China and Philippines to Implement RCEP Tariffs, Bolstering Trade Relations

The Philippines has ratified the RCEP pact, following which China has announced it will implement changes in the tariff rates for certain import items from June 2. The RCEP acts as a catalyst for closer economic ties and mutually beneficial outcomes among its 15 Asia-Pacific member countries.

China has recently expressed its intention to implement the tariff rates specified in the Regional Comprehensive Economic Partnership (RCEP) agreement for specific imports from the Philippines. This development, scheduled to be implemented on June 2, 2023, reflects the shared commitment of both nations toward the RCEP.

We discuss the implications of this decision for China and the Philippines, with a focus on the potential opportunities it brings for investors and business stakeholders.

By aligning with the RCEP tariff rates, China and the Philippines aim to enhance trade cooperation and foster a conducive environment for economic growth.

RCEP and its implementation in the Philippines

On February 21, 2023, the Senate of the Philippine Congress formally ratified the RCEP. On April 3, 2023, the Philippines deposited the instrument of ratification of the RCEP to the Secretary-General of ASEAN. According to the RCEP, the agreement will enter into force for the Philippines on June 2, 60 days after the deposit of the instrument of ratification.

The RCEP, which encompasses approximately one-third of the global population and GDP, is the largest free trade agreement established thus far. This trade agreement covers the Asia-Pacific region, including China, Japan, South Korea, New Zealand, Australia, and the 10 member states of ASEAN; it is already in effect since the beginning of 2022 after sufficient member countries ratified the pact triggering the implementation threshold.

Following the ratification of the deal by the Philippines, the agreement is now operational in all 15 signatory countries.

The RCEP is designed to facilitate the gradual elimination of tariffs on at least 90 percent of traded goods among its member countries over a span of 20 years starting from when it comes into effect.

It will promote free trade, strengthen industrial and supply chains, abolish tariffs, and enhance the scope for services and investments. By doing so, it should expedite regional economic recovery following the challenges posed by the COVID-19 pandemic. An important milestone achieved through the RCEP is the establishment of free trade relations between China and Japan, for the first time in history.

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The RCEP is important for China and foreign investors. The pact presents substantial import-export opportunities for China, enabling enterprises to expand their exports in sectors where China possesses comparative advantages. Simultaneously, it facilitates increased imports of crucial technologies, components, and raw materials. Furthermore, the RCEP establishes a robust and stable connection between China and Asia-Pacific economies, fostering stronger trade and business ties.

The role of the Philippines within the RCEP

The Philippines’ ratification of the RCEP signifies its active participation in this significant free trade agreement, which holds immense potential for the country across various trade sectors. Key areas such as electronic equipment, metals, oil, gas, vegetables, fruits, nuts, mineral products, machinery, rice, transport, sugar, construction, and fishing are poised to benefit from the RCEP. Consequently, the Philippines stands to gain increased trade opportunities and enhanced market access within the region by being a part of this agreement.

Participating in the RCEP provides a platform for the Philippines to strengthen economic ties with other member countries, enabling the expansion of exports and attracting foreign investment. Industries such as digital services, business process outsourcing, financial services, aerospace, shipbuilding, and research and development are expected to witness increased participation and growth, presenting lucrative prospects for the country’s economic development.

One notable example of the agreement’s significance is its potential to revitalize the Philippines’ garment sector, previously the largest in Asia. With the implementation of the RCEP, the country’s garment industry can regain competitiveness and improve cost-effectiveness, opening doors for increased exports and job creation within the sector. This, in turn, contributes to overall economic growth.

Furthermore, with the implementation of the RCEP in the Philippines, the country is expected to deepen its integration into regional industrial and supply chains, paving the way for increased collaboration and opportunities for businesses operating within these networks.

However, it is essential to acknowledge that certain agricultural products of the Philippines, including swine meat, poultry, potatoes, onions, garlic, cabbages, sugar, carrots, and rice, have been excluded from the RCEP agreement. Tariffs on these products will remain in place, presenting a challenge for the agricultural sector. Consequently, alternative strategies may need to be explored to effectively compete in the regional market in these sectors.

How will the RCEP facilitate China-Philippines bilateral trade?

China is the Philippines’ largest trade partner. In 2022, bilateral trade between the two countries reached US$87.725 billion.

The RCEP implementation is set to further strengthen this relationship by fostering an environment of enhanced economic cooperation. By aligning trade policies, reducing trade barriers, and streamlining customs procedures, the RCEP creates a more conducive business environment that encourages increased trade and investment flows between China and the Philippines.

For the Philippines, the RCEP presents a gateway to expand its export market. With access to a larger consumer base within the RCEP member countries, Filipino businesses can tap into new opportunities and increase their exports. This diversification of export destinations mitigates risks associated with over-reliance on a few markets and boosts economic growth.

Furthermore, the RCEP’s provisions for market access and trade facilitation enable Philippine businesses to leverage their competitive advantages and access a broader range of goods and services from China, enhancing their productivity and competitiveness.

China stands to make gains as well. The agreement strengthens China’s economic integration with Southeast Asia, creating a more seamless flow of goods, services, and investments. With reduced trade barriers, Chinese enterprises can access the Philippine market more easily, expanding their operations and contributing to the country’s economic development. Moreover, the RCEP fosters a stable and predictable business environment in the Philippines for Chinese businesses, enabling them to make long-term investment decisions with confidence.

Beyond the immediate economic benefits, the RCEP serves as a platform for deeper collaboration and cooperation between China and the Philippines. By aligning trade policies, standards, and regulations, both countries can promote fair competition, encourage knowledge sharing, and foster technological exchanges. This facilitates the development of robust industrial and supply chains, driving innovation and enhancing productivity.

In addition, the RCEP also provides a framework for addressing challenges and exploring new avenues of collaboration. By promoting regional economic integration, the agreement encourages China and the Philippines to work together in addressing shared concerns, such as sustainable development, digital trade, and intellectual property rights. Through this collaboration, both countries can navigate emerging economic trends and seize new opportunities together.

Opportunities for businesses and investors

The bolstered trade relations between China and the Philippines create a favorable climate for various investment possibilities.

With the RCEP officially coming into effect for the Philippines, the country added zero-tariff treatment to several Chinese goods, including (but not limited to) automobiles and components, some plastic products, textiles and clothing, and air-conditioning washing machines.

According to the official Agreement, after a certain transitioning period, the tariffs on the above products will be gradually reduced from 3 percent to 30 percent, and then to zero.

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With regards to services and investment, the Filipino government has promised to open the market to more than 100 service sectors, encouraging transportation services, and also promising foreign companies more certainty in the fields of commerce, telecommunications, distribution, finance, agriculture, and manufacturing. These measures will provide more free and convenient conditions for Chinese and foreign enterprises to expand trade and investment exchanges with the Philippines.

In addition, the following areas are expected to benefit from such opening opportunities.

Infrastructure development

Infrastructure development presents a lucrative investment opportunity in the context of the strengthened trade relations between China and the Philippines. China’s extensive experience and expertise in infrastructure development, coupled with the Philippine government’s commitment to improving its infrastructure, sets the stage for mutually beneficial collaborations. Investors can explore and capitalize on emerging opportunities in various areas, including:

• Transportation: The Philippines has been prioritizing the enhancement of its transportation networks, such as roads, bridges, railways, ports, and airports. Investors can participate in projects related to the construction, expansion, and modernization of transportation infrastructure. For instance, the development of new airports or the expansion of existing ones, the construction of highways and bridges to improve connectivity, and the implementation of efficient urban transit systems are all potential areas for investment.
• Energy: The Philippines aims to bolster its energy sector to meet the growing demand for power and to promote sustainable and renewable energy sources. Investors can explore opportunities in renewable energy projects, such as solar and wind farms, hydroelectric power plants, and geothermal energy ventures. Additionally, investments in power grid expansion, transmission, and distribution systems are crucial for ensuring reliable and efficient energy supply across the country.
• Telecommunications: With the increasing demand for connectivity and digital services, the telecommunications sector in the Philippines offers promising investment prospects. Investments can be made in the expansion of telecommunications networks, the deployment of advanced technologies like 5G, and the improvement of internet infrastructure to support the growing digital economy.
• Urban Development: As urbanization continues to progress, there is a need for sustainable and well-planned urban development projects. Investors can consider opportunities in the construction of smart cities, residential and commercial developments, mixed-use complexes, and eco-friendly infrastructure. Collaborations between Chinese and Philippine companies can leverage China’s expertise in urban planning and development to create modern and efficient urban spaces.

By investing in these infrastructure sectors, investors can not only benefit from the growing demand for improved infrastructure in the Philippines but also contribute to the country’s economic growth, job creation, and enhanced connectivity. It is essential for investors to navigate the regulatory frameworks, conduct thorough due diligence, and establish strategic partnerships to maximize the potential of their investments in the Philippine infrastructure landscape.

Manufacturing and export

This landmark trade agreement provides a platform for increased trade integration and offers promising opportunities for investors in various industries, including electronics, automotive, textiles, and more.

• Electronics: China and the Philippines have established strong ties in the electronics manufacturing sector. The RCEP agreement further enhances this collaboration, promoting the exchange of technology, capital, and resources between the two countries. Investors can explore joint ventures, and manufacturing partnerships, or expand existing operations to tap into the growing demand for electronic devices and components in both domestic and international markets.
• Automotive: China is one of the largest automobile markets globally, and its expertise in automotive manufacturing and components production presents investment opportunities for Philippine businesses. Likewise, the Philippines offers a strategic location for automotive parts production and assembly, leveraging its skilled labor force and favorable investment climate. Investors can explore partnerships or establish manufacturing facilities to cater to the rising demand for vehicles and automotive components in both markets.
• Textiles and garments: The RCEP agreement presents a favorable environment for the expansion of the textile and garment industry. China is a major global player in textile production, while the Philippines has a strong tradition in garment manufacturing. The elimination of trade barriers and the harmonization of rules under RCEP create a conducive environment for collaboration and investment.

Other industries to watch

As RCEP facilitates deeper economic integration, certain sectors and industries are expected to experience notable growth and increased investment flows. Opportunities may emerge from various fields, including (but not limited to):

• E-commerce: The RCEP agreement promotes digital connectivity, creating a conducive environment for e-commerce expansion. Investments in online marketplaces, logistics infrastructure, and digital payment systems can reap significant rewards.
• Renewable energy: Both China and the Philippines have committed to renewable energy development. Investors can explore solar, wind, and hydroelectric projects to benefit from the increased focus on sustainable energy sources.
• Financial services: With RCEP facilitating financial cooperation, the financial services sector is poised for growth. Investments in banking, insurance, fintech, and digital payment platforms can be fruitful.
• Tourism and hospitality: With the implementation of RCEP, tourism, and hospitality industries are likely to witness an upsurge in travel between China and the Philippines. Opportunities exist for investors to capitalize on the growing demand for accommodations, attractions, and travel services.

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