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.
China’s sensitive goods list is on pages 115-126 and it makes for interesting reading. The product lines it will continue to levy tariffs on include:
- Coconut juice
- Engines for vehicles
- Light diesel oil
- Paper and paperboard
- Particle board
- Tankers, crude oil and gas
- Trucks, truck parts
- Wood veneers
Among the Asean countries, Singapore has the shortest list of sensitive goods – just one tariff line on medicated samsoo products. The other Asean Six members have even longer lists than China, particularly Indonesia and the Philippines.
About 90% (in terms of value) of all goods produced in Asean and China can now start entering each other’s markets tariff-free. The list is on Annex 1 of the free trade agreement and can be downloaded here.
For China, the long list of products that will no longer be subject to tariffs if they originate from Asean countries include:
- Citrus fruit
- Coffee, roasted and decaffeinated
- Cross country cars (four wheel drive)
- Cucumbers and gherkins
- Ethyl alcohol and other spirits
- Fuel oil No.5-No.7
- Passenger vessels, motorized not motorized
- Petroleum oils and oils not obtained from crude
- Pneumatic tyres
- Vegetable fats and oils and their fractions
To be granted tariff-free or reduced tariff access, the product must originate from Asean and/or China, meaning that at least 40% of its local content must come from Asean and/or China. Exporters are required to obtain a Certificate of Origin Form E from the relevant agency in the country where they operate.
Is it that simple? Not really. Controversially, Indonesia, the new free trade area’s second most populous country after China with 228.2 million people, wrote its Asean partners days after the agreement came into force to request a delay for one year, to January 1, 2011. “I don’t know why they are complaining only now,” says a mystified Severino.
It may be a political gesture. Some in Indonesia have charged that the government failed to consult them. “We’re totally unable to compete [with Chinese manufacturers] and we’ll have to close our factories,” Sofjan Wanandi, chairman of the Indonesian Employers Association, told the Wall Street Journal.
Indonesian lawmaker Airlangga Hartarto told the AFP news agency 12 sectors will be badly hit in his country, among them textiles, petrochemicals, footwear, electronics, steel, auto parts, food and drinks, engineering services and furniture. “For example, a local sack for sugar, rice and fertilizer costs about 1,600 rupiah (US$1.70) each,” he says. “A Chinese sack costs about 800 rupiah.”
However, no one really expects the Indonesians to get their way. “An Asean endorsement of Indonesia’s request for a one-year delay in treaty terms no in effect is extremely unlikely,” according to the Journal, “as that would need to be agreed by all 10 member governments.”
But There are worries about other barriers to trade. “The tariff barriers may have been lowered, but there may be other transaction costs such as poor corporate governance that may make the [free trade agreement] less significant,” Dr. Tan Khee Giap, chairman of the Singapore National Committee for Pacific Economic Cooperation, was quoted in the Straits Times as saying.
There are also cultural challenges. Exporters must take into account the tastes and expectations of the target market and may need to reformulate and redesign their products to meet local requirements. And Asean companies looking at China must realise that the vast country of 1.3 billion people is not just one consumer market, but a collection of geographic and socio-economic markets, each with unique product, marketing and distribution expectations.
The Shape of Things to Come
Still, it is short-sighted for any company in Asean or China to ignore the new free trade area. Like it or not, every manufacturer needs to take into account the overseas factor in its long-range planning. Even if it does not intend to export or invest abroad, foreign competitors and products will almost certainly challenge it in its home market.
- business services such as computer related services, real estate services, market research, management consulting;
- construction and engineering related services;
- tourism and travel related services;
- transport services; educational services;
- telecommunication services;
- health-related and social services;
- recreational, cultural and sporting services;
- environmental services; and
- energy services
The Asean-China Investment Agreement
was signed in August last year. It covers investment in areas such as movable and immovable property, portfolio investment, intellectual property rights and business concessions. The two sides promise to strengthen promotion and facilitation of investment through:
- joint investment promotion activities;
- business matching events;
- seminars and briefings on investment opportunities;
- simplifying procedures for investment applications and approvals;
- promoting the dissemination of investment information, including investment rules, regulations, policies and procedures; and
- establishing one-stop centres to provide advisory services to the business sectors including facilitation of operating licences and permits.
Everything is still a work in progress. But the Asean-China Free Trade Area is already a reality. And companies in the world’s most populous FTA will do well to take the dreams and aspirations of some 2 billion people seriously.
About the Author
Cesar Bacani is senior consulting editor at CFO Innovation.