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Talking Trade blog

Using RCEP: High-tech electronics manufacturing

Published 31 March 2021

During its National People’s Congress in early March, China was among the first signatories to ratify the Regional Comprehensive Economic Partnership (RCEP). The Chinese government encouraged other signatories to swiftly ratify the groundbreaking agreement that ties 15 Asia-region economies to enable trade and integration. In all, RCEP stands to eliminate as much as 90 percent of tariffs over 20 years between its members that account for nearly 30 percent of world GDP.

The agreement will enter into force once at least six ASEAN and three non-ASEAN signatories undergo their respective ratification processes.  The target date for launching RCEP is the start of 2022.

The electronics industry is one where RCEP stands to make a meaningful impact. In most cases, trade in consumer electronics is already tariff-free thanks to the World Trade Organization’s Information Technology Agreement (ITA), enacted in 1996 and updated in 2015.

The ITA and ITA2 has provided duty or tariff-free access to a wide range of listed electronics products.  It has helped underpin today’s digital economy as the agreement lowered costs for everything from laptops to mobile devices.

While the agreements dropped tariffs on (mostly) final products, the inputs for these goods received fewer benefits.  Many tariffs remain in place, adding a substantial burden to the countries and companies that manufacture high-tech consumer electronics.

Nowhere is this more apparent than in East Asia, where RCEP signatories South Korea and Japan have not always seen eye-to-eye on trade issues. Driven in part by historical grievances, no prior Japan-South Korea Free Trade Agreement (FTA) is in place an outlier in the Asia region, which is otherwise awash with trade agreements.

Despite an ongoing diplomatic spat, Japan and South Korea remain deeply economically intertwined, as South Korea is Japan’s third largest trading partner. By the time of full implementation, RCEP will eliminate duties from 92 percent of Japanese goods exported to South Korea up from the 19 percent that currently enjoy duty-free access.

Though pre-existing agreements like the ITA have already eliminated most tariffs on final consumer goods, RCEP still stands to benefit the consumer electronics industry in the region. While consumer electronics are often assembled for the final consumer in factories in China, individual components might come from places like South Korea, Japan and ASEAN. Components themselves may be largely tariff-free, but this is not necessarily true of the hugely expensive inputs necessary for their production.

An example can be found in flat display screen manufacturing equipment. Many of the world’s liquid crystal display (LCD) and next-gen organic light emitting diode (OLED) devices are manufactured in East Asian cleanrooms. LCD and OLED devices are semiconductor technologies used in modern display screens everywhere from laptops to smartwatches to fridges.

South Korean display manufacturers, like Samsung and LG display, have handily cornered the cutting-edge screen market, manufacturing displays for the largest electronics producers. In 2020, South Korean display manufacturing accounted for 37 percent of the global total, though market share has been decreasing over the past few years. Despite producing far more display screens than anywhere else, South Korea relies on expensive and imported high-tech manufacturing equipment to maintain its dominant position.

In 2019, South Korea imported 72 percent of its flat panel display manufacturing equipment from Japan. LCD and OLED manufacturing is, to put it simply, extremely complex. In addition to requiring a highly-skilled workforce and innovative ideas, companies need the appropriate machinery classified under the Harmonized System (HS) code 8486.30.  

Manufacturing equipment used in high-tech processes that involve heating materials at high temperatures and pressures using technologies like photon beams and ultrasonic cleaners is not included under ITA or ITA2.

Japan is a clear market leader in the export of high-tech semiconductor and screen manufacturing equipment. Globally, Japan accounts for 52 percent of total flat panel display manufacturing equipment exports, although it contributes just 4 percent of actual display manufacturing. Major Japanese manufacturers like Canon, Tokki and Horiba rely on exports to display screen-producing countries like South Korea.

But until RCEP is implemented, South Korean tariffs will remain between three and eight percent for imports of Japanese display screen manufacturing equipment under HS 8486.30. When RCEP kicks in, these tariffs will fall to zero by the tenth year of the agreement.

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Building facilities for display screen manufacturing is extremely expensive given the high barriers to entry from obtaining the necessary intellectual property (IP) and manufacturing equipment to recruiting highly skilled labour. In the high-tech manufacturing industry, where innovation and intense competition are commonplace, tariffs on any input especially one as important as the manufacturing equipment itself can quickly make a lucrative business non-viable.  

Competitors from other major display manufacturing countries like China and Taiwan already enjoy tariff-free imports of high-tech manufacturing equipment. For China, in particular, this is despite a similar lack of an existing FTA with Japan. This may explain why South Korea has seen a declining share of the screen manufacturing market over the past five years.

As South Korea’s tariffs on high-tech manufacturing equipment fall to zero under RCEP, the country’s display manufacturing industry and downstream consumer electronics industries can remain competitive in an increasingly crowded industry that rewards innovation.

But it is not only South Korean and Japanese manufacturers that will benefit from the reduced tariffs. As consumer electronics supply chains have increasingly integrated regional supply chains, RCEP stands to benefit its signatories through facilitating trade. This will not only benefit existing tech manufacturing centres like China, but also emerging electronics-producing economies in ASEAN like Vietnam.

Though at first glance RCEP appears to do little for an already low-tariff industry like consumer electronics, eliminating tariffs on the inputs for manufacturers stands to make a meaningful impact. Regional trade agreements like RCEP can deliver often unexpected opportunities, even in sectors that appear to have minimal benefits.

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