Free trade agreements in Asean and beyond – a key to attractive business perspectives

published on November 8, 2018 / reading time approx. 6 minutes
 
​While a global trend in protectionism could be seen in the last years, we gladly observe some different approaches in the Asia/Pacific region. The Association of South East Asian Nations ASEAN, comprising the member states Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, is continuously growing in importance for European entrepreneurs as an attractive regional alternative or complement to business activities in China and India. This trend is reflected by an increasing number of regional and bi-lateral Free Trade Agreements (FTAs).


 

To sustainably boost external trade relations, low customs levels and reduced tariff barriers are an effective means to facilitate a cost-effective trade in goods between the countries involved. This is where FTAs come into play, by giving room e.g. for a cutback of customs duties for specific products as well as for further trade and investment barriers being reduced on an intergovernmental basis. The complexity of the existing global FTAs with different ranges and characteristics represents quite a challenge for many entrepreneurs planning an investment in foreign markets. It is well worth the effort though to thoroughly follow up on relevant FTAs, as they offer significant potential not only with regard to the cost-price-effectiveness, but also in terms of gaining and securing market shares.

 

The European Commission expects close to 90 % of the worldwide demand for goods to be met outside the EU in the years to come. This represents an immense potential ahead for European entrepreneurs. Despite the resolution passed during the WTO summit in Bali in December 2013, fostering the conception of global trade agreements, specific bi- or multilateral free trade agreements remain on the rise.
 

The ASEAN region has been particularly active in this regard, by concluding for instance the ASEAN-China Free Trade Area in 2010. ASEAN is thus currently holding FTAs with 6 countries (Australia, China, India, Japan, New Zealand and South Korea). This so-called ASEAN+6 Free Trade Zone considerably strengthens the region´s economic weight on the global scale. In 2017, another FTA has been signed with Hong Kong, which is expected to enter into force in 2019, subject to completion of the necessary procedures. The next step on the agenda will be the conclusion of the Regional Comprehensive Economic Partnership (RCEP) negotiations which were initiated in November 2012. RCEP is supposed to substantially intensify the economic cooperation between ASEAN and Australia, China, India, Japan, New Zealand and South Korea. The quantitative target of RCEP is the elimination of import duties for around 90% of all goods.
 

Negotiations for a region-to-region FTA between the EU and ASEAN were launched in 2007 and stalled in 2009 for political reasons. Meanwhile, several bilateral FTA negotiations have been initiated which are conceived as building blocks towards a future region-to-region agreement. The resumption of the abandoned multilateral negotiations is envisaged.
 

Bilateral agreements between the EU and Asean members

Malaysia

Negotiations regarding a bilateral EU-Malaysia FTA have been started in October 2010. After the 7th round of negotiations in 2012, proceedings have come to a stop at the request of Malaysia. A stocktaking exercise was conducted in 2016/17 to assess the potential to revive negotiations; up to now the new Malaysian government has not yet taken a position concerning the resumption of negotiations.

 

Singapore

In October 2014, the EU and Singapore finalized their negotiations of 4 years and jointly concluded the EU-Singapore Free Trade Agreement. Since then, ratification proceedings are pending. In 2015, the EU Commission requested an opinion from the EU Court of Justice, as to which provisions of the EUSFTA shall fall within the EU's exclusive or shared competences, and which shall remain within the exclusive competence of the Member States. On 16 May 2017, the Court of Justice opined that the agreement also covered shared competences, particularly in the investment chapter. In conclusion, further negotiations between the Commission and Singapore led to the splitting of the EUSFTA. In 18th April 2018, the Commission presented two agreements to separately cover trade issues and investment protection. The entry-into-force of the FTA is scheduled for 2019.

 

Thailand 

Thailand is determined to intensify its global trade relations by concluding further FTAs. The country has already woven a dense net of bilateral FTAs which are complemented by several regional FTAs concluded through the ASEAN Association of South East Asian Nations. Top priority is now conceded to the EU and to the Regional Comprehensive Economic Partnership. Negotiations for a Thai-EU agreement have been officially launched in March 2013, the declared objective comprising a full range trade agreement covering customs duties, non- tariff trade barriers as well as further trade relevant aspects like services, investments, public procurement, intellectual property, regulations, competition and sustainability. Pioneered by the decision of the EU Foreign Affairs Council in Brussels in December 2017 to resume the political relations with Thailand at all levels – after these relations had been frozen amid the military coup in May 2014 – general preparations for resuming negotiations with the EU are underway. However, a return to negotiations may probably be expected only after the next elections, which might be in the first half of 2019.

  

Vietnam

The negotiations between the EU and Vietnam started in October 2012 and were concluded in December 2015. The final text was agreed in June 2018. Besides the elimination of over 99% of all tariffs, the agreement also covers non-tariff barriers and other trade related aspects such as public procurement, regulatory issues, competition, services, investment, intellectual property rights, and sustainable development. The Commission recently translated the text of the trade agreement into the other 22 EU official languages and launched the legal review of the investment protection agreement. The Commission will then make a proposal to the Council of Ministers for signature and conclusion of the agreements. Subsequently they will be sent to the European Parliament. The investment protection agreement with Vietnam will follow its ratification procedure also at Member State level. Being Vietnam´s most important trade partner within the EU, Germany appreciates the successful conclusion of the negotiations. The new FTA prepares the ground for German products to smoothly access the continuously growing Vietnamese market. As a result, existing jobs in Germany may be preserved and new jobs will be created. At the same time, Vietnamese goods will as well gain better access to the German market.

 

The EU officially launched negotiations with the PHILIPPINES in December 2015 and with INDONESIA in July 2016. While the fifth round of negotiations with Indonesia has been conducted in July 2018 (the sixth round being scheduled for October), the second round with the Philippines had already taken place in February 2017, with no further progress since then due to political reasons.

  

Asean-China free trade area

The conclusion of the ASEAN-China Free Trade Area (ACFTA) created an economic zone with 1.9 billion people, and a most attractive hub for investors and trading companies. Until recently, many German entrepreneurs used to consider the People´s Republic of China mainly as an extended workbench. Prompted by the ongoing currency devaluation of the Euro vis-à-vis the Chinese Renminbi (RMB), rising wages in China, bureaucratic barriers and the fact that modern just-in-time production requires shorter delivery routes, a growing number of companies started to put their traditional production and sales routines to the test. Besides considering to increasingly supply the South East Asian market from China instead of Germany, these reflections also comprise the establishment of regional logistic centers to benefit from the FTA.

 

In 2010, China and the ASEAN 6 states (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) agreed upon eliminating 90 % of all customs duties. Since then, the import duties for these nations are ranging between 0 % and 5 % on agricultural products. The four economically less developed ASEAN members Cambodia, Laos, Myanmar and Vietnam (CLMV) succeeded in pushing through interim solutions in their favor. These expired in 2013 for Vietnam, followed by Laos and Myanmar in 2015, leaving these countries with a maximum of 5 % of customs duties on agricultural products as well. As of 2017, these regulations are also valid for Cambodia. In general, exemption of duties has been agreed upon for all other goods, with a couple of exceptions like e.g. for rare earths (China) and – being of significant importance for the German machinery and engineering industry – also for the automotive sector. These exemptions, however, are scheduled to be successively eliminated by the end of 2018. As a result, exemption of duties is currently already granted on approx. 99 % of all goods, which means that 9,400 products may be traded free of duties between China and the ASEAN member states. Caution is still required with regard to the persisting non-tariff barriers like e.g. specific import or clearance certificates which have to be submitted. These requirements definitely need to be taken into consideration upon planning the supply chains.

 

The ACFTA stipulates a joint commitment of all participating nations to continuously develop market liberalization. For the time being, the main focus is set on a free movement of goods, while free movement of capital and services have barely been affected yet; this continues to affect foreign direct investment.

The FTAs have a considerable commercial and economic impact. Companies exporting their products into ASEAN countries face an intensified competition, as the national import duties on finished products persist. Companies may only benefit from preferential tariffs if they generate local content of at least 40 %. German manufacturers producing in ASEAN and thus generating the required added value, may increasingly benefit though from the agreed reduction of import duties. On the one hand, they may tap new sales markets in China for products manufactured in the ASEAN member states. On the other hand, they benefit from reduced procurement costs for raw and ancilliary materials from China for manufacturing activities in ASEAN.

 

When planning a new site or distribution warehouse, it is of major importance to not only assess tax issues, but to also carry out a detailed customs analysis. For example, a company which does not exclusively plan to export goods from China into ASEAN might consider establishing a bonded warehouse in Hong Kong. Hong Kong does neither levy import sales tax nor customs duties, thus offering a chance to import and export goods incurring a minimum administrative burden. Caution though: Repacking the goods may result in losing the entitlement to preferential tariffs.

 

Furthermore, the accounting procedures need to be thoroughly checked. If customers in the ASEAN region have been supplied by the German mother company so far, these existing supply chains may not be modified offhand. This may result in the German fiscal authorities recognizing a relocation of function which is subject to additional taxation in Germany. Additionally, it needs to be verified that the German parent company does not become subject to add-back taxation in Germany upon installing a distribution company in a country with low taxation – which does not only refer to Hong Kong and Singapore but also to various other ASEAN nations. Finally, it needs to be checked whether transfer pricing is adapted and consequently has to be documented in a transfer pricing study.  Doing business in full consideration of the ACFTA is quite complex and requires a diligent planning and management to result in successful business operations. It is definitely worth the effort though, as reduced import duties may have a considerable and immediate impact on the profit margin.

 

Asean-India free trade agreement

The intensified economic cooperation between India and ASEAN aims at creating a variety of advantages for investors. Thanks to its reduced customs duties, India may e.g. serve as an attractive manufacturing location. The Framework Agreement on Comprehensive Economic Cooperation between India and the ASEAN confederation has been signed in October 2008. Thereupon, the ASEAN-India Free Trade Agreement (AIFTA) has been concluded in August 2009 in Bangkok, entering into force on 1st January 2010. The AIFTA comprises a market of 2 billion people and stipulates the successive elimination of customs duties on more than 4,000 product groups, covering e.g. the electronics, chemical, machinery and textile industry. Main objective of the AIFTA is the strengthening of a sustainable economic integration and cooperation between India and the ASEAN nations.

 

The AIFTA provides for every signatory country, in accordance with the “General Agreement on Tariffs and Trade” (GATT), to treat goods originating from other contracting nations in exactly the same way as applicable for domestic goods, with putting imported goods at a disadvantage by applying national tax or other provisions being prohibited.

 

The AIFTA further stipulates a successive reduction of customs duties for goods from the contracting nations. The exact schedule is laid down in the “Schedule of Tariff Commitments”, distinguishing 5 product categories with different regulations applicable for the corresponding liberalization of customs duties. For “Normal Track” goods, a permanent tariff rate of 0 % will be achieved by 31st December 2019. Moreover, for “Sensitive Track” goods a tariff rate of 5 % will be achieved by 31st December 2019. This tariff rate will only be maintained for 50 product groups out of this category. For all other product groups the tariff rate will be further reduced to 4.5 %. The “Special Products” category only refers to the genuine Indian product lines of palm oil, coffee, black tea and pepper. By 31st December 2019, applicable tariffs will be reduced by an average 50 %. Also by 31st December 2019, tariffs in the “Highly Sensitive List” will be reduced by 25 – 50 %. Finally, goods stated on the “Excluded List” are exempt from the general reduction of tariffs. Nonetheless, relevant tariffs will be verified on an annual basis in order to provide for an ease of market entry.

 

The AIFTA comprises detailed regulations as to how the origin of products and thus their entitlement to preferential tariffs shall be determined. Export goods that have been entirely manufactured in one of the contracting countries are automatically entitled to the benefits of the AIFTA. Goods with an added value of at least 35 % generated in an AIFTA member country (AIFTA Content), are equally eligible for the agreement´s conditions. The AIFTA contains detailed regulations and formulas for the determination of the AIFTA Content, also comprising guidelines for the calculation of the ex-works price. The determination of origin has to be documented in a “Certificate of Origin” issued by the relevant national authority of the exporting country.

 

Sectors that are most likely to benefit from choosing India as manufacturing location for products to be exported into ASEAN nations (including advantages arising from importing raw material from ASEAN) are steel, chemicals, medical and pharmaceutical products, textiles, clothing, gems/jewels, arts and craft, carpets and special machinery. The sectors machinery as well as equipment and electronic devices are likely to benefit from AIFTA upon the export of goods that have been manufactured in ASEAN to India. An additional FTA for the movement of services and capital has only recently been signed between India and the ASEAN nations. The details of implementation are currently being negotiated between the contracting partners. The agreement holds a significant potential with regard to the cross-border application of India´s considerable resources in the field of services.

 

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