The Regional Comprehensive Economic Partnership (“RCEP”) was signed on 15 November 2020 and entered into force on 1 January 2022 for ten countries: Australia, New Zealand, Brunei Darussalam, Cambodia, China*, Japan, Laos, Singapore, Thailand and Vietnam. It was subsequently entered into force for the Republic of Korea on 1 February 2022 and Malaysia on 18 March 2022, and most recently ratified by Indonesia on 30 August 2022. RCEP is one of the largest free trade agreements (“FTA”), covering around one-third of the world’s population and accounting for about one-third of global GDP.
*Note that Hong Kong, China (“Hong Kong”) is a separate customs territory from the People’s Republic of China (“China”).
Here’s a little recap from our blog on what you need to know about RCEP.
Over the past few months, there has been much discussion about Hong Kong’s accession to RCEP and how it could strengthen its position as the major gateway between mainland China and the rest of Asia. Here we look at some of the implications from a trade-in-goods perspective**.
**This article aims to provide traders with a point of view from the trade-in-goods aspect of Hong Kong joining RCEP. It does not discuss other possible incentives such as services, investment, or broader geopolitical considerations.1. Preferential tariffs for import and export goods
Hong Kong does not levy import duty on most commodities as a free port. From an importation perspective, there are no implications as the duty rate is already free for non-excisable goods. From an export perspective, Hong Kong is generally no longer a manufacturing origin for most sectors, so the benefits of domestic exports (Hong Kong originating goods) may have less impact. Minor processing or assembly activities do not constitute a change in origin.2. Re-exporting via Hong Kong, or Hong Kong as a regional distribution hub
To enjoy FTA benefits, shipments must meet a ‘direct consignment’ rule that requires shipments to be transported directly from the country of origin to the country of importation, or, if it were to pass through an intermediary country, it should meet the prescribed conditions. Thus being a member country of the FTA would retain the preferential treatment of otherwise eligible goods.
There are many considerations businesses need to account for when deciding where to locate a hub; duty savings is one of them. Supply chain convenience and logistics considerations are some others. Many businesses still hope to leverage benefits from FTAs as Hong Kong is still a major trading hub for their goods.
Should Hong Kong become an RCEP member, it will qualify as an intermediary member country and allow the goods passing through Hong Kong to continue to enjoy some duty savings benefits when they reach their destination. In theory, it should. One must remember that utilizing FTAs in practice is not always straightforward. In a regional distribution hub scenario, we are talking about consolidating orders, bulk breaking, and partial shipments, which means a lot of reconciliation of the inbound and outbound shipment quantities subject to ‘free trade’. That said, with the proper planning and with Hong Kong joining RCEP, it is a process that can be managed to provide better savings opportunities to traders that utilize Hong Kong as a regional hub.
3. Streamlined customs procedures
As a separate customs territory to mainland China, all goods passing through Hong Kong are required to undergo import and export formalities. Should Hong Kong become a part of RCEP, there may be trade facilitation opportunities to potentially streamline current customs procedures. This could benefit Hong Kong and its trading partners but is more of a longer-term objective and will likely be challenging to implement.
So what is the latest status?
Hong Kong submitted its application for accession to RCEP in January 2022. According to the legal text of the Agreement, accession is allowed 18 months after the date of entry into force of the Agreement, subject to the consent of the Parties and any terms or conditions that may be agreed, and either:
- 60 days after the date of application; or
- On the date on which all member countries notify completeness of their respective applicable legal procedures, whichever is later.
As with other FTAs, the procedures and timeline for accession to RCEP can be a lengthy process. But like many RCEP member states, if Hong Kong continues to prioritize this as its economic focus, and with the blessing of other member states, it could soon become the next RCEP signatory, and traders may start reviewing the potential benefits ahead of its ratification.