Market Insights

How Trade Barriers and Regionalization Are Shaping Global Supply Chains: Insights on RCEP, EU, and US Industrial Policies

By 13 September, 2024No Comments

Bangkok, Thailand

Trade Barriers and Regionalization

In the contemporary global trade environment, trade barriers and regionalization are two critical concepts that shape international business dynamics and influence how countries engage in commerce and cooperate within specific geographic regions.

Trade barriers refer to the government-imposed obstacles to limit free trade between international economies, which are used by countries to protect domestic industries from foreign competition. Trade barriers include tariffs and non-tariff barriers such as quotas, subsidies, embargoes, or other regulatory measures. While these barriers can provide short-term benefits by safeguarding local jobs and industries, they can also lead to trade wars, increased consumer prices, and strained international relations. A prominent example of this is the trade dispute from 2018 between the US and China, involving mutual tariff impositions. Read more about the U.S.-China Economic Dynamics here. Another significant case is Brexit, which reintroduced customs checks, tariffs, regulatory differences, and border controls between the UK and EU member states.

Regionalization, on the other hand, refers to the tendency of countries belonging to the same region to trade relatively more between each other (intra-regional trade) than with the rest of the world (inter-regional trade). This process involves the formation of alliances or trade agreements where neighboring countries reduce or eliminate trade barriers among themselves, leading to enhanced trade flows, economic growth, and stronger political ties. Notable regional trade agreements include the European Union (EU), North American Free Trade Agreement (NAFTA), now replaced by the US-Mexico-Canada Agreement (USMCA), and the Regional Comprehensive Economic Partnership (RCEP) in Asia. Currently, regionalization has become a strategic response to the uncertainties of multilateral trade negotiations and the rise of national protectionism.

Regional Comprehensive Economic Partnership (RCEP)

Signed in November 2020, RCEP holds huge potential when broadening and deepening the engagement of the Association of Southeast Asian Nations (ASEAN) with China, Japan, South Korea, Australia, and New Zealand. Together, these 15 members represent approximately 2.2 billion people (30% of the global population), a regional GDP of around 38,813 billion USD (30% of global GDP), and 28.8% of global trade, making RCEP the largest trade bloc in history.

Map showing ASEAN regions

Source: Asia-Pacific Economic Cooperation

RCEP aims to establish a modern, comprehensive, high-quality, and mutually beneficial economic partnership that facilitates the expansion of regional trade and investment, contributing to global economic growth and development. A key element of RCEP is the reduction of tariffs and other trade barriers, increasing market access to a large and regionally significant market. In fact, RCEP increases the number of duty-free tariff lines from 22.9% (at the beginning of its negotiations) to 63.4% once fully implemented for all members. Moreover, 89.7% of total tariff lines would become duty-free upon RCEP’s Year-21, representing a significant liberalization of goods in the region considering the collective size and value of members. In addition, RCEP is groundbreaking for agreeing on preferential tariff treatment among members with no prior FTA, such as trade flows between China and Japan, as well as Japan and South Korea.

The economic impact of RCEP is projected to be significant. A Brookings Institution study estimates that RCEP will add 209 billion USD annually to global incomes and 500 billion USD to global trade by 2030. For member countries, RCEP promises to boost incomes by 0.6%, adding 245 billion USD annually to regional income and 2.8 million jobs to regional employment, according to recent RCEP impact assessment reports by Park et al. (2021) and World Bank (2022). Additionally, it provides a counterbalance to other major trade agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU.

When celebrating its second anniversary in January 2024, China hailed the significant role of the RCEP in promoting regional trade and investment cooperation despite rising protectionism. In 2023, China’s total imports and exports with the other 14 members of RCEP reached 1.8 trillion USD, contributing to over 30% China’s total foreign trade. The ASEAN remained China’s largest trading partner over the year with total trade volume of 912 billion USD.

Europe/USA Industrial Policy

In contrast to the regionalization efforts embodied by RCEP and other trade agreements, the current industrial policies of Europe and the USA have been characterized by a more protectionist approach, aiming at bolstering domestic industries amidst global competition and geopolitical challenges.

The EU has implemented policies to enhance its industrial base and ensure strategic autonomy. The EU’s Industrial Strategy (introduced in 2020) focuses on fostering innovation, supporting small and medium-sized enterprises (SMEs), and reducing dependence on non-EU suppliers for critical technologies and raw materials. Its approach also incorporates the implementation of the European Green Deal, which aims to make Europe the first climate-neutral continent by 2050. This policy includes measures to support the green transition of industries through subsidies and regulatory adjustments.

The USA’s industrial policy has been characterized by some as the “America First” and “Made in America” policies, aiming to reduce dependency on foreign supply chains and revitalize domestic manufacturing. These approaches include tariff impositions on imports from major trading partners, including China and the EU, as well as efforts to renegotiate existing trade agreements to secure more favorable terms for American businesses. The US government has also implemented subsidies and incentives to boost domestic industries such as technology, automotive, and pharmaceuticals. For example, the Inflation Reduction Act provides 369 billion USD in funding for clean energy initiatives, supporting sectors such as electric vehicles and renewable energy.

Impact on Supply Chains

Trade barriers and regionalization are reshaping global supply chains in profound ways.

A primary challenge posed by trade barriers and the protectionist policies of the EU and the USA is the increased cost of importing raw materials and components, which significantly raises the cost of production. Tariffs on Chinese goods, for example, have forced many US companies to seek alternative suppliers or relocate production facilities to regions with more favorable trade conditions, such as India or Southeast Asian countries. The EU’s emphasis on strategic autonomy may also lead to the localization of supply chains, reducing reliance on non-EU countries but potentially increasing costs and complexity. These shifts can disrupt established supply chains and require substantial investments in new infrastructure and logistics.

On the other hand, regionalization through agreements like RCEP presents opportunities for businesses to streamline their supply chains within the region. By reducing tariffs and harmonizing regulations, RCEP facilitates smoother and more cost-effective trade flows among member countries. This can enhance the efficiency of supply chains and reduce the risk of disruptions caused by geopolitical tensions or trade disputes.

Business Adaptation Strategies

In response to the evolving trade landscape, businesses are adopting various strategies to navigate trade barriers and capitalize on regionalization opportunities.

Diversification of supply chains is a key strategy for mitigating the risks associated with trade barriers. By sourcing materials and components from multiple suppliers across different regions, companies can reduce their dependency on any single source and minimize the impact of tariffs or other trade restrictions. For example, to reduce its reliance on China, Apple is gradually shifting its device assembly process to other countries, including Vietnam. A JPMorgan analysis forecasts that the current figure of 95% of Apple products made in China will drop to about 75% by 2025. Instead, the tech giant plans to relocate 20% of iPad, 5% of MacBooks, 20% of Apple Watch, and 65% of Air Pods to be manufactured in Vietnam by 2025. This move not only mitigates the risks associated with US-China trade tensions but also takes advantage of Vietnam’s favorable business environment and lower labor cost. Additionally, RCEP, for instance, can also be successfully leveraged by Japanese electronics firms to optimize their supply chains across Asia-Pacific. By expanding manufacturing and assembly operations in ASEAN countries, companies like Sony and Panasonic benefit from reduced tariffs and standardized procedures under RCEP, lowering production costs and improving market access within the region. In 2023, Panasonic announced business plan to move its automated equipment production base from China and Japan to Thailand. The plan includes consolidating factories with similar products into large-scale facilities and closing small-scale factories, emphasizing additional investments in the country.

Localization is another strategy where companies move production closer to key markets to avoid tariffs and reduce the costs and risks associated with cross-border trade. In 2020, General Motors invested 2.2 billion USD to transform its Detroit-Hamtramck assembly plant (Michigan, USA) into a dedicated electric vehicle (EV) manufacturing facility. By producing EVs domestically, GM not only avoids import tariffs but also aligns with the US government’s push for increased domestic manufacturing and job creation. Another example is the investment of 400 million EUR of BMW to upgrade its Dingolfing plant in Germany in 2019. This investment aims to ensure that production remains within the EU market, mitigating risks associated with potential tariffs and border checks between the UK and EU due to Brexit.

The use of digital technologies is also playing a crucial role in enhancing supply chain resilience and efficiency. Technologies such as blockchain, artificial intelligence (AI), and the Internet of Things (IoT) enable businesses to improve supply chain visibility, optimize logistics, and manage risks more effectively. These innovations are particularly valuable in a trade environment characterized by uncertainty and complexity.

Strategic Implications

The strategic implications of RCEP and the industrial policies of Europe and the USA are far-reaching and multifaceted.

In the case of RCEP, the agreement offers significant potential for businesses to expand their operations and access new markets within the Asia-Pacific region. Companies that can navigate the regulatory landscape and leverage the benefits of reduced tariffs and streamlined customs procedures will be well-positioned to thrive in this dynamic region. This could also enhance the global competitiveness of Asian manufacturers.

The industrial policies of Europe and the USA, despite presenting trade barrier challenges, also create opportunities for businesses to benefit from government support and incentives. Companies that align their strategies with the priorities of these policies, such as investing in green technologies or reshoring production, can gain a competitive edge and access new funding and resources.

In the long-term, these trends may lead to a more fragmented global trade environment, characterized by distinct regional blocs. Companies will need to develop tailored strategies for each region, balancing the benefits of regional integration with the challenges of navigating trade barriers.

Future Outlook

Looking ahead, the future of global trade will be shaped by the ongoing interplay between trade barriers and regionalization. RCEP’s impact will continue to expand as member countries deepen their economic ties and more businesses take advantage of the agreement’s benefits. The Asia-Pacific region is poised to become an increasingly vital hub of global trade.

In the EU and the USA, industrial policies may continue to emphasize strategic autonomy and protection of domestic industries. This could lead to further localization of supply chains and a focus on building resilient and self-sufficient economies.

However, global trade policies are subject to change, influenced by political shifts, economic pressures, and technological advancements. Businesses must stay agile and informed, ready to adapt to new trade policies and market conditions.

Read more about our advisory & strategy expertise

References

    Ready to talk to our experts?


    The insights provided in this article are for general informational purposes only and do not constitute financial advice. We do not warrant the reliability, suitability, or correctness of the content. Readers are advised to conduct independent research and consult with a qualified financial advisor before making any investment decisions. Investing in financial markets carries risks, including the risk of loss of principal. Past performance does not guarantee future results.

    The views expressed herein are those of the author(s) and do not necessarily reflect the company's official policy. We disclaim any liability for any loss or damage arising from the use of or reliance on this article or its content. ARC Group relies on reliable sources, data, and individuals for its analysis, but accuracy cannot be guaranteed. Forward-looking information is based on subjective judgments about the future and should be used cautiously. We cannot guarantee the fulfillment of forecasts and forward-looking estimates. Any investment decisions based on our information should be independently made by the investor.

    Readers are encouraged to assess their financial situation, risk tolerance, and investment objectives before making any financial decisions, seeking professional advice as needed.