yarn-forward rules of origin for companies that have never had to grapple with these provisions in the past.
The TPP as a whole is a high-quality agreement. The textile provisions—particularly for entry into the American market—are not. It remains needlessly complicated and does not represent anything close to 21st century rules. It does not foster efficient supply chains, will not encourage smaller firms, and basically goes against most of the general momentum of the rest of the agreement.
Many TPP countries granted duty free access to garments on the first day of the agreement. The United States did not, except for a narrow range of products, like some categories of dresses. Some American tariffs will remain in place for a decade.
Some of the final reductions in important categories like denim can only take place after the United States certifies that labor provisions from elsewhere in the agreement have been fully implemented at the five year mark.
But the lucrative American market has always been difficult to enter for textile and apparel firms, so even poor quality TPP rules can make substantial bottom line differences to companies willing to invest the time and effort needed to figure out the new system.
Firms are already moving into Vietnam for spinning and dyeing operations, for example, to take advantage of new opportunities to get into US markets. [Vietnam has the added appeal of the pending EU-Vietnam trade agreement that will provide improved access to the European markets.]
However, not every textile or apparel company can use the TPP. Not every firm is located in a TPP market or is able and willing to move to one. Not all sell products to TPP markets. Not all are going to be able to easily shift sourcing of fabrics from current suppliers, especially.
But all is not lost for textile and apparel companies. Most Asia-based companies may also be able to use provisions in the Regional Comprehensive Economic Partnership (RCEP) negotiations.
RCEP is an ongoing negotiation that brings together 16 parties in Asia—the 10 member countries of ASEAN, plus China, Korea, Japan, India, Australia and New Zealand. Talks are targeted for conclusion this year and there is still time for companies to push for better outcomes that cover textile and apparel products of importance to firms in the region.
The garment supply chain for Asia often includes fabrics sourced from China, India, or Korea, sewn in Cambodia, Vietnam or Indonesia, and sold across the region including into Japan, Australia or China. All these products could be eligible for RCEP benefits, if the rules of RCEP—including tariff cuts and rules of origin—are written to provide better preferences for RCEP member firms.
RCEP will likely be much easier to use than the TPP as well. RCEP should not be using a yarn-forward rule of origin, so manufacturers can source fabrics from across the 16 member countries for inclusion into garments.
Depending on how the rules are written, fabrics might be sourced from outside the region as well, as long as the garments are cut and sewn in RCEP member countries for sale within RCEP member countries. This rule would benefit many garment manufacturers that currently source fabrics from non-RCEP countries like Taiwan. It would allow manufacturers greater flexibility to choose materials from the most suitable source.
Companies from across Asia will have to push their governments to be more ambitious in textiles and garments. Otherwise, important items could be left out of the final provisions and rapidly dilute the utility of the final agreement for firms.
Asian companies are not used to working proactively with governments to shape ongoing trade negotiations. This is, however, a critically important opportunity that ought to be seized by firms. Government officials working on market access for goods, rules of origin and trade facilitation may not know very much about the specific conditions for textile and garment manufacturing in their own country or across the region.
Officials will certainly not know that, for instance, domestic companies could shift an additional 50,000 pieces of dress shirts per month if a key tariff were eliminated into a market. They may not realize that they are fighting to protect a product category that will no longer be manufactured domestically at all or that growth opportunities are best found in a different category that needs the lowest possible tariff or a more favorable rule of origin calculation method.
The rules set down in RCEP are likely to be the rules that govern trade in Asia for the next decade. Using a 16 country agreement will be much easier for companies to use than overlapping sets of existing regional and bilateral agreements. For a start, if the RCEP customs paperwork is consistent, firms will no longer need to fill out six or more different types of customs paperwork to ship products to the 16 markets in Asia.
Firms should plan to attend the next round of RCEP talks in Perth, Australia, during the last week of April and should be talking to their own market access for goods and rules of origin RCEP negotiating officials now.
RCEP helps textile and garment firms that are sourcing and supplying to customers across Asia. But it is also not a panacea. Most of the final customers for companies remain consumers in North America and Europe. RCEP provides benefits for neither market.
***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***