RCEP's overall impact on Chinese exports clearly beneficial

The Regional Comprehensive Economic Partnership agreement came into effect on Jan 1. How will its implementation influence China's export structure? What industrial chains will benefit from the agreement for further development? Will it be a boon for, or a bane of, China's exports, and how should China make use of the agreement to boost its exports and improve trade quality?

The implementation of the RCEP pact has facilitated the sound growth momentum of China's exports to other member countries of the agreement.

During the first six months, exports and imports between China and other RCEP countries hit $939.3 billion, accounting for about 32 percent of China's total trade. China's exports to other RCEP member countries were worth about $468.5 billion during the period, growing 14.7 percent year-on-year, which was 2.3 percentage points higher than the average annual growth rate of China's exports to other RCEP member countries in the past 20 years.

Chinese exports to other major RCEP member countries have increased significantly during the first half, except for Vietnam and Japan. Other RCEP countries' contributions to China's exports have also increased during the period, and the share of non-RCEP member countries in China's outbound shipments dropped by 1.11 percentage points from a year earlier. In addition, shares of most RCEP countries in China's exports have all risen, except for Japan, Vietnam and New Zealand.

Japan's smaller share in China's total exports was mainly due to the sharp depreciation of the Japanese yen since the end of May, which has weakened Japan's import capacity. In the first four months before the sharp depreciation of the yen, Chinese exports to Japan accounted for 4.97 percent of China's total exports, higher on a yearly basis.

Vietnam's share decline is probably attributable to two factors. One is some competition between China and Vietnam in machinery manufacturing, textile and garment industries.

Vietnam's preferential tariffs for many of these Chinese products are not yet fully in place. Also, Chinese exports to Vietnam mainly focus on upstream mechanical and electrical products, and Vietnam's demand for those products is softer this year as it focuses on boosting end product production to meet overseas demand.

The RCEP has facilitated China's exports to Japan and South Korea. The implementation of the trade pact has for the first time established direct free trade relations between China and Japan, and Japan will eventually remove 88 percent of tariffs on Chinese imports. The RCEP is also the first free trade agreement involving China, Japan and South Korea, which helps with economic integration in Northeast Asia.

To consider the RCEP's influence on the structure of China's exports, there are three aspects to consider.

Compared with products from other RCEP countries, are related Chinese products more competitive? Are they highly competitive with lower tariffs? Or do such products face competition from other RCEP countries?

Products that do not have export or other competitive advantages over products from other RCEP members cannot significantly boost China's export performance, and the RCEP has limited impact on such exports.

For Chinese exports that only enjoy competitiveness over products from RCEP countries, such advantages may not last long. For instance, because of their bulky weight or short shelf lives, products like leaf tobacco and paper products only have export advantages vis-a-vis neighboring RCEP countries. Global energy supply contracts and food price surges can also swiftly alter competitive advantages for China's exports.

Chinese products having certain competitiveness and significant export advantages in the RCEP region will usually enjoy high-level preferential tariff treatments, and export strength of such products is unlikely to subside over the short term.

Chinese products that have strong competitiveness in global markets but moderate advantages in the RCEP region will enjoy more export room in high-end markets, but must pay attention to competition from other RCEP countries.

Thanks to preferential tariff treatment over the long term, competitiveness of some Chinese products, such as integrated circuits, automatic data processing equipment and automotive parts, will remain strong.

Products such as midstream manufactured goods, which include electromechanical machine parts and storage equipment, do not face fierce competition in the region while enjoying protective tariffs under the RCEP agreement. As domestic industrial chains upgrade, export volume and value of such products are expected to grow.

Yet for traditionally labor-intensive products, such as furs, suitcases, clothing, household items and toys, they will be more likely to get replaced by products from the Association of Southeast Asian Nations, although tariff treatment under the RCEP may extend export opportunities for some time. That is because while China's environmental protection regulations tighten and labor costs grow, ASEAN member states have been gradually receiving transfers of related capacity from China, especially in textile and clothing industries, thanks to their rich labor resources, low cost and foreign investment incentives.

The RCEP will reduce tariff and non-tariff barriers among member countries, thereby boosting trade, which is called the trade creation effect. At the same time, China and other RCEP members have similar industrial systems and resource endowments, and therefore face certain competition in export markets. The implementation of the RCEP will therefore have a "substitution" effect on China's exports.

However, the creation effect is more influential than the substitution effect.

Due to the resurgence of COVID-19 cases in China, ASEAN's capability to replace China in global export markets increased temporarily.

The share of China's textile products in global export markets has been partially replaced by ASEAN, but that was the result of the transformation and upgrades of China's manufacturing industry and the relocation of relatively low-end industrial chains.

China's textile and apparel industry has moved up the value chain toward two ends of the same spectrum－conception and marketing that command higher added value on the one hand, as well as the core manufacturing aspect on the other.

ASEAN has had a relatively strong substitution effect on China's textile product exports, but its export substitution effect on China's electromechanical products is very limited. China's capital and technology-intensive industries in the electromechanical sector provide ASEAN with upstream products and high-end intermediate products, which are difficult to be replaced by ASEAN.

No matter whether one is talking short term or long term, the RCEP will play an important role in supporting China's export growth.

Some studies show that from 2020 to 2035, the RCEP will lift China's exports by about 7.6 percent compared with the baseline scenario. With the recovery and expansion of ASEAN production capacity, the deep implementation of the RCEP agreement and the recovery of China's supply chain, the value chain in the RCEP region will become a pillar of China's exports.

China and ASEAN are each other's largest trading partners. In the short term, China's role in the operations of regional industrial and value chains is very firm, especially that of ASEAN.

For one thing, ASEAN needs China's supply of intermediate goods to produce end products. Most of the ASEAN countries have weak industrial foundations and support facilities. Foreign investment has led to an increase in ASEAN plant construction and machinery purchases, and its imports of intermediate and high-end machinery and equipment have increased. The implementation of the RCEP agreement boosts China's exports of electromechanical equipment and chemical products.

Also, the ASEAN manufacturing sector is increasingly dependent on the Chinese market. China has become the largest market for manufactured products from ASEAN, taking in more than 30 percent of the final products from ASEAN manufacturers.

To boost the RCEP's positive effect on China's exports while alleviating side effects, the following measures are recommended.

First is making full use of RCEP accumulative rules of origin. Raw materials sourced within the region can be treated as part of value-added products from the region to enjoy tariff treatment, which will help reduce costs for enterprises. Chinese enterprises should accelerate adaptation to such rules and make better use of them.

China should also promote digital transformation and upgrade to grasp new opportunities presented by digital trade as the RCEP requires member countries to adopt a more open attitude toward digital trade.

China should also promote upgrades in manufacturing and product design to face competition properly, while strengthening regional value chain cooperation and domestic policy optimization.

The nation is also advised to provide relevant training and professional assistance to enterprises, improve infrastructure and financial support for foreign trade market entities, enhance the business climate, and promote multilevel and mechanism-based communication and cooperation with other RCEP members.

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