Asean-China Free Trade: How to be a Winner

by Cesar Bacani, 01 February 2010

topics:
Budgeting and Planning Management

tags:
Asean Six Brunei Cambodia China free trade goods Indonesia investments Laos Malaysia Myanmar Philippines services Singapore tariffs Thailand Vietnam

It’s a fantastic idea – on paper. The Framework Agreement on Comprehensive Economic Co-operation between Asean and China will establish a free trade area for most goods made in China and the ten-member Association of Southeast Asian Nations – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Singapore, Philippines, Thailand and Vietnam. It will also improve market access for trade in services, including those related to computers, real estate, construction and tourism.

The agreement aims to create a consumer and business market that is the world’s most populous ever, with a combined population of nearly 2 billion people (that’s a third of humanity). In terms of trade volume, the Asean-China pact will form the globe’s third-largest free trade area after the European Union and North America’s NAFTA as of today – and possibly earth’s biggest over time.

The Asean-China Trade in Goods Agreement came into effect on January 1 this year, which means that 90% of the products traded between China and the Asean Six – Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand – will no longer be levied any tariffs. Cambodia, Laos, Myanmar and Vietnam have until 2015 to follow suit.

The remaining 10% of products have been placed on a ‘Sensitive Track,’ with each country allowed to include 400 to 500 tariff lines on the list. Tariffs on goods designated as ‘sensitive’ will be reduced to 0-5% by 2018 (for China and the Asean Six) and 2020 (for the rest of Asean); tariffs on goods designated as ‘highly sensitive’ will be reduced to not more than 50% in 2015 and 2018.

Gauging the Impact

What does all this mean for businesses (and their CFOs) in Asean and China? Quite a lot, in fact. Companies that focus primarily on the domestic market may find themselves competing with imported goods, particularly from China. But manufacturers that sell abroad may find new outlets for their products in China.

It’s still too early to say who the corporate winners and losers are going to be under the landmark pact. “Keep in mind that with these agreements, they have to be actually used by traders and investors,” Rodolfo Severino, former Asean secretary-general and now head of the Asean Study Centre, told Singapore’s Straits Times. “If they’re not used or not used properly, they won’t have much effect.”

But there are many things that companies in Asean – and those in China – can do now to make sure they will be one of the winners. The most basic step is to find out whether your product lines are considered sensitive and therefore will be protected from imports at least until 2018.

If you do not export to other Asean countries and China, having your goods designated as sensitive works to your relative advantage, since you need to worry only about local competition at this time. But if you are an exporter and your products are in the sensitive list, the free trade agreement does not benefit you at all, since you will still be at a disadvantage compared with local manufacturers.

‘Sensitive’ Goods

What are these sensitive products? The list is in Annex 2 of the Asean-China Free Trade Agreement, which you can download here.

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