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Biggest regional trade deal unveiled

By Kevin Brown in Singapore

Published: January 1 2010 16:35 | Last updated: January 1 2010 16:35

Containers waiting to be moved at Shanghai’s port
Containers wait to be moved at Shanghai’s port. The country stands to benefit from the deal with Asean as it seeks new markets for its goods

China and the 10-country Association of South East Asian Nations on Friday launched the final stage of the world’s biggest regional trade agreement, measured by population, in spite of Indonesia’s last-minute attempts at renegotiation.

The launch of the China-Asean Free Trade Agreement, which covers almost 1.9bn people, coincides with the implementation of a similar deal with Australia and New Zealand and a deepening of Asean’s own internal trading agreements.

Taken together with earlier deals with Japan, South Korea and India, the New Year day accord puts south-east Asia at the centre of a series of regional trade agreements extending from Beijing to Wellington and from New Delhi to Tokyo.

The China-Asean deal takes effect following the completion last summer of an agreement on investment rules, the last leg of an eight-year negotiating marathon that produced earlier agreements on goods and services.

Tariffs have been falling since 2005, with 90 per cent of goods due to be tariff free from Friday for China and the six core Asean members – Indonesia, the Philippines, Thailand, Singapore, Malaysia and Brunei. The target is 2015 for the other four – Laos, Cambodia, Burma and Vietnam.

mapHowever, the deal remains short of genuine free trade. The trade in goods agreement provides for each country to register hundreds of sensitive goods on which tariffs will continue to apply, in many cases until at least 2020.

Sensitive products include various types of electronic equipment, motor vehicles and automotive parts and chemicals, as well as items such as popcorn, snowboarding equipment and toilet paper.

The deal creates the third largest regional trading agreement by value after the European Union and the North American Free Trade Agreement, covering countries with mutual trade flows of $231bn in 2008 and combined gross domestic product of about $6,000bn, according to China’s ministry of commerce.

Jayant Menon, principal economist in the Asian Development Bank’s office of regional economic integration, said it could eventually lead to a wider trade agreement involving Asean, China, Japan, South Korea and the US – an idea floated in November by Yukio Hatoyama, the Japanese prime minister. “There is a lot of expectation of this FTA,” said Mr Menon.

Surin Pitsuwan, Asean’s secretary-general, said the agreement would allow the Asean countries to benefit more from the growth of China, which is already south-east Asia’s third largest trading partner, with about 11 per cent of total two-way trade. “When China grows, Asean has to ensure that we are on the supply line towards that growth,” he said.

Asean, which has a population of 580m and a combined economy bigger than that of India, has substantial reserves of resources such as oil, natural gas, coal and other commodities that China desperately needs to keep its factories operating.

China, which runs a substantial trade surplus with Asean, stands to benefit hugely from easier access to the bloc as it seeks new Asian markets for goods that can no longer be sold to consumers in Europe and North America.

“China and the Asean countries have many products that complement each other,” Zhang Kening, a director at the ministry of commerce, said earlier this week. “We can see great potential to adjust our trade patterns by importing more from Asean countries.”

The deal remains deeply controversial within the region, where suspicion of China’s economic clout and political ambitions vies with the desire to take advantage of the export potential of its fast-growing economy.

Indonesia has led opposition to the pact, seeking to delay its implementation because of fears that sectors from steel and petrochemicals to cosmetics and herbal medicines would face overwhelming competition from cheap Chinese imports.

Jakarta has announced a review of the impact of the deal, but drew back from tougher action after the industry minister told parliament his attempts to renegotiate elements of the deal with the other 10 countries had failed.

The co-ordinating minister for the economy warned on Wednesday that there could still be clashes between Jakarta and Beijing. “When a nation has cheap products, we must see whether there’s unfair trade in it, such as unfair subsidies,” he said. “We must be proactive.”

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FOOTNOTE:

ASEAN-6 Achieves Zero Tariffs
ASEAN Secretariat, 31 December 2009

Starting the first day of 2010, Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore and Thailand can import and export almost all goods across their borders at no tariff.

As of 1 January, for ASEAN-6 an additional 7,881 tariff lines will come down to zero tariffs, bringing the total tariff lines traded under the Common Effective Preferential Tariffs for ASEAN Free Trade Area (CEPT-AFTA) to 54,457 or 99.11%. Additionally, with the reduction, the average tariff rate for these countries is expected to further decrease from 0.79% in 2009 to just 0.05% in 2010. In 2008, intra-ASEAN import value of commodities for these 7,881 tariff lines amounted to US$ 22.66 billion, or 11.84% of ASEAN-6 import value within ASEAN.

The tariff lines include final consumer products such as air conditioners; chilli, fish and soya sauces; as well as intermediate materials such as motorcycle components and motor car cylinders. Other products include iron and steel, plastics, machinery and mechanical appliances, chemicals, prepared foodstuff, paper, cement, ceramic and glass sectors.

The elimination of tariffs by ASEAN-6 underscores ASEAN’s commitment to dismantle tariffs and keep intra-ASEAN trade open. It will also serve as a catalyst for the development of the single market and production base projected by the ASEAN Economic Community (AEC) Blueprint.

The actual impact and how much this final instalment will be translated as savings for consumers will depend on the market dynamics of the respective ASEAN-6 countries. The Secretary-General of ASEAN, Dr Surin Pitsuwan, said that “We sincerely hope that all parties will act to ensure that the man on the street will benefit from these reductions in tariffs.”

As for the business community, especially the downstream producers, Dr Surin said that they also stand to gain. “Lower cost of inputs will allow the business community a wider choice of goods, and in the process, they will move towards becoming more competitive globally, as envisaged in the AEC Blueprint,” he added.

The CEPT-AFTA covers the whole range of products traded by the ASEAN Member States and provides for the gradual reduction in tariffs of these products, which has been ongoing since 1993. Under the CEPT-AFTA schedule for tariff reduction, each ASEAN Member State is allowed to place their products in the normal track, where the commitment is for the tariffs to be reduced to zero by 2010 for ASEAN-6 and 2015 for the remaining four countries, namely Cambodia, Lao PDR, Myanmar and Viet Nam. In 2010, these countries will also see tariff reductions under the CEPT-AFTA commitments to 5%, where the average tariff rate will decrease from 3% in 2009 to 2.61%.

Under the CEPT-AFTA, agricultural products such as tobacco, coffee, live animals and animal products, which come under the Sensitive List (SL), will have their tariffs reduced to 5% on 2010 and to zero tariff by 2015. The Highly Sensitive List (HSL), comprising rice, will have their tariffs capped on a specified date. As for the General Exclusion List (GEL), the tariffs will remain based on factors such as national security and morals/health/aesthetic/archaeological grounds (e.g.: weapons and opium). As of today, 487 tariff lines or 0.89% of tariff lines for ASEAN-6 still remain in the SL, HSL and GEL categories.

Besides tariff liberalisation, ASEAN is also embarking on parallel initiatives in trade facilitation to complement tariff reduction. ASEAN is also actively working on formulating streamlined and simplified customs procedures for clearance of goods, eliminating non-tariff measures, developing the ASEAN Single Window and the ASEAN Trade Repository, improving investment protection, providing for dispute settlement and better Intellectual Property Rights regime and removing the obstacles hindering the movement of professional and skilled workers.