RCEP? There is a ‘key to success’ in the Korean economy in this unfamiliar word

As of 2022, Korea has signed 18 free trade agreements (FTAs). Korea, which signed its first FTA with Chile in 2004, somewhat later than other countries, succeeded in establishing FTAs ​​with major countries around the world in just 18 years. Korea has also finished signing an FTA with four countries, including Israel, and is waiting for it to take effect, and is in final negotiations with 10 countries, including Ecuador. This means that the picture of Korea’s FTA network closely intertwining the whole world except for some underdeveloped countries such as Africa is completed.

Since there are so many and simultaneous negotiations and announcements, the conclusion of an FTA has not become a topic of great interest to the public from some day. At the time of the first FTA ratification by the National Assembly, he is indifferent to the extent that he thinks it is the country where fierce protests took place, saying, “Agriculture, the foundation of the country, will collapse.”

The same was true when the Regional Comprehensive Economic Partnership (RCEP), the largest FTA ever, took effect in Korea in February. In the midst of the presidential election, all the news was focused on the outbreak of the novel coronavirus infection (COVID-19), which was reaching its peak, but the RCEP was considered only to be “another FTA has been added”.

Is that really the case? If we look carefully at the appearance of RCEP, the first thing that comes to mind is the sense of heterogeneity that has not been seen in general quantum FTAs. The participating countries of the RCEP, which went into effect this year, are 10 countries from the Association of Southeast Asian Nations (ASEAN) and 15 countries including Korea, China, Japan, Australia, and New Zealand. RCEP’s import and export volume accounts for 31.9% of global trade, and its gross domestic product (GDP) also reaches 30.8%. This means that one in three items sold worldwide is produced, distributed, or consumed by RCEP. In terms of scale, it easily surpasses Korea’s existing FTA.

Nevertheless, the general reaction is that “it’s only large, and the RCEP will have the same effect as the existing FTA.” This point is partly right and partly wrong. Like other FTAs, RCEP is taking a method of gradually removing import/export tariff barriers between participating countries and easing rules of origin. However, the RCEP stipulated that all 15 countries could not only pay customs duties under one treaty, but also accumulated the country of origin for exchange. Ultimately, it means that all obstacles to import and export in the region will be removed and the participating countries will be bundled into one economic block.

Although it is a continuation of difficult international economic terminology, RCEP’s differentiation of tariffs in 15 countries has significant meaning. In particular, Korea, where exports are the key to growth, is a point that should not be overlooked.

RCEP gives wings to the export industry of ‘Korean electronics and sewing’

The finished product of a Korean company’s display module produced and assembled abroad. unit 808 capture

Let’s take the display module, one of Korea’s main export products, as an example. Currently, Korean companies send nine core parts produced in six countries, including China, Korea, Vietnam, Japan, Malaysia and Australia, to their factories in Vietnam for final assembly and then export the finished products. In this process, only four parts from Korea and Vietnam are exempt from customs duties by meeting the rules of origin. This is because only the Korea-Vietnam FTA is valid since the final process is being carried out in Vietnam.

However, when RCEP is applied, the situation is different. Since the other four countries, including China, also participate in the RCEP, parts imported from these countries will also be recognized as the same country of origin and tariffs will be abolished. In this case, the existing unnecessary import/export costs are eliminated and the production cost is lowered. This is a structure in which the net profit of Korean companies will naturally increase.

In addition, RCEP does not impose tariffs on the export of final products of display modules to countries within the region. This means that if it is within the RCEP economic bloc, it can gain a clear advantage in price competitiveness compared to goods produced in non-RCEP regions imported with heavy tariffs.

Local workers are producing special gloves at the Vietnamese subsidiary factory of Globeland, a Korean company located in Bac Giang Province, northern Vietnam. Courtesy of Globeland

The benefits of RCEP are not limited to high value-added industries such as electronic products in a ‘multi-country cumulative production method’. Labor-intensive industries such as clothing, shoes, and gloves, which are one of Korea’s other ‘filial piety’ export products, can also be expected to increase their profits through RCEP.

For the past 20 years, ASEAN and other developing countries have been playing the role of receiving yarn from Korea, Japan and China, sewing clothes, etc., and finally exporting them using cheap labor as a weapon. However, rather than designing and selling products on their own, these countries set various conditions, such as △change of two-unit three times △cutting and sewing processing (SP) △value added by 40%, as ‘region of origin satisfaction criteria’. This means that industrial protective barriers have been erected so that yarns from multiple countries cannot be used to manufacture a single product, or finished products can be exported only through minimal cutting and other processes in their own country.

RCEP, which pursues ‘complete economic bloc’, even eliminated this. RCEP stipulated that ‘Made in RCEP’ would be recognized as ‘Made in RCEP’ if it removed the protection regulations for the sewing industry in developing countries and met the ‘2 unit tax change standard’. This is good news for Korean companies that have had to import and further process yarn from only one country. This is because from now on, it is possible to export products with the originally planned quality by mixing yarns from multiple countries with low prices.

Kim Tae-yoon, a customs officer at the Korea Trade-Investment Promotion Agency (KOTRA/KOTRA) Hanoi Trade Center, said, “The country that makes final products using materials from various countries, like Korea, will benefit the most due to the nature of RCEP, where the origin accumulation system is the key.” Besides industries, RCEP will be a huge opportunity for most Korean companies that have not been able to reduce transaction costs through complex FTAs.”

China, whose location is ambiguous, Japan missed in the previous period… “Korea, move strategically”

On the 20th, at the ‘Korea-Vietnam Mega FTA Export-Import Strategy in the RCEP Era’ webinar held jointly by the Korea International Trade Association and the Korea Trade-Investment Promotion Agency (KOTRA) on the 20th, Eun-Jin Cho, Deputy Minister of Trade in Hanoi, gave an opening address. Hanoi = Correspondent Jae-ho Jeong

If RCEP is the ‘key to success’ for future exports to Korea, rivals China and Japan, which are adopting a ‘multi-country raw material production method’ similar to Korea, can also benefit. However, the prevailing opinion in the local industry is that “Korea has a relatively advantageous position compared to China and Japan.” In order to receive the full effect of RCEP, it is important to secure a stable production base in the region, because unlike the two countries, Korea has a strong ‘second economic base’ called Vietnam.

In fact, it is pointed out as a weakness that China is in an ambiguous position in the RCEP, neither as a final producer nor as a supplier of raw materials. Although the supply of basic parts is still strong, it is because they have not been able to get past the stage of processing industrial products with a lower level of technology compared to Korea and Japan. In addition, there is a high possibility that the effect of the accumulator of origin will not come to a large extent since there are so many territories and various industrial groups in the country.

Japan’s belated ‘post-China, production base diversification strategy’ is painful. After the US-China conflict, the Japanese government is promoting the relocation of Chinese companies to Southeast Asia, but the pace is slower than expected. As global companies have already preempted major industrial complexes in ‘post-China’ countries such as Vietnam, the reality is that there is not as much room for Japan to break in as expected.

On the other hand, Korea has maintained and developed stable trade with Vietnam despite the COVID-19 crisis. South Korea’s exports to Vietnam last year amounted to $56.72 billion (about 71 trillion won), an increase of about $80 million from the previous year. There is no significant change in the fact that 88% of exports are intermediate goods sent to Vietnam to make finished products. In the export stage, only ‘Made in Vietnam’ is stamped, and the final fruit means that Korean companies have been taking it stably.

The remaining variable in Korea is the degree of uncertainty in Vietnam’s customs administration. Vietnam officially declared the entry into force of the RCEP in January, but detailed items such as the agreed tax rate will be finalized through the regular National Assembly in July. Kwon Jun-seong, managing director of Worldwide Logistics, said, “There is a lot of uncertainty in the Vietnamese administration, so if the certificate of origin is not thoroughly inspected, there is a possibility of being fined after export. emphasized.

RCEP certificate of origin (CO) form issued by Vietnam. The phrase ‘From RCEP’ is clearly stated at the top of the document. Provided by Worldwide Logistics

Hanoi= Jaeho Jung correspondent next88@hankookilbo.com