RCEP Reshaping Regional Strategies, 23% Expect Positive Impact
On 15th November 2020, the 10 member states of the Association of Southeast Asian Nations (ASEAN), Japan, South Korea, Australia, New Zealand and China, signed the Regional Comprehensive Economic Partnership Agreement (RCEP). Pending ratification by all signatories, it will be the largest free-trade agreement in the world, covering nearly one third of the global population.
The RCEP is primed to nudge some companies, including European ones, towards integrating their China operations into a broader regional strategy. As more and more Chinese companies shift lower-cost production to Southeast Asia, European companies should anticipate some disruptions as suppliers and customers that were once within China’s borders make their way across the logistically and administratively more complex border. The geopolitical situation may also prompt more due diligence of supply chains.
The overwhelming majority of survey respondents believe that the impact of the RCEP on their business is either very low or that it is too early to tell. Only 3% expect it to have a negative impact on their business, while 23% of respondents expect that it will have a positive impact. Under the RCEP, some companies are seeing an opportunity to integrate their China operations into a broader regional strategy. Time will tell if they are correct.
Out of those member companies that expect the RCEP to have a positive impact on their business, 67% expect an uptick in revenue due to increased exports from China to other RCEP countries, and 39% anticipate cost reductions as a result of cheaper imports or diversified supply chains. This is good news for companies, especially those that are well positioned to take their China operations to a larger, regional ecosystem.
2. Rethinking regional supply chains
After filtering out those that expect the RCEP will have little to no impact, or who argue that it is too early to say, respondents are split as to whether it will affect regional supply chains. While 51% of respondents do not expect that it will, 32% expect that it will lead them to rethink their regional supply chains to export more to RCEP countries from China, and 17% foresee the reverse. Companies are already seriously discussing the best strategy moving forward. For example, interviewed chemicals companies are currently evaluating whether they want to increase production in southern China with the aim of exporting to their customers in Southeast Asia, or if they should instead invest into those countries to supply their customers locally.
Rising labour costs, automation, complex regulation, an increasingly unstable geopolitical situation and China’s own interest in moving up the value chain have resulted in 38% of respondents observing their Chinese customers/suppliers moving operations into other markets in 2020. This trend is likely to proceed apace, and companies would do well to respond accordingly. One big advantage that European companies in China have benefitted from is the completeness of local industrial clusters and supply chains. European players that were accustomed to having local suppliers and customers in the same jurisdiction may need to adjust to cross-border business and the logistical challenges of shipping, as well as regulatory ones like customs.