ROOs

Unpacking RCEP: Benefits for Processed Foods

Unpacking RCEP: Benefits for Processed Foods

Managing multiple agreements for the trade of processed foods can be particularly challenging. Food and agricultural products have always been one of the most sensitive topics in trade agreement negotiations, leaving in place often high protectionist barriers. RCEP negotiators, however, were able to liberalize market access for food products, especially those that include more than one ingredient or are processed in any way. The large geographical scope, 15 countries, and the aforementioned concessions, give RCEP the potential to lower barriers and further facilitate and strengthen the development of regional processed food value chains. To illustrate the potential of RCEP to facilitate food trade in the region, consider a Thailand-based diversified food company making peach jam for export. The company uses peaches sourced from China and produces jam in a factory located in Thailand, where the peaches are chopped and then blended with sugar and pectin. The jam is cooked, pasteurised and packaged in jars for export. RCEP’s potential to lower the costs of trade for this and other processed food firms can be outlined under two key benefits: the elimination of existing tariff barriers between member countries and the lowering of compliance costs for regional processed food trade. In most RCEP members, tariffs for peach jam can be up to 30 and 34 percent. RCEP will eliminate those tariffs for ASEAN-based peach jam producers.

Using RCEP: Swimsuits and Textile Trade

Using RCEP: Swimsuits and Textile Trade

The upcoming entry into force of the Regional Comprehensive Economic Partnership (RCEP) should be helpful to the textile and apparel sectors. It will make it considerably easier to make fabrics and clothing in Asia and distribute them across the region with lower tariff rates or even duty-free treatment. Most important, the rules of origin will be consistent around the region. Given the highly integrated supply chains for these products that span multiple RCEP economies, having rules that better fit existing footprints will be especially helpful. To see how this works, think about a women’s swimsuit. It needs to be able to handle chlorinated and salt water, fit snuggly but not uncomfortably, and have sufficient flexibility in movement to allow swimming, surfing, diving and other water activities. A swimsuit requires high performance fabrics and sophisticated sewing abilities to make a final product that fits a range of body types and is attractive to buyers. As a result of these demands, the supply chain for swimsuits often includes the purchase of specialized fabrics from Japan or South Korea, nylon fabrics from Australia or Korea, and sewing skills from China or Vietnam. The global market for swimsuits (disrupted, as with so many things, by the pandemic in 2020) is still expected to reach US$27 billion by 2027, with growth of just over 5% annually. Existing MFN tariff rates on swimsuits (HS6112) can be quite high across Asia. Australia charges 10% on women’s swimsuits. China’s tariffs are 17.5% for synthetic materials and 16% for other fabrics. Japan has six different categories for swimsuits with base tariffs ranging from 10.9% to 8.4%. Korea levies 13% tariffs. Vietnam charges 20%.

RCEP: Creating Rules for Trade in Goods

RCEP: Creating Rules for Trade in Goods

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. 

Evaluating Trade Deals Like NAFTA 2.0

Evaluating Trade Deals Like NAFTA 2.0

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.

Special Edition: Why Trade Negotiations Are So Hard—The Details of Orange Juice

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.