This article briefly examines some of the advantages and disadvantages for Vietnam in the RCEP, a multilateral FTA that was signed yesterday in Hanoi, Vietnam.
Yesterday, 15 November 2020, fifteen Asia-Pacific nations signed the Regional Comprehensive Economic Partnership, or RCEP, a multi-lateral free trade agreement. The signing comes as the crowning achievement of Vietnam’s chairmanship of the ASEAN community and the 2020 ASEAN Summit held in Hanoi and virtually.
The RCEP includes all the members of ASEAN plus Australia, China, Japan, Korea, and New Zealand. While ASEAN has existing free trade agreements with the additional countries individually, this is the first time some of those countries will be entering into an FTA between them. The RCEP contemplates nearly a third of the global population and nearly a third of the global economy. It is the largest FTA entered into in the history of multilateral FTAs.
For Vietnam in the RCEP, one of the ASEAN members of the RCEP, there are several advantages:
- The RCEP provides for consistent rules of origin across the treaty area. This means that goods partially originating in one country can use the same rules to determine if those goods truly originate there whether they are shipping to Australia or Vietnam. This eliminates the need to consult numerous FTAs and adapt different procedures for different countries in the RCEP for the same goods. In addition to rules simplifying import/export processes and costs, the simplified rules of origin will reduce time and expenses for Vietnamese exporters, thus increasing profit margins and making Vietnamese goods more competitive in RCEP markets.
- The RCEP also standardizes rules regarding the preservation of trade competition. Provisions for anti-dumping and countervailing duties are allowed and made consistent across the region. This will supersede domestic trade remedies. Interestingly, the RCEP does not create a dispute settlement mechanism to challenge a country’s imposition of trade remedies against another member state.
- The RCEP also removes certain restrictions in the telecommunications, finance, and professional service sectors, making it easier for service providers of member states to cross borders and open up shop in other member states. The addition of new tariffs on goods are prohibited and investment guarantees are codified to preserve cross-border FDI.
Unfortunately, there are also some disadvantages for Vietnam in the RCEP that were pointed out in an article posted on VN Express and available in Vietnamese here. Two such disadvantages include:
- In addition to opening RCEP countries to trade in services, the agreement applies national status in trade in goods for all goods allowed under Article III of GATT 1994. While this doesn’t change much for inter-ASEAN trade, it does reduce tariffs of many RCEP countries for Chinese goods. Vietnamese producers will be forced to compete, domestically, with a new range of lower cost goods from China. This will force Vietnamese producers to either reduce prices, and profits, to compete with imported goods from a supply chain that is larger and more established. Though limited, there are some industries that will be hit by this reduction in tariffs.
- Another disadvantage comes from the entry–for the first time–of Japan and China into an FTA between the two parties. By reducing tariffs and competition for Chinese goods in Japan, those goods sourced from China will enter into direct competition with Vietnamese goods exported to Japan. This means that, in one of Vietnam’s largest export markets, direct competition with China will commence and cause hardship for some exporters who cannot set prices competitively with the powerhouse to the north.
Aside from these disadvantages, much of the RCEP repeats what is included in existing FTAs for regional parties. It can be seen as a China-led FTA in response to the CPTPP that had been initiated by the United States during the Obama administration but was abandoned under Trump. The RCEP serves to unify the Asian-Pacific region with China and creates a feather in that country’s cap in the continuing trade conflicts with the United States.
Overall, Vietnam in the RCEP will have minimal effect, though it will experience some economic growth, the results will be less stunning compared with the EVFTA that was enacted earlier this year (for reference to that agreement see our article here). It is a sign of Vietnam’s continuing emergence as a participant in globalization and world trade, however, and in that respect, Vietnam in the RCEP is a positive move for the country.