An Empirical Study on the Impact of Tariff Reduction on China’s Textile Industry under the Background of RCEP

1.1 The Purpose and Motivation of the RCEP

The RCEP, known as the Regional Comprehensive Economic Partnership, was initially initiated by the ten ASEAN countries in 2012, and later invited China, Japan, South Korea, India, Australia, and New Zealand to join them. It is a regional economic integration cooperation led by ASEAN. The purpose is to establish a unified large market of 15 countries by reducing tariff and non-tariff barriers to promote economic development in the region.

The RCEP is based on WTO rules and higher-level free trade agreements. The RCEP agreement covers a large area, including the 15 members covering the world’s second and third largest economies, covering an area of 22.51 million square kilometers, covering 2.3 billion people, and accounting for about 30% of the total global population. In 2020, the total GDP of RCEP members will reach 25.86 trillion US dollars. The signing of the RCEP marks the establishment of the world’s most populous, largest free trade zone with the most development potential, where about one-third of the world’s economy will become an integrated market, which will be a major change for the global economy.

For a long time, the European Union and the North American Free Trade Area have played significant roles in regional free trade. The establishment of RCEP will occupy an important position in the future development of economic globalization, with its agreement members covering most parts of the Asia–Pacific region. Faced with a vast and fragmented market, RCEP integration and the emergence of the Asia–Pacific market have streamlined 15 scattered and disorderly trade rules, while also balancing the global strategic position of the Asia–Pacific economy.

1.2 The Main Content of the RCEP

The RCEP agreement covers a wide range of contents, including market access for goods trade, market access for services trade, and other market access provisions, as well as trade facilitation, intellectual property, e-commerce, economic and technical cooperation in 20 chapters. The main goal of the RCEP State parties is to jointly establish a modern, comprehensive, high-quality, and mutually beneficial economic partnership and cooperation framework to promote economic growth within the region and contribute to global economic development. Chapter II of the agreement provides detailed provisions on goods trade and includes modifications to tariffs, market access, and import licensing. Chapter IV puts forward relevant administrative measures for customs procedures and trade facilitation. Chapter VI strengthens the implementation of the WTO Agreement on Technical Barriers to Trade among member states and reaches an understanding of technical regulations and standards of countries within the region.

Textile industry covers a wide range of tariffs, for example, the most direct result is that our country-to-Japan export costs greatly reduced, originally Japan imposed 8–11% of the textile and garment products tariffs, RCEP after part of the goods, the main export clothing products will gradually reduce to zero tariffs. This series of adjustments is very conducive to industrial upgrading and transformation and the optimization of resource allocation.

1.3 Import and Export Trade Scale of China’s Textile Industry

The textile industry is a traditional pillar industry in China. It plays an important role in safeguarding foreign exchange reserves, adjusting international balance of payments, maintaining exchange rate stability, addressing employment issues, and improving people’s livelihoods. Since ancient times, China has been using wild materials to produce rough and simple clothing. With the influence of reform and opening up, the modern textile industry joined the WTO. China has become one of the most prominent countries in the global textile field. In 2019, China’s textile exports accounted for nearly two-fifths of the global total. According to the statistics of Figures 1 and 2, the results show that in recent years, the import and export scale of textiles and garments is stable, and China’s textile industry occupies an important position in the world textile industry.

Figure 1

Statistical table of China’s textile industry (Source: China Free Trade Zone Service Network http://fta.mofcom.gov.cn/).

Figure 2

Export statistical table of China’s textile industry (Source: China Free Trade Zone Service Network http://fta.mofcom.gov.cn/).

Due to the global spread of COVID-19 in 2020, the global textile industry has been affected to a certain extent, but according to the customs data, the export trade of China’s textile industry shows a positive growth trend. As shown in Figure 3, in April, after the epidemic was first controlled in China, the export growth rate of China’s textile industry rose rapidly, driven by epidemic prevention materials, which brought recovery to China’s textile industry after the epidemic. According to the statistics of the Ministry of Commerce, in 2020, China exported 224.2 billion masks, worth more than 50 billion US dollars, accounting for 34% of the total textile exports; 2.31 billion protective clothing, worth more than US $6 billion.

Figure 3

Statistical table of national textile industry export trade in 2020 (Source: China Free Trade Zone Service Network http://fta.mofcom.gov.cn/).

Other RCEP member states have always been important trading partners of China and have close trade cooperation in the textile industry. Figure 4 shows that in 2019, China imported textile and garment from other RCEP countries to US $12.07 billion, which is 47.4% of China’s total textile and garment imports. China’s exports of textiles and garments to RCEP countries reached $76.19 billion, accounting for 27.1% of China’s total textile and garment exports.

Figure 4

Statistical table of textile and garment import and export trade between China and other RCEP countries in 2019 (Source: China Free Trade Zone Service Network http://fta.mofcom.gov.cn/).

1.4 Adjustment of Tariff and Non-Tariff Measures under the RCEP Agreement

The RCEP agreement adjusts tariff and non-tariff measures, two of which are zero tariffs for more than 90% of the trade in goods in the region and reduce unnecessary technical barriers in the region to achieve trade facilitation. As shown in Table 1, the proportion of products between China and RCEP member countries.

The signing of the RCEP agreement makes the first free trade agreement between China and Japan. China has been the main source of textile and garment imports for Japan for a long time, so the textile tariff reduction measures between China and Japan will have a great impact on China’s textile industry. As shown in Table 2, the tax reduction ratio of related textile products in Chapters 1150–1163 of the HS code between China and Japan.

ASEAN is the initiator of the RCEP agreement, and in recent years, it has undertaken a large number of labor-intensive industries in China’s textile and garment industry. The implementation of measures related to the RCEP agreement will further promote the multi-party cooperation between ASEAN and China. As shown in Table 3, it is the tariff reduction of China on the ASEAN textile industry under the RCEP agreement.

In terms of exports, in 2020, China exported textiles and apparel worth $78.06 billion to 14 RCEP member countries, a year-on-year increase of 6.1%, accounting for 26.4% of China’s total textile and apparel exports. Among the ASEAN ten countries, they represent China’s third-largest market for textile and apparel exports and the largest market for textile exports. Japan is China’s fourth-largest market for textile and apparel exports. In terms of individual countries, three RCEP members, namely Japan, Vietnam, and South Korea, are among China’s top ten export markets.

Regarding imports, in 2020, China imported textiles and apparel worth $10.43 billion from 14 RCEP member countries, a year-on-year decrease of 6.7%, accounting for 44.1% of China’s total textile and apparel imports. Among the ASEAN ten countries, they represent China’s largest source of textile and apparel imports. Japan is China’s third-largest source of textile and apparel imports. In terms of individual countries, five RCEP members, namely Vietnam, Japan, South Korea, Indonesia, and Malaysia, are among China’s top ten import sources.

3.1 Introduction of the GTAP Model

The empirical approach used in this article is the general model – GTAP model – and the GTAP (Global Trade Analysis Model) was developed by the Global Trade Analysis Program led by Professor ThomasW.Hertel of Pulton University.

The GTAP model is an international trade model designed based on the neoclassical economic theory and the general equilibrium theory. At the same time, the data in the model adopt the economic and trade data of various countries and industries around the world, which is more practical.

In the GTAP model, countries, firms, and private entities are considered “rational,” with input–output in equilibrium. Firms aim to maximize cost and profit, while private enterprises seek to maximize utility (Xue, 2017). The GTAP model establishes sub-models for the production, consumption, and government expenditure of each country (region), forming a general equilibrium model with multiple countries and sectors. The model assigns certain impact intensities to relevant variables and solves the model to obtain changes in production, trade, GDP, prices, social welfare, and other economic and trade indicators for different regions under different policy impacts. This model is commonly used for ex-ante prediction analysis or post-impact analysis of trade policies, tax policies, and energy policies. This article also examines the impact of RCEP trade policies on policies. Since RCEP has just been successfully signed, many measures have not yet been implemented. Therefore, this article belongs to RCEP predictive analysis and is suitable for empirical research using the GTAP model.

3.2 Model Construction Method

3.2.3 The GTAP Model Structure

The GTAP model assumes that the market is a fully competitive market, and the scale return of production remains unchanged. Under this assumption, the producer minimizes the production cost and maximizes the consumer utility, and all products and input factor markets are cleared (Li, 2017). At the same time, each country has only one account, and all the income from taxes, financial assets, capital, and labor income accumulate (regional sector in Figure 5). Suppose the country or the region of the country or region of the private sector and government spending and savings, savings into a virtual global bank, the bank decides to allocate investment flows, private expenditures, and government expenditures to two separate departments responsible for purchasing domestic products and importing foreign products, respectively. Product sales are divided into domestic and export two departments. The income in the account is divided into three parts: private consumption, deposit, and government consumption. The equation for private expenditures uses the fixed difference elasticity (constant difference of elasticity, CDE) utility equation. The utility equation of the government adopts the Cobb-One-Douglas equation:

U = A X α Y 1 − α

where U is the utility, A is the technical level parameter, X and Y are the product, and α is the share of X income in U.

Figure 5

The GTAP model structure.

GTAP model has a good effect on quantitative analysis of policies. With the continuous improvement of China’s international status and the continuous development of global economic integration (Sang, 2020). Using the GTAP model to analyze China’s foreign trade development is significant. Based on the tariff reduction and non-tariff reduction policies in the RCEP agreement, this article takes the Chinese textile industry as the research object to simulate and analyze the impact of RCEP on China’s textile industry.

3.3 Empirical Scenario Design

2020 is the year of the outbreak of COVID-19, and the economies of the world have been impacted to varying degrees. The establishment of the RCEP Free Trade Zone is in the context of the outbreak. In order to stimulate their own economic growth, compensate for economic losses during the pandemic, and gradually restore their economies, all countries have actively negotiated and signed the RCEP free trade zone agreement. According to Table 1, the average immediate tariff ratio between China and RCEP member states is about 60%, and in the RCEP agreement, countries will achieve free trade of goods through tariff reduction. Therefore, based on the different degrees of tariff reduction in the RCEP free trade agreement, this article sets a regional tariff reduction of 60 and 100% for free trade. In addition, reducing unnecessary technical barriers to trade in the region is also an important measure emphasized in the agreement. Therefore, this article also simulated a scenario where non-tariff barriers in the region are reduced by 10% on the basis of achieving free trade. There are a total of three simulated scenarios in the empirical study:

Scenario 1: A 60% reduction in tariffs on all goods among RCEP members.

Scenario 2: 100% reduction of free trade on all goods among RCEP members.

Scenario 3: Free trade among RCEP members, while non-tariff trade barriers among members fall by 10%.

Given the dynamic nature of global trade and economic policies, it is essential to anticipate potential impacts and outcomes of the RCEP before its full implementation. By conducting scenario simulations using the GTAP model, we can better understand the potential economic effects of the agreement under different circumstances. This proactive approach allows policymakers, businesses, and stakeholders to identify potential challenges and opportunities, thereby facilitating informed decision-making and strategic planning in anticipation of the RCEP’s implementation.

As the RCEP has only recently been successfully signed, many measures have yet to be fully implemented. Therefore, this article constitutes a predictive analysis of the RCEP and is equally suitable for empirical research using the GTAP model.

3.4 Theoretical Model

In the GTAP model, sub-models between countries worldwide are linked through a global external trade network, and bilateral trade between countries is connected via trade prices between the two nations. From a theoretical perspective, when tariffs are reduced among RCEP member countries, the post-tax prices (pms) of sectors within these countries change, and the equation for pms is as follows:

where pms represents the post-tax price of good i exported from country r to country s, tm is the import tax on good i in country s, tms is the import tariff on good i from country r to country s, and pcif is the CIF price of good i exported from country r to country s.

The tariff reductions among RCEP member countries lead to changes in pms, which in turn affect the bilateral trade volume qxs between RCEP member countries, as shown in equation (3.2):

Here, qxs represents the export trade volume of good i from country r to country s, ams represents non-tariff trade barriers for good i exported from country r to country s, qim is the import volume of good i in country s, ESUBM is the Armington import substitution elasticity, pms is the post-tax price of good i exported from country r to country s, and pim is the import price of good i in country s.

To further study the impact of RCEP member countries’ tariff reductions on China’s textile industry, this article focuses on shocks to import tariffs (tms) and non-tariff trade barriers (ams) within the GTAP model. On the one hand, the reduction in tms leads to changes in the post-tax prices pms, which then affect bilateral trade volume qxs through equation (3.2). On the other hand, changes in non-tariff trade barriers (ams) also directly stimulate changes in the bilateral trade volume qxs between RCEP member countries. Concurrently, the changes in bilateral trade between RCEP member countries directly impact China’s textile import and export trade, and thereby affect domestic economic and social welfare through changes in import and export trade volumes. Thus, this article explores the impact of RCEP tariff reductions on China’s textile industry’s import and export trade prices, volumes, output, and the domestic macro economy at different stages of the RCEP free trade agreement.

4.1 Analysis of the Impact of RCEP on China’s Macro Economy

In the initial stage of the establishment of the RCEP FREE Trade Zone, when commodity tariffs among RCEP members were cut by 60%, there was a certain resource agglomeration effect, capital began to transfer to RCEP members, and China’s investment also increased by 0.247% (Chen, 2021). At the same time, the sharp reduction in tariff and trade barriers among RCEP member countries has stimulated the development of foreign trade for each member nation. Therefore, China’s total import volume and total export volume showed a growth trend. China’s total import volume increased by 1.577%, the total export volume increased slightly smaller, and China’s total export volume increased by 0.962%. From the empirical results (Table 4), China’s export growth was less than the increase in imports, resulting in the decline of the domestic trade balance by $8.7686 billion. The resource agglomeration brought by the RCEP agreement is bound to stimulate the economic performance of the RCEP member states. Under the positive stimulus of export and investment, China’s real GDP increased by 0.058%. On the other hand, GDP grows by 0.04%, and private consumption in China also increases by 0.066% as the economy expands. Therefore, overall, the country’s overall social welfare has increased by $5.952.8 billion. Establish RCEP7 macroeconomic brought more positive stimulus, and with the further decline of tariff trade barriers, when all commodities between RCEP members after free trade, China’s economic indicators were affected more obvious, due to further growth imports trade balance fell further, and investment, total imports and exports, government spending, private consumption, actual GDP and the overall social welfare changes are further increased, establish RCEP free trade area to our macroeconomic has brought a more profound positive impact. When non-tariff trade barriers among RCEP member countries also begin to decline, the overall policy impact on China becomes more pronounced. Actual GDP increased by 1.335%, the total import volume increased by more than 10%, the total export volume increased by more than 6%, and the overall social welfare level increased by 148.9523 billion US dollars. It can be seen that when the RCEP agreement is further deepened, China’s macroeconomic development speed will also be further accelerated.

4.2 Analysis of the Impact of RCEP on the Import and Export Scale of China’s Textile Industry

4.3 Analysis of the Impact of RCEP on the Output and Price of China’s Textile Industry