INSIGHT: Asia petrochemical trades to get strong long-term boost from RCEP

Author: Nurluqman Suratman


SINGAPORE (ICIS)--Petrochemical trades within Asia are expected to get a strong boost over the long term from the recently signed Regional Comprehensive Economic Partnership (RCEP) - which formed the world’s biggest trade bloc so far.

Signatories to the deal are the 10 ASEAN nations (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam), China, Japan, South Korea, Australia and New Zealand.

The RCEP is currently the world’s largest free trade agreement (FTA), covering 30% of the world’s GDP and the world’s population, and about 30% of total global trade.

It aims to eliminate as much as 90% of the tariffs on imports between member countries, and some of the cuts would take place over 20 years from the time of implementation.

The RCEP benefits for petrochemicals in the early years of implementation will largely bank on China’s massive consumption and growth potential.

“The RCEP will make it easier, through lowering tariff barriers, for China to obtain the petrochemicals it needs from its Asian trading partners,” ICIS senior consultant John Richardson said.

Japan, which does not have a bilateral free trade agreement (FTA) with China, is likely to see increased exports to the world’s second-biggest economy and a major importer of petrochemicals.

In the case of vinyl acetate monomer (VAM), China could benefit from an additional supply of duty-free imports from Japan which currently commands a 5.5% duty. VAM imports from Singapore, South Korea and Taiwan are duty-free in China.

“China is getting more affluent and with its currency appreciating against the US dollar, it will certainly be positive for trade in the region,” a southeast Asian-based rubber distributor said.

“Harmonised rules of origin, another key part of the trade deal, will also reduce the cost of all China’s raw material imports that are re-exported as finished goods,” ICIS’ Richardson said.

“China will thus strengthen its already dominant position in export markets across the 15 member countries of the RCEP,” he said.

The deal signed on 15 November has buoyed sentiment in several petrochemical markets, although ratification may be months away and details on implementation are still to be released.

In southeast Asia, players in the polyvinyl chloride (PVC) and polyethylene terephthalate (PET) markets do not expect much change in trade flows in the near term since the ASEAN has an existing trade pact with China called the Comprehensive Economic Cooperation Agreement (ACFTA).

“PVC from China already enjoys zero duties in most ASEAN markets like Malaysia and Thailand, so the NE [northeast] Asia and SE [southeast] Asia supply and demand balance is not expected to change too much,” a China-based trader said.

Benefits from the new trade pact will not be reaped until after the coronavirus pandemic, which has severely weakened overall demand for petrochemicals, according to players in the polycarbonate (PC) and bisphenol-A (BPA) markets.

“The deal strengthens China’s relationships with the developing world at a time when China is drifting further and further way from the US,” Richardson said.

“I believe the RCEP could add to the momentum of this drift, as we head towards a bipolar word of two trading and geopolitical zones - one led by China and the other by the US,” he said.

“While Taiwan is not a participant in the RCEP, it would be affected indirectly by the implementation of the pact. One implication is for Taiwan’s trade competitiveness in the long run,” Singapore-based DBS Group economist Ma Tieying said in a research note.

Taiwan may have to deal with increased competition in its major markets of China and South Korea, from Japanese exporters, “particularly in capital and intermediate goods segments”, once the RCEP takes effect.

China accounts for 28% of Taiwan’s exports, while South Korea has a 5% share in total Taiwanese shipments, Ma said.

Taiwan has the Economic Cooperation Framework Agreement (ECFA) with mainland China, while it has no bilateral FTA with South Korea.

“On the policy front, RCEP will likely exert more pressure on the Taiwanese authorities to expand the island’s free trade networks to maintain competitiveness,” Ma said.

“It is possible that Taiwan will more actively seek to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) going forward, especially if the US could return to the agreement under the new leadership in the next several years,” she added.

Japan led 11 other nations in the signing of the CPTPP in early 2018, after the US withdrew from the deal when President Donald Trump assumed office in 2017.

The RCEP is not expected to come into force until the second half of 2021 since it requires ratification by at least six ASEAN nations and three non-ASEANs.

“There will also be improved tariff elimination concessions over and above existing regional and bilateral FTAs, which will allow businesses especially in the chemicals and plastics, and processed food sectors, to benefit from cost savings when selling their products to these markets,” Singapore’s UOB Global Markets & Research said in a note.

From the perspective of tariff savings, South Korea stands to be the biggest beneficiary as it does not have a bilateral FTA with Japan, which is its third largest trading partner, DBS Group economist Ma said.

"We estimate that the potential tariff savings on imports from Japan will amount to $2.2bn for South Korea (0.1% of GDP), if the RCEP is fully implemented,” she said.

"Tariff savings will be most significant for the imports of capital and intermediate goods, such as machinery & electrical equipment, plastics & rubber, and chemicals," she said.

Additionally, the RCEP deal's simplified customs procedures and enhanced trade facilitation measures will allow efficient administration of procedures and expeditious clearance of goods.

“At a time when global trade has been coming under steady protectionist blows, the very fact that such a trade deal can be successfully pushed through is in and of itself a sign of hope,” said Wellian Wiranto, a macro research analyst at Singapore’s OCBC Bank.

“Even if the effects would take time to percolate, the RCEP should nonetheless be helpful to market sentiment especially when trade activities are still trying to recover from the pandemic,” Wiranto said.

Insight by Nurluqman Suratman

With additional reporting by Helen Yan, Jonathan Chou, Julia Tan, Hazel Goh, Helen Lee and Pearl Bantillo

Photo: Vietnam's Prime Minister Nguyen Xuan Phuc (left) and Minister of Industry and Trade Tran Tuan Anh (right) cheer after the virtual signing ceremony for the RCEP in Hanoi, Vietnam on 15 November 2020, at the end of the virtual 37th ASEAN Summit. (By LUONG THAI LINH/EPA-EFE/Shutterstock)

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