Unpacking RCEP: Benefits for processed foods

Calculating the specific benefits of RCEP will be especially challenging for firms, as they need to assess the agreement’s benefits within the context of existing regional and bilateral trade deals that include the ASEAN Trade in Goods Agreement (ATIGA), the ASEAN+1 agreements with dialogue partners—China, Australia, New Zealand, Japan, and Korea—and potential bilateral FTAs between RCEP members. 

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.

Elimination of Tariff Barriers

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, as shown in the graph below.

RCEP is also the first time economies like Japan and China have signed a trade agreement.  It also the first time that some members, like China and Korea, have revisited previous trade commitments. Under RCEP, peach jam tariffs into China will drop to 0 for both Japan, which had no previous FTA commitments, and Korea, had received a 20 percent duty preference rate under the China-South Korea FTA.

Lowering Compliance Costs for Regional Processed Food Trade

ASEAN countries have existing trade agreements with all RCEP countries that provide them with equal, and in some cases better, tariff benefits than the RCEP agreement. However, there are two key constraints that could prevent an ASEAN-based peach jam firm from leveraging these benefits.

First, the rule of origin criteria varies across existing agreements.

For instance, while the ASEAN-Japan FTA provides duty free access into Japan, the rule of origin for peach jam—a change in tariff classification except from Chapter 8, which includes all fruits—can only be met if the firm sources peaches from Japan or ASEAN. Since the peach jam firm in this example sources its peaches from China, it fails to meet this condition and cannot use AJFTA. To be eligible for duty free access under AJFTA, the firm would need to shift its sourcing to Japan or ASEAN.

If the Thai firm wanted its peach jam to be eligible for all duty benefits into all 15 Asian markets prior to RCEP entry into force, it would have to modify its production processes according to the rule of origin criteria specified under each agreement. This can be taxing and even impossible for smaller firms with no economies of scale or with limited sourcing alternatives.

Second, assuming that the firm is able to develop different versions of the product to remain eligible for tariff preferences or benefits under existing FTAs, the process of managing different production processes and the paper work required to demonstrate eligibility is costly and administratively complex. 

In the peach jam example, the firm will need to request and keep track of three different certificates of origin—an express certification by an authorized authority stating that the goods in question originate in a specific country—to export into ASEAN, Australia, Japan, China, and Korea.

RCEP solves both of these problems—the rules of origin will be identical in all 15 markets and the internal processes to claim tariff benefits are simplified.

Under RCEP, tariffs on peach jam from not only drop to zero, but provide a single rule of origin that will allow the peach jam firm to reap benefits without having to change sourcing or transform production processes.  

A previous Talking Trade Blog explores the way in which RCPE’s single rule of origin should simplify trade for companies that manage production across multiple markets.

The rule of origin for peach jam in RCEP requires a change in tariff classification between the raw products—peaches—and the final product—peach jam. This means that as long as the firm manufactures the peach jam within an RCEP country, it can reap preferential duty benefits without any changes to the components or their source. This means the peach jam firm will be able to continue to source all of its peaches from China and export at lower duties into ASEAN, Australia, Japan, China and Korea.

In addition, RCEP requires only one certificate of origin document to claim these preferential duty rates in any of the RCEP members; allowing the peach jam firm to streamline and lower the costs of internal trade compliance processes.

As the jam example indicates, RCEP will significantly lower tariff and compliance costs for many food manufacturers in the region.

For firms with regional supply chains that are currently ineligible for tariff reductions under existing trade agreements, RCEP provides an opportunity to access those markets at lower duties.

For firms managing multiple FTAs to export processed food products, the elimination of most processed food tariffs will streamline their production and trade compliance procedures and better facilitate the development of regional food value chains.