Free Trade Agreements in Asia: A Progress Report

Transcription

1 VOL 4, NO 6 October 009 Free Trade Agreements in Asia: A Progress Report A number of Asian countries have been actively working toward conclusions of Free Trade Agreements (FTA s). India and South Korea concluded a pact in August, and this was followed by an ASEAN FTA with India. Further, ASEAN will be a complete Free Trade Area (AFTA) in 00, and customs duties between ASEAN and China as well as between ASEAN and South Korea will be eliminated, as agreed to in their FTA s. Progress with a number of FTA s with ASEAN is expected in the coming years. In this report, we review recent developments in Asian FTA s and the impact on Japanese companies. We also offer an overview of the issues involved in what is presumably the next step, an FTA structure covering all of East Asia.. The ASEAN-India FTA (AIFTA) () Outline On August, the Association of South East Asian Nations (ASEAN) and India signed the Trade in Goods Agreement, which forms the first substantive pillar of the ASEAN-India Free Trade Area (AIFTA). The pact is expected to take effect on January, 00, following individual approval procedures by the participating countries. The AIFTA will result in tariffs being lifted on 8 of goods (75% in terms of trade value) for both signatories, creating a giant economic zone of.7 billion people. Customs duties will be either eliminated or reduced according to graduated schedules, depending on the classification of the goods involved. Normal Track (NT, further divided into NT- or NT-) tariff line rates will be eliminated gradually. Sensitive Track (ST) tariff line rates will be reduced gradually to 5%, while Highly Sensitive List (HSL) tariff line rates will be reduced by a designated rate over 0 or more years. Tariff rates on Special Product List will be reduced by a set rate within 0 years (See Figure, Table ). According to the AIFTA tariff reduction schedules, 7% of customs duties on goods traded between India and five ASEAN countries (apart from the Philippines; Brunei, Indonesia, Malaysia, Thailand, and Singapore) will be gradually eliminated by the end of 0, in line with the NT- schedule. A further 9% of duties will be lifted by the end of 06 under the NT- schedule. Also, duties on the approximately 600 ST tariff line rates will be reduced to 5% by 06. India has designated five items highly significant to ASEAN as special products : crude and refined palm oil (CPO and RPO), coffee, black tea, and pepper. These goods will fall under a separate customs reduction schedule. India has also placed approximately 500 items including agricultural and fishery goods, textiles and apparel, and automobiles and automobile parts on an Exclusion List and tariffs will not be cut for those goods.

2 Normal Track (NT) Normal Track (NT-) Normal Track (NT-) Sensitive Track (ST) Figure :ASEAN-India FTA Tariff Reduction Schedule % + Tariff 5% Tariff Common 4% of the tariff lines placed in ST Highly Sensitive List (HSL) Category Category Category by end of 0 by end of 08 by end of 08 by end of 06 by end of 09 Cut to 5% by end of 06 by end of 0 Cut to 5% by end of 09 Cut to 5% by end of 0 up to 50 tariff lines at current rate (5%) Cut to 4.5% at implementation, then reduced to 4% by end of 06 Cut to 4.5% at implementation, then reduced to 4% by end of Cut to 4.5% at implementation, then reduced to 4% by end of 0 by end of 09 by end of 0 by end of 04 Cut to 5 by end of 09 Cut by 5 by end of 09 Cut by 5% by end of 09 Note : Schedules are: ASEAN 5 - India, Indian side for CLMV - India, Philippines-India, CLMV side for CLMV- India. ASEAN 5 is Brunei, Indonesia, Malaysia, Singapore, and Thailand. CLMV is Cambodia, Laos, Myanmar, and Vietnam. Note : Highly Sensitive List of goods applies only to Indonesia, Malaysia, Thailand, Philippines, Cambodia, and Vietnam among ASEAN countries. Tariff reduction shall be achieved by end of 0 for Philippines, and by end of 04 for Cambodia and Vietnam. Source Compiled by BTMU Economic Research Office from ASEAN Secretariat materials Table :India s Tariff Reduction Schedule for Special Products(SP) Tariff Line Base Rate AIFTA Preferential Tariffs (Not later than January) (%) end of 09 CPO RPO Coffee Black Tea Pepper Source: Compiled by BTMU Economic Research Office from ASEAN Secretariat materials Under the AIFTA rules of origin, a product must meet two criteria in determining place of origin: ) added value of 5% or more; and ) a change in tariff subheading (HS 6 digit level) i. Under FTA rules of origin, goods would ordinarily have to satisfy either the ) value added criteria, or ) the change in tariff subheading criteria. (The FTA often stipulates one of the two criteria initially or allows the parties to choose between the two.) However, India had sought stricter conditions. Even so, the AIFTA terms are considered relatively easy, compared to India s FTA s with

3 Thailand (only duties on 8 products under the Early Harvest Scheme will be lifted) and Singapore (both criteria, the change in tariff subheading plus value added of 4 or more). Further, the AIFTA preferential tariff rate will apply to products that meet the criteria of 5% or more cumulative value added within ASEAN relative to the free on board price (FOB price) of the final export good. () Background to the negotiations ASEAN and India agreed to an FTA Framework Agreement in October 00 and commenced negotiations in March 004. Initially, both parties aimed to start reducing tariffs in January 006 and subsequently eliminate tariffs for ASEAN member countries (excluding the Philippines) by the end of 0 and all remaining tariffs by the end of 06. However, negotiations stalled over the rules of origin and exemption goods, and a final agreement was not reached until August 008. The agreement was slated to be signed in December 008 and implemented in January 009, but the signing was further delayed because of political turmoil in Thailand cancelling international meetings and the Indian general elections. The FTA was ultimately delayed a full four years beyond initial plans. The parties will next focus on negotiations concerning trade in services and investment. The conclusion of an FTA with China (the Framework Agreement in November 00 and a Trade in Goods Agreement in November 004) encouraged ASEAN to pursue FTA negotiations with more nations outside the region. AIFTA is ASEAN s fifth FTA, following agreements with China, South Korea, Japan, and Australia and New Zealand. ASEAN has high hopes for the Indian market, its second biggest market after China. Meanwhile, FTA s are already underway between India and individual ASEAN member countries: Thailand (only early tariff reductions on 8 goods from September 004) and Singapore (concluded in June 005 and implemented in August of that year). While India is increasingly working toward concluding FTA s with the East Asian region, it has started to negotiate FTA s based upon its Look East Policy in order to counter China s growing influence in ASEAN and because of concerns about disadvantageous terms arising from East Asia FTA structures that exclude India. In addition to its FTA s with Thailand and Singapore, India also concluded an FTA with South Korea in August 009, and negotiations with Japan, Malaysia, and several South Asian countries are already underway. () Impact on Japanese companies Japanese companies active in ASEAN and India can expect expanded business opportunities because of AIFTA. As the India-Thailand FTA has already shown, Japanese companies that do not have production bases in India have more opportunities to enter the Indian market by exporting manufactured goods from production bases in ASEAN countries. Further, Japanese companies that do have production bases in India can benefit from lower procurement costs and offer a bigger product lineup by importing raw materials and manufactured goods from ASEAN bases. Thus, there will likely be more opportunities to restructure production and sales networks in ASEAN for India. India currently levies customs of 5- on many goods, and a major accomplishment of the AIFTA will be the lifting of duties on approximately 8 of goods over seven years after the FTA is implemented. That said, trade in some goods will not be liberalized or may be subject to different tariff reduction or elimination schedules automobiles and automobile parts are among the approximately 50 items in the Exclusion List on the Indian side. Further, some goods such as auto parts including airbags, some general electronic appliances such as air conditioners and fully-automated washing machines, textiles and apparel, and chemicals are on the Sensitive Track so individual items must be confirmed separately.. South Korea-India Comprehensive Economic Partnership Agreement () Outline South Korea and India officially signed a Comprehensive Economic Partnership Agreement (CEPA) on August 7, shortly before the ASEAN-India FTA. The CEPA will take effect January, 00. The agreement not only covers trade in goods, but more comprehensively addresses services and investment. India will end tariffs on 74.5% of imports (in terms of value) from South Korea within eight

4 years, and on a further % of goods within 0 years. However, the remaining 4.5% of imports including television cathode ray tubes and passenger vehicles will be treated as exemptions. South Korea will end tariffs on 84.7% of imports from India over eight years and gradually reduce tariffs on a further 5% of imports. The remaining 0.% of imports including agricultural products such as beef and pork and kerosene/light oil will be exempted. Like ASEAN and India s AIFTA, the South Korea-India CEPA require both rules of origin criteria tariff subheading change (HS 6 digits) and added value (5% or more) to be fulfilled. Furthermore, India considers 08 items produced in North Korea s Kaesong Industrial Complex as products of South Korea ii. The South Korea-India FTA is India s first FTA with a negative list in the area of investment, and performance requests are prohibited. The FTA does cover national treatment. Both parties will enjoy openness in services communications, business services (accounting, real estate, medical treatment, energy distribution, etc.), construction, distribution (excluding retail), advertising, leisure/culture, and transport services. Further, specialty service occupations, such as IT technical specialists, engineers, management consultants, and English instructors will also be opened mutually. There will likely be more opportunities for Indian skilled specialist workers to work in South Korea. Table :Korea-India CEPA Tariff Reduction Schedule Number of tariff lines (HS 6 digits) India of trade Import value of trade Number of tariff lines (HS 0 digits) (%, Mn USD) South Korea of trade Import value of trade Elimination of Tariffs,79 7.5, , , Immediately 0.9, , , Eliminated within 5 years , Eliminated within 8 years, Cut to -5% within 8 years Cut by 5 within 8 or 0 years ( ) Exceptions Total 5, , ,6 00.0, Note: India - Within 0 years; South Korea - Within 8 years. Source: Compiled by BTMU Economic Research Office from South Korea Ministry for Foreign Affairs () Background to negotiations and the impact on Japanese companies The governments of South Korea and India began FTA negotiations in March 006, and provisionally signed the agreement in February 009. India is South Korea s th largest trading partner in terms of trade value (exports plus imports), with USD9. billion of trade in 006. India was also South Korea s th largest recipient of direct investment (006). For India, South Korea was its th biggest trading partner (FY07) and target of direct investment (008). Neither India nor South Korea is an especially important trading partner for the other. That said, South Korea has high hopes for India s market growth, and it actively sought negotiation of an FTA in order to improve the business environment for South Korean companies operating in India and to capture future market share. In particular, the South Korea-India CEPA is expected to boost price competitiveness for automobiles, electronics, and iron and steel by cutting parts procurement costs. South Korean auto giants hold the second-biggest market share in India, and approximately of small car parts and the bulk of medium-sized car parts are imported from South Korea. These goods are subject to 4

5 import taxes of 0-.5%. Electronic parts are also taxed at a high rate of 5-. We think that any impact on Japanese companies will be limited. Most Japanese companies are more frequently procuring their parts tax-free either locally or from Thailand under the FTA. Also, South Korean automobiles and auto parts, which compete with Japanese goods, are either exempted goods or their tariffs will be lowered only over a long term; it is unlikely that there will be an impact in the near term. We expect that Japanese companies will be able to overcome any disadvantages that lie ahead once the ASEAN-India FTA and the Japan-India FTA (currently being negotiated) are implemented.. ASEAN-China FTA (ACFTA) ASEAN and China signed the ASEAN-China Investment Agreement on August 5, and the agreement is set to take effect on January, 00. The parties have already concluded a Trade in Goods Agreement (that took effect in July 005) and a Trade in Services Agreement (July 007), and the recent signing of the Investment Agreement concludes the series of negotiations between ASEAN and China since the Framework Agreement of November 00. China accounts for a mere.4% of all direct investment into ASEAN (as of 008). However, Chinese companies are boosting their investment in ASEAN under the country s Going Global Strategy (zouchuqu, also known as the Go Out Strategy ). The scale of ASEAN direct investment in China is also relatively limited, but investment has increased in recent years; in particular, Singaporean investment in China has surged through its government fund. China was Singapore s largest investment target in 008, with USD4.4 billion (.5 times the sum in 007) directed there, and protecting investors remains an issue. The recent investment agreement includes provisions not only for national treatment and most favored nation status, but safeguards and dispute resolution are also outlined in the event of forced expropriation by the government. The investment environment between the two signatories is expected to improve. The ACFTA Trade in Goods Agreement applies much more to agricultural goods than manufactured goods at present. This is because in addition to ) the current reduction in tariffs being small, ) of the goods traded between ASEAN and China, many are intermediate goods destined for export iii and are subject to non-fta tariff exemption measures (including exemptions for exports destined for export processing zones and bonding measures for manufactured export goods), and ) the tax rate for most-favored nations will be reduced after the FTA takes effect. Conversely, the most-favored nation tax rate is lower than the FTA tax rate. However, the tax rate for Normal Track goods (9 of ASEAN goods in terms of 00 import value and 9% of Chinese goods) will be cut to zero in principle by the end of 009. This is expected to boost trade by reducing trade barriers (Figure ). However, it should be borne in mind that there are separate tax reduction schedules for Sensitive List (SL) and Highly-Sensitive List (HSL) iv goods (Figure ). Automobiles are on either the SL or HSL by both China and ASEAN, while Thailand and the Philippines consider household appliances including air conditioners, refrigerators, and washing machines SL goods. It appears that markets will not be fully integrated for some time. Further, the principle of reciprocity stipulates that goods can only be subjected to preferential tariff benefits if those goods are designated normal track goods by both trade parties. Even if the goods are designated as Normal Track goods by one country, there is no need to lift the tariff if they are considered SL goods by the counterpart country. We therefore assume that the number of goods whose tax rates actually will be lowered is less than the number of goods designated as NT. 5

6 Figure :ASEAN-China FTA Tariff Reduction Schedule Early Harvest Enforcement deadline(year) China and ASEAN6 (*) Normal Track Up to 50 items Sensitive Track (*) Sensitive items Highly sensitive items(*) or below 0~5% 5 or below Early Harvest CLMV (*) Normal Track Up to 50 items Sensitive Track (*) Sensitive items Highly sensitive items(*) or below 0~5% 5 or below Note : ASEAN 6 is Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand. CLMV is Cambodia, Laos, Myanmar, and Vietnam. Note : Sensitive Track: up to 400 items and of total import amount, up to 500 items for CLMV. Note : Highly sensitive items: maximum is the smaller of ()4 or below of the number of sensitive items or ()00 items (for CLMV 50 items) or less. Source: Compiled by BTMU Economic Research Office from METI materials Figure :ASEAN-China FTA Sensitive/ Highly-Sensitive Lists (number of the tariff lines) Highly Sensitive List Sensitive List Agricultural products, foods Cement Mineral fuels Chemical products Plastic, rubber products Leather article Wood products Paper products Textile goods Garments Footwear Stones, ceramics, glass Precious stones Steel, steel products Other metals Machinery Electrical machinery Transport machinery Optical instruments Furniture Toys Other manufactured goods Note: Total number of the tariff lines placed in the Sesitive List by ASEAN and the People s Republic of China. Source: Compiled by the Research Office, Bank of Tokyo-Mitsubishi from Agreement on Trade in Goods between ASEAN and 4. ASEAN Free Trade Area (AFTA) Next year will be noteworthy not only because of the various FTA s involving ASEAN that will take effect and the further tariffs cuts, but also because the ASEAN Free Trade Area (AFTA) itself is due to become fully implemented. The ASEAN member countries sought to reduce or abolish tariffs toward the creation of AFTA, based on the Common Effective Preferential Tariff (CEPT) concluded in 99 and that took effect in January 99. The six member countries (Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand) lowered the tax rates on nearly all affected goods to 5% or less by January, 00, and tariffs on 85% of goods have been abolished (as of August 009, see Table ). AFTA is due to become fully implemented on January, 00, (05 for Cambodia, Laos, Myanmar, and Vietnam) as tariffs on affected goods are completely lifted. 6

7 Note that ASEAN eased its CEPT rules of origin on August, 008, in order to improve AFTA s ease of use. Previously, goods were required to have cumulative value added from within the region of 4 or more in order for goods to be considered produced within ASEAN and for CEPT tariffs to apply. The rules were eased to allow partners to choose either the 4 or more regional aggregate value added criteria or the change in tariff subheading criteria (HS 4 digits). Following the easing of the rules, for example, a high value-added good such as a flat-screen TV panel procured outside the region (for example, in Japan) and used in assembly within ASEAN would be subject to CEPT tariff rates when exported as a product assembled within ASEAN to a third country. This allows Japanese companies in ASEAN more flexible production and sales possibilities. Table :Progress of AFTA (as of August 009) Total No. of items in Inclusion List (IL) of which with tariff rate against IL (%) of which with tariff rate 5% and below against IL (%) General Exception List (GEL) Sensitive /Highly Sensitive List (SL/HSL) of IL against all products (%) Brunei 8,00 8, 7, Indonesia 8,77 8,6 6, , Malaysia,5,9 0,57 8.0, Philippines 8,980 8,94 7,54 8., Singapore 8,00 8,00 8, Thailand 8,00 8,00 6, , ASEAN 6 54,95 54,68 46, , Cambodia 0,689 0, , Laos 8,00 8,4 5,844 7., Myanmar 8,00 8,40 4, , Vietnam 8,00 8,099 4, , CLMV 5,589 5,090 6, , ASEAN Total 90,54 89,78 6, , Note: Inclusion List : Products subjected to tariff reduction. General Exception List : Products which are not subjected to tariff reduction (defense, academic value related products). Sensitive List : Products will be transferred to IL on a case by case basis (non-processed agricultural products) Highly Sensitive List : Products related to rice. Source: Compiled by BTMU Economic Research Office from JETRO materials ASEAN not only reduced tariff barriers, it is also working toward creating an ASEAN Community (AC) by 05 in hopes of boosting competitive strength by unifying markets. The ASEAN Economic Community (AEC), the substantive pillar of the effort, is intended to reduce regional barriers across a wide variety of fields not only for goods, but also for services, investment, capital, and skilled labor. The detailed plans are presented in the AEC Blueprint adopted in November 007. ASEAN has been reviewing the various agreements and arrangements in order to create a more comprehensive agreement as part of the efforts toward the AEC. In December 008, ASEAN signed two agreements, ) the ASEAN Trade in Goods Agreement (ATIGA) and ) the ASEAN Comprehensive Investment Agreement (ACIA). The ) ASEAN Trade in Goods Agreement, or ATIGA, is considered a revised version of the CEPT Agreement based on AFTA. The CEPT Agreement is extremely short it covers only 0 items and there are many ambiguities, amended definition documents and agreements have been necessary to address the addition of new member countries, expanded liberalization across more industries, and changes in the tariff reduction schedule (accelerations). ATIGA has chapters and 98 articles. It is a compilation of the agreements and commitments ASEAN has made to date, and has been restructured to cover more comprehensive agreements. These include tariff reductions/elimination, non-tariff barriers, rules of origin, trade facilitation measures, customs procedures, standardization and mutual recognition measures. At present, the separate fields related 7

8 to tariff concessions are being amended and ratified, and the agreement will take effect once it is approved by all member countries. The ) ASEAN Comprehensive Investment Agreement (ACIA), like ATIGA, is a comprehensive agreement. It revises and integrates two previous agreements, the Framework Agreement on ASEAN Investment Area (AIA) of 998 and the ASEAN Investment Guarantee Agreement (ASEAN-IGA) of 987. Previously, investment protection regulations had only applied to investors from ASEAN member states, but ACIA also applies to extra-regional companies investing in the region. The agreement is expected to help support investment conditions for foreign companies. 5. Outlook and Future Developments ~ Toward a Vast East Asian FTA Asian market integration through FTA s is approaching an important milestone in 00. In ASEAN, not only will AFTA become fully implemented, but also tariffs between the six original ASEAN member countries and China and South Korea will be abolished in line with the respective FTA s. Also, FTA s with India and Australia and New Zealand are also scheduled to take effect. Though there are still many remaining issues, including exempted goods and non-tariff barriers, significant progress in reducing tariff barriers is anticipated. As more so-called ASEAN + FTA s are concluded between ASEAN and outside countries like China, South Korea, Japan, India, and Australia and New Zealand, the focus is shifting to an FTA covering all of East Asia as the next step. Private-sector discussion and study of an East Asian-wide FTA is already underway, with Japan supporting an ASEAN + 6 structure (a Comprehensive Economic Partnership in East Asia, or CEPEA), while China and South Korea promote an ASEAN + framework (an East Asia Free Trade Area, EAFTA). Final reports on the two proposals were presented at the meeting of ASEAN economic ministers in August 009. If the reports are approved at the East Asia Summit (EAS) slated for October, the issues will move on to government-level study. This will be a step toward realization. Japan has concluded Economic Partnership Agreements (EPA s) with not only ASEAN, but also bilaterally with Singapore, Mexico, Malaysia, Chile, Thailand, Indonesia, Brunei, the Philippines, and Switzerland. On October, an EPA with Vietnam, its th counterpart country/region, took effect. EPA s with South Korea (suspended from November 004), the Gulf Cooperation Council, India, Australia, and Peru are also in various stages of negotiation. However, Japan s trading share with its EPA counterparties stands at only approximately 6%, well below South Korea s 4 share. Therefore, issues for Japan going forward will be FTA s with its two big trading partners, the United States and the EU, as well as an FTA covering all of East Asia. The Democratic Party of Japan (DPJ) administration that took office in September has declared its desire to focus on foreign relations with Asia (an East Asian Community), and also supports FTA s with the US and the EU. However, the DPJ has not outlined a process or schedule toward realization of these goals, and details will not be released for some time. In particular, should the sale prices of farm products expected to take a hit from FTA tariff reductions fall below production costs, the gap could be covered through the creation of an income subsidy system. However, it is unclear how the issues of introducing such a system and procuring resources in excess of JPY trillion would relate to raising food self-sufficiency, one of the DPJ s strategic objectives. The DPJ s focus on Asia in its foreign policy has been extremely well-received in the region. ASEAN can now expect not only Japan s support through EPA s, but also stronger leadership in East Asia through Japan s improved ties with China and South Korea. The first issue to address will probably be building ties of trust. Aki Fukuchi, October, 009 8

9 i The added-value and the change in tariff subheading criteria are used to determine the country of origin of a good. The added-value criteria refers to the value added in a country or region as a percentage of the final cost of the good. The change in tariff subheading criteria refers to a change in the final subheading (the HS code) from the customs classification subheading of the input good. ii Under the South Korea-Singapore FTA, goods produced in North Korea s Kaesong Industrial Complex are considered South Korean goods. However, the US and EU have not agreed on this point in their FTA negotiations with South Korea, and the discussion is ongoing. iii Interim goods comprise 55.5% of total imports into China (excluding food and fuel), while they comprise 6.% of total imports into ASEAN. iv Tariff rates on Chinese and ASEAN sensitive goods will be cut to or less by 0 and to 5% or less by 08. Rates will be cut to 5 or less by 05 for highly-sensitive goods. The Bank of Tokyo-Mitsubishi UFJ, Ltd. Economic Research Office -7-, Marunouchi, Chiyoda-ku, Tokyo , Japan This report is intended only for information purposes and shall not be construed as solicitation to take any action such as purchasing/selling/investing financial market products. In taking any action, each reader is requested to act on the basis of his or her own judgment. This report is based on information believed to be reliable, but we do not guarantee its accuracy. The contents of the report may be revised without advance notice. Also, this report is a literary work protected by the copyright act. No part of this report may be reproduced in any form without express statement of its source. 9