November 25 2021
RCEP: Free Trade Opportunities in the Post-pandemic Era
RCEP brings new development to businesses in the region.
The signing of the RCEP agreement, witnessed by the leaders of participating countries China, 10 ASEAN member states, South Korea, Japan, Australia and New Zealand via video link on 15 November 2020, marked the creation of the largest free trade bloc in the world in terms of economic power and population. Its huge market potential has attracted the immediate interest of global business. The signatories to the RCEP agreement represent 2.2 billion people, almost 30% of world population. Their combined GDPs total US$ 26.2 trillion or some 30% of the global economy, and they account for nearly 28% of global trade [1]. The enhanced market access to the 15 signatory states made possible by the agreement will create vast market opportunities for businesses in the region and beyond.
This is particularly significant at a time when lockdowns caused by the Covid-19 continue to disrupt global markets and supply chains. Yet effective pandemic prevention and control work in some countries and regions, such as China and certain ASEAN members, has resulted in a gradual recovery of many economic activities, so that industrial production is increasingly robust and demand from the consumer market is growing. Foreign direct investment (FDI) flows to developing countries in Asia, which accounted for more than half of global inward and outward FDI flows, continued to increase in 2020 despite global FDI contraction, according to a recent report released by the United Nations Conference on Trade and Development (UNCTAD). UNCTAD also pointed out that FDI prospects for Asia will remain resilient in 2021, as the Asian region could be further strengthened by the signing of the RCEP agreement [2].
Many companies are reviewing their development strategies to address the revived demand in Asia and beyond. Business operations worldwide have pursued digitalisation at an unprecedented pace to deal with the devastating effects of the pandemic. Digital platforms and cross-border e-commerce activities have become more prominent than ever. As supply chains especially in Asia gear up for production, companies are challenged to ride the momentum of recovery and reposition themselves digitally to revive business, to achieve sustainable development and move towards a post-pandemic era.
In the circumstances, the RCEP is expected to further the advancement and integration of regional supply chains, as well as encourage the specialisation of production. Asia has already developed the world’s largest co-operative manufacturing base, boosted by transfers from the West to low-cost Asian locations in the last few decades. Integration will be enhanced by RCEP provisions like tariff elimination on most finished products, intermediate goods and raw materials, easier customs procedures, promotion of e-commerce, protection of intellectual property rights and simplified cross-border investment. The agreement, which should be implemented by as soon as January 2022 [3], will have far-reaching impacts on supply chains and production relationships in the region. Hong Kong, as a city in the GBA, will be an important business hub to help enterprises in the region handle their production, trading and related investment businesses. Further integration of supply chains will elicit more business opportunities for consultants and service providers in the city.
GDP of RCEP countries in 2020 (in USD billion)
Per capita GDP of RCEP countries in 2020 (USD)
Brace for challenges
The RCEP agreement offers a wide range of tools to tap into the opportunities offered by its 15 member countries and the synergies that can be found between their markets and the growth of the GBA. However, even as companies look to benefit from these synergies and opportunities, challenges remain. One immediate problem is the limited local knowledge among companies looking to expand into new markets. Insufficient understanding of local politics, culture, legal and regulatory regimes can present many hurdles. These challenges are exacerbated by the reality that many of RCEP’s emerging markets are less transparent than might be expected, making it difficult to ensure projects comply with local requirements. The lack of transparency can also make it difficult to assess the medium and long-term benefits and risks of any investments.
To further complicate matters, the RCEP agreement is a technical document that can be difficult to understand. Taking tariff concessions as an example, members promise to eliminate import tariffs on most goods traded in the region, but this may take as long as 20 years to complete. Some members will adopt a single tariff reduction schedule for imports from all members, while others will put forward country-specific schedules with separate reduction timetables for the different members. Traders and companies will therefore need to consider the RCEP offers carefully if they want to capitalise on the tariff preferences appropriately. A lack of in-house understanding can exacerbate issues created by weak talent or underdeveloped infrastructure in the region targeted for expansion. Expert input and advice will help them understand the benefits that the agreement can provide while minimising the business risks.
Capitalising on RCEP opportunities via the Hong Kong platform
For Hong Kong, there are significant opportunities in promoting the development of RCEP and the success of the agreement. Hong Kong is an important trading hub for the 15 RCEP members as well as between mainland China and the rest of the world. This is particularly true for companies in the GBA that can use Hong Kong as a super-connector to go global.
Hong Kong as an important trading hub in the region
A strengthened supply chain relationship between RCEP members not only helps their external trade but also benefits Hong Kong as a key trading hub. Although Hong Kong is not a RCEP member at the moment, it will continue to play a defining role in promoting RCEP trade, in particular the intra-regional trade between mainland China and other RCEP members. Hong Kong exported US$359.6 billion worth of products to the RCEP in 2020, which accounted for 71% of the city’s total exports, while some 75% of its imports (US$408.1 billion) also came from the RCEP. The exports to the RCEP are largely re-exports (98.9% of total exports in 2020), and the products mainly originate from RCEP members. The mainland and ASEAN are the two major sources of these exports, accounting for 43.6% and 12.0% of the origins of Hong Kong’s exports to the RCEP respectively in 2020. Hong Kong will continue to be an important trading platform for promoting the intra-regional trade of RCEP members with its huge commercial network, comprehensive transportation infrastructure and efficient logistics services.
Hong Kong's Trade with RCEP
Many of the Hong Kong exports to production bases in the mainland and ASEAN countries are industrial products such as machinery and electronic parts and components for manufacturing and assembly processes. This is because Hong Kong is not only an international trading hub in Asia, but also an important window for the mainland to import industrial inputs and export manufactured products. With the further integration of the supply chains of RCEP members, Hong Kong can expect to handle more intra-regional trade between the members, especially trade in electronic products and other industrial items.
Origin of Hong Kong's Exports to RCEP
GBA turbo-charges Hong Kong to facilitate enterprises "going global" in RCEP region
On the other hand, more and more companies in the region and beyond are seeking to take advantage of the emerging opportunities brought about by the RCEP agreement. On the mainland, although China-US trade friction and the Covid-19 pandemic have continued to bring uncertainty to the global economy, many companies in the GBA continue to "go global", hoping to enter new markets and to develop international businesses in order to diversify business risks. They also bring in external partners and resources to optimise their business portfolio and sustainable development capabilities. The implementation of the RCEP agreement will become a new driving force for such mainland enterprises to go global.
However, in order to develop their international business, most mainland companies need extensive professional service support. According to a survey conducted by the HKTDC on mainland enterprises in the GBA, almost all companies that were interested in "going out" said that they needed several professional services. Among them, 49% were interested in joining marketing activities tailored for overseas and Belt and Road Initiative (BRI) markets, while 47% were looking to marketing strategies for developing new business and new markets. Other professional services needed included product development and design (31%), banking, financing and project valuation (30%), brand design and marketing strategies (30%), and related legal and accounting services (30%).
Professional Services of Most Interest or Most Sought-After for Tapping Overseas Opportunities
The 15 RCEP participating countries are not only very different in their economic and population structures, but also in their labour markets, wage levels, stages of economic development, investment policies and incentives. There are substantial differences in the actual production environment and conditions among individual countries and regions. These include, for example, plant locations, conditions of the local supply chains, the standards of logistics facilities and services in peripheral areas, the efficiency of inland and international transportation, environmental requirements, the skilled and unskilled labour supply, local skills and management training, etc. All these issues will affect the capability and competitiveness of a company’s global strategy.
Investment planning, location selection and due diligence
When carrying out investment planning and selecting a location, an investor must properly evaluate the country, region and policies to ensure that the development of the overseas business will align with the local medium to long term development plan. This will minimise any hidden risks such as the investment project is not in line with the government incentives, or that policy incentives and other support have to be negotiated with the local government. There is therefore a need to seek professional services support.
Hong Kong’s service providers are familiar with the legal and investment regimes of advanced countries and can also use their international networks to carry out effective risk assessments for mainland enterprises seeking to invest in emerging markets or RCEP member countries. They can also offer strategic recommendations on the feasibility of an investment project and conduct surveys on key issues such as the environmental policies and tax incentives of an investment location. This can help investors control risks and ensure the sustainable development of a project after an investment has been made.
Financial services
Hong Kong is one the world’s major international financial centres, and funds are available from various sources and a wide range of financing products. As such, Hong Kong is in a position to match and accommodate funds and meet the insurance needs of different maturation, exchange rates and asset risks.
Furthermore, Hong Kong’s services platform can offer different investment options to mainland enterprises, including the use of private-equity investment funds.
Legal, accounting and other professional services
Hong Kong’s advantages as a business platform in the Asia Pacific include a sound legal system, free flow of capital and information, and a full complement of professional services in law, accounting, etc. When investing in RCEP countries, mainland enterprises can make use of Hong Kong’s professional project evaluation and sustainability assessment services to bring in external funds to finance their overseas investment projects and other business ventures. They can also set up a regional office in Hong Kong and capitalise on Hong Kong’s efficient business environment to co-ordinate investment projects on the mainland or in ASEAN and RCEP countries to enhance overall operational efficiency.
Local partner searching and matching
As a way to diversify risks, mainland investors can use Hong Kong’s international network to identify offshore partners to carry out equity joint investment and other joint-stock cooperations. Mainland enterprises can also use their investment partners’ strengths to overcome their own limitations. By generating synergy between their partner’s and their own knowledge and expertise, they can expand the business scope of their RCEP investments. The experienced industry and market specialists based in Hong Kong, using data and insights from their long-standing experience in helping enterprises go global, have established matching services to help enterprises identify and screen potential business partners in the RCEP region.
Hong Kong innovative products and services tailored to the specific needs of GBA enterprises
When looking for professional services, 56% of the surveyed GBA enterprises said they would first try to source them locally. Enterprises would also seek support outside the mainland. In this regard, Hong Kong was the preferred destination for the largest number of enterprises, taking up 50% of the surveyed enterprises considering “going out”. Other preferred destinations included the US (23%), Singapore (21%) and Japan (14%).
All Enterprises Considering 'Going Out'
In May 2021, ACCA produced the report “Market Demand for Professional Accountancy Services in the Asia-Pacific FY 2021-2024". The findings of the study were drawn from a survey of 841 senior executives and professionals. Not surprisingly, Hong Kong, as the global accountancy hub in the Asia Pacific area, was ranked top. The report suggested that the major criteria for selecting accountancy services were cost and ease of doing business; quality of public service and competence level; excellent accounting, tax, and financial services infrastructure; health, safety, and public security; and high mobility of international capital.
Hong Kong’s strengths as a trading hub and its ability to facilitate the global expansion of companies in the GBA give it a unique significance, particularly within the context of the RCEP agreement. The deep pool of professional expertise that exists in Hong Kong can facilitate investment planning, the selection of appropriate locations for expansion and due diligence. Hong Kong is also home to the financial, legal, accounting and other professional services that are necessary for companies to tap into the RCEP. There are also few better places to search for and match with local partners.
With the necessary infrastructure and talent pool, Hong Kong is a well-regarded financial centre and is home to many of the world’s major financial institutions. The city is China’s first modern and diversified free trade port and international financial centre. It not only ranks highly globally in its overall competitiveness and business environment but has also long played a key role in the Greater Bay Area’s development.
The Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area, promulgated in February 2019, has already set out the principles for GBA development, driven by innovation, co-ordinated development, opening up, co-operation and adherence to “one country, two systems”. The GBA is positioned to leverage the advantages of Hong Kong and Macao as free and open economies and of Guangdong as the pioneer of reform and opening up. There are measures to support Guangdong, Hong Kong and Macao in strengthening co-operation to jointly participate in the BRI. GBA enterprises are encouraged to collaborate in “going out”, and to lead the co-operation in international production. The GBA, along with other coastal provinces and cities, has long been a bridgehead in the mainland’s development of foreign trade and economic co-operation. The GBA is also in close proximity to BRI markets, such as ASEAN. As the RCEP brings new development to businesses in the region, Hong Kong will become an even more important service platform to help enterprises in the GBA seize these emerging opportunities.
This article forms part of a joint study conducted by HKTDC Research and ACCA : “Tapping the RCEP Opportunities: Hong Kong to Maximise GBA’s Unique Edge as a Business Platform”
[1] (i) 2019 figures; (ii) Source: Joint Leaders’ Statement on the Regional Comprehensive Economic Partnership (RCEP), 15 November 2020
[2] “World Investment Report 2021: Investing in Sustainable Recovery”, UNCTAD
[3] China’s Ministry of Commerce revealed on 22 March 2021 that all member states of the RCEP had stated they would approve the RCEP agreement before end-2021 in order to take it into effect on 1 January 2022. According to the RCEP provisions, the Agreement will enter into force for those signatory States that have deposited their instrument of ratification, acceptance, or approval, 60 days after the date on which at least six signatory States which are Member States of ASEAN and three signatory States other than Member States of ASEAN have deposited their instrument of ratification, acceptance, or approval with the Secretary-General of ASEAN, who has been designated as the Depositary for the RCEP Agreement. Singapore and China in April 2021, and Japan in June 2021, reportedly had deposited their instruments of ratification with the Secretary-General of ASEAN. For further information, please refer to: RCEP to Take Effect in January 2022