China, Japan, Korea – strategic foreign markets of SMP GROUP are 3 out of 15 countries that signed RCEP.
After 8 years of negotiation, the Regional Comprehensive Economic Partnership (RCEP) has been approved by 15 countries, including: Brunei, Malaysia, Singapore, Vietnam, Cambodia, Indonesia, Laos, Myanmar, Philippines, Thailand, Japan, New Zealand, Australia, China, Korea, signed on the morning of November 15.
RCEP, with the participation of 15 members, will create a market of 2.2 billion people, equivalent to 26,200 billion USD, creating the largest free trade area in the world. Thanks to the commitment to open markets for goods, services and investments, rules of origin in the RCEP geographic area and trade facilitation measures, this FTA will provide opportunities for new supplying chains.
More products will enjoy preferential import and export tax rates
Although this world’s largest FTA does not help open more new markets, because the member countries already have bilateral and multilateral trade agreements with Vietnam, it will be a valuable addition for domestic enterprises to better meet the rules of origin requirements, thereby making better use of existing markets.
Determination of Rules of Origin (RRO) is the identification of the country or territory from which the whole good was produced, or where the final processing was performed (in the case of multiple countries).
Not only includes the production, but also “tracking” the source of the raw materials to produce that goods. In the previous FTAs, many exported products of Vietnam, due to using imported raw materials outside the FTA, were not entitled to preferential tax rates. Now, China, Korea, Japan and other countries that are the main source of raw materials for Vietnam are in the RCEP, making the problem of rules of origin, so that exported goods can enjoy RCEP preferential tariffs, is simpler than ever.
Take an example of a shampoo bottle (code HS3305)
In order to enjoy FTA preferential tariffs, typically products need to be 100% from the agreement’s member countries (e.g. grown, harvested) or need to show that the product has been significantly transformed in the member countries in order to be eligible for the preferential tariffs. If the goods are 100% from FTA members then everything is very simple, for example a carrot or a potato traded between two parties in an FTA would be eligible for for tax rates lower than those in a bilateral trade agreement. However, shampoo products have ingredients that may be sourced from outside the market and may include products from outside both (or all) of the FTA parties. So how much value content does a shampoo bottle need from members to enjoy a lower tax rate?
An export shampoo bottle produced by Vietnam, on the label has 20 ingredients, many of which are imported from multiple countries. If Vietnam wants to export to a country A that has signed an FTA, products wishing to enjoy preferential tariffs must be made entirely from raw materials of Vietnam or Japan. Therefore, the above shampoo products will not be eligible for the preferential tariffs due to the availability of materials from many different countries.
This is part of the reason why companies do not often use FTAs, even if they could benefit from it. If enterpises find the FTA rules too complicated, if the preferential tariffs are small compared to the MFN rate, or if the products are simply ineligible, they can always export their products at the MFN rate and avoid using the FTA. For many companies that are able to use different FTAs, there are both more benefits and more complexity.
To illustrate the problem, if the company wants to export shampoo to Korea, it may be necessary to ensure that the product has added Korean ingredients to meet the ASEAN / Korea rules of origin. If the company receives an order from Japan, it may not be possible to use the same product, because the Korean value content is not counted. Instead, it may be necessary to change the added raw materials to Japanese raw materials in order to qualify for the ASEAN / Japan preferential tariffs.If an employee in Singapore accidentally exports a bottle of Japanese shampoo to South Korea and wants to enjoy FTA preferences under ASEAN / Korea, the company may be liable for misreporting, and substantial fees and penalties.
However, within the framework of the RCEP, the shampoo company exports shampoos safely in markets, as long as the value content of the shampoo from anywhere in the 15 markets in Asia meets the rules of origin (ROOs) of RCEPs, can be exported to any of the 15 markets in Asia without any change in the calculation formula. The size and diversity of these RCEP markets is a significant advantage for all companies based in Asia. According to RCEP, companies will even only need to fill out a piece of paper to prove that their products meet the requirements of origin. The new RCEP Certificate of Origin (CO) will reduce costs and time for companies.
The range of benefits, or lower preferential tax rates, will vary in the RCEP. In some cases, the gap between the current MFN rate or FTA benefits and the new RCEP rate may be small. But the ability to export products, like shampoos, across Asia is still so significant, which means companies will compete in markets they may have never considered before. Companies should start preparing now to use this trade pact.