Strengthening Regional Value Chains

Room remains for upgrade of the RCEP

By Shen Minghui

The year 2021 marks the 30th anniversary of China-ASEAN dialogue partnership as China-ASEAN economic cooperation is making historic achievements. According to data released by China’s customs administration, total China-ASEAN trade hit US$684.60 billion in 2020, up 6.7 percent year-on-year. ASEAN became China’s largest goods trading partner in 2020 while China has maintained its position as ASEAN’s top trading partner for 12 years.

Fast Trade Growth and Challenges

China-ASEAN trade in 2020 showed several characteristics. First was the fast growth rate, which ranked among the highest of China’s major trading partners in both RMB and USD terms. Secondly, the trade structure has become more balanced. The growth rate of China’s exports to ASEAN (6.7 percent) and the growth rate of imports from ASEAN (6.6 percent) have remained basically the same. Lastly, regional integration has deepened. Electrical and mechanical products account for more than half of trade between the two sides. In particular, the COVID-19 pandemic stimulated the booming digital economy as electronic manufacturing industries throughout the region became more closely linked.

Since the outbreak of the COVID-19, China and ASEAN have led regional cooperation to combat the virus while jointly maintaining the stability of the regional industrial chain and supply chain in various forms. Strategies included a “fast track” for movement of people and “green channel” for movement of goods. The 17th China-ASEAN Expo signed 86 investment and cooperation projects worth a total of 263.87 billion yuan (US$41.3 billion), an increase of 43.6 percent year-on-year and the highest figure since the first China-ASEAN Expo in 2004.

The China-Europe freight service celebrates its maiden journey from the eastern Chinese city of Yiwu to Hanoi, capital of Vietnam, on October 10, 2020. (GONG XIANMING)

Meanwhile, trade between China and ASEAN member countries remains uneven. Vietnam, Malaysia, Thailand, and Singapore all trade heavily with China. Vietnam has overtaken Australia to become China’s seventh largest trading partner, and the growth rate of China-Vietnam trade has reached as high as 18.7 percent, ranking Vietnam first among China’s major trading partners. However, China’s trade volume with Cambodia, Laos, Myanmar, and other less developed ASEAN countries remains small with considerable room for both sides to improve.

Continued implementation of the upgraded China-ASEAN FTA and the signing of the RCEP are expected to help resources and production factors move more freely across the region. Trade advantages and market advantages leveraged by China and ASEAN member states are expected to link up on a wider scale and at a higher level.

However, much room to upgrade the RCEP also remains. For example, the e-commerce chapter of RCEP does not cover matters such as treatment of digital products, source code, cross-border data flow, or location of computing facilities in financial services. The government procurement chapter of RCEP does not yet clearly cover commitments on market access and things like that. And we are still waiting on a long transitional period for many important rules of RCEP to come into force in practice. For example, according to Article 4 of Chapter III of the RCEP on trade of goods, regional cumulation of origin still needs to be reviewed by all member countries within five years from implementation of the agreement before the application of cumulation can be extended to all parties.

As Asian Development Bank (ADB) noted, Asia’s regional value chain has deepened over time. According to ADB’s measurement based on multi-regional input-output table data, Asia has seen regional value chain linkage increase from 46.6 percent in 2000 to 48.9 percent in 2018. Analysis of Asia’s more complex regional value chains shows that they have increased as well, from 23.4 percent in 2000 to 26.2 percent in 2018.

Nevertheless, regional value chain linkages among members of the RCEP are much lower than the Asian average, reflecting relatively weaker economic linkage among member countries. Overall, the regional value chain participation rate among the member countries remains at 46.8 percent, and the complex regional value chain participation rate was a mere 15.8 percent in 2018, much lower than the regionwide level of 26.2 percent.

This means 46.8 percent of trade among RCEP members involves production stages spread over two or more economies within the group, and 15.8 percent of the trade entails intermediate goods crossing borders twice or more before final goods are exported. RCEP members such as Laos, Cambodia, Indonesia, and Thailand have lower participation in complex regional value chains than the Asian average, indicating that these economies have not yet fully merged into East Asian production networks.

Promoting Deeper Integration

To combat COVID-19 by leveraging deeper regional integration, several pillars need to be addressed.

First, we need to increase and improve investment and cooperation in health and medical supplies in the region and especially in ASEAN countries to further secure the resilience of the regional supply chain of key medical and health supplies such as masks, goggles, PPE, disinfection supplies, and medical devices. Meanwhile, priority needs to be placed on cooperation in R&D and joint production and supply of COVID-19 vaccine in ASEAN member states.

Second, since China has completed the approval of RCEP, China and ASEAN need to strengthen communication and cooperation to promote the implementation of RCEP as early as possible, hopefully by the end of this year. After the agreement comes into effect, timely review of regional cumulation of origin, Declaration of Origin by importers, and customs clearance within six hours for things like fresh fruit will help reap the gains of deeper regional economic integration as quickly as possible.

Third, more work needs to be done to strengthen economic cooperation and capacity building between China and ASEAN. Lower economic integration measured by regional value chain linkages among RCEP members at the moment suggests huge long-term gains could be made by strengthening value chain linkages from trade liberalization and facilitation under the terms of the partnership. We may see the regional value chain participation rate among the members surpass the Asian average over time.

Strengthening and expanding regional value chains is vital because it fosters economic and societal benefits that cascade not only across nations but throughout the region.

(About the author: Dr. Shen Minghui is a senior research fellow at the National Institute of International Strategy, Chinese Academy of Social Sciences.)

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