By Deborah Elms, Executive Director, Asian Trade Centre, Singapore
The number of free trade agreements (FTAs) in Asia has increased rapidly in the past ten years. FTAs eliminate tariffs and import quotas on most (if not all) goods traded between the member countries. Under FTAs, countries agree to offer preferential terms for businesses in partner or member countries.
The most obvious benefit of an FTA is lower tariffs for goods entering a member country. Tariffs can be thought of as a tax on imports. High tariffs can make the prices higher for consumers and manufacturers, and can reduce competition in the market.
Other agreements contain provisions that may grant member firms better access to services for sectors like accounting, architecture, retail, distribution, health or travel. Member companies may also get more access and better transparency for their investments made in partner countries.
Many agreements signed by developed economies include other areas like customs cooperation, competition policies, rules around intellectual property rights, or opening up government procurement markets.
In short, the depth and breadth of commitments varies between FTAs. This means that firms wanting to take advantage of the benefits of these trade deals need to understand the specific commitments for each agreement.
To complicate matters further, some of the key agreements that matter for companies operating in Asia are global. Others are regional. Finally, Asian countries have been enthusiastically signing up for bilateral deals.
For companies operating in the food and beverage industries, here is a quick guide to some of the most important agreements:
World Trade Organization (WTO)
: The baseline agreement for trade can be found at the World Trade Organization (WTO). The 160 member countries have successively promised to lower tariffs to one another. Many have also made pledges on services. All members had to change their intellectual property rights laws to bring them into compliance with WTO rules. To learn what specific commitments any given member has made at the global level, check out the WTO website (www.wto.org
The WTO rules and commitments act as a foundation. Nearly all FTAs build on these promises and go beyond in offering members better benefits than the WTO grants to all 160 members.
The ASEAN Economic Community (AEC)
is scheduled for completion at the end of 2015. Although the objectives of the AEC include the free movement of goods, services, investment, skilled labor and freer movement of capital, it is unlikely that the 10 members of ASEAN will meet these ambitious goals.
However, companies can take advantage of some of the elements of the AEC that have already come into force. For example, nearly all goods in ASEAN are now duty-free or zero tariffs. This means that manufacturers can ship products across all of ASEAN without paying tariffs.
ASEAN has also started to address trade facilitation by making it easier to move goods. This includes changes to customs procedures for paperwork now in place in 6 countries that is supposed to lead eventually to an ASEAN-wide single window.
Other important elements of trade agreements within ASEAN are increasingly useful market access opportunities for service firms and a growing set of investment possibilities for member firms.
: ASEAN currently has 5 agreements signed between the 10 ASEAN countries and their dialogue partners: Japan, South Korea, China, India and Australia/New Zealand.
The quality and coverage of these ASEAN+1 agreements varies widely. The best of the group is AANZFTA with Australia and New Zealand. Under this deal, members pledged to open markets in goods, services, and investment with relatively ambitious offers to one another. There are also some rules on intellectual property protection that exceed WTO commitments.
Other ASEAN+1 deals may not cover anything but goods (including ASEAN+Japan) or may have very poor coverage. For example, under ASEAN+India, India only made commitments on about 70% of tariff lines and Indonesia failed to open more than half of the goods market to member country firms.
Critically, under all ASEAN agreements, the provisions and benefits vary between ASEAN members. Thus, if a product qualifies under one agreement it may or may not be covered under a different agreement. It means that firms must carefully study the market access schedules of each agreement for the specific pledges in each sector or tariff line.
Although these agreements—like all FTAs—apply to member firms only, some ASEAN countries take an expansive view of what counts as a domestic entity. For example, Singapore usually draws a wide circle around the types of firms that can qualify for benefits in their agreements.
: The European Union (EU) is rapidly expanding the pool of countries that are covered by FTAs in Asia. The EU and Korea have a very high quality agreement already in place. EU-Singapore is complete and waiting ratification. The EU is close to concluding with Vietnam and is working through negotiations with Japan and Malaysia.
Under most EU FTAs, the coverage is considerably broader and deeper than either the WTO or ASEAN. This means that more goods are included, with tariff reductions closer to zero. It means that services promises are generally made in all 12 services sectors with most of the 160 subsectors also eligible for some market opening. Investment is carefully spelled out. The entire agreement is legally binding with a dispute settlement system in place for resolving disagreements.
US-Singapore and US- Korea Agreement (KORUS)
: Bilateral agreements vary tremendously in quality. Deals between developing countries are not required to have the same scope in coverage as agreements with developed economies. In Asia, every country is counted as developing except for Japan, Australia and New Zealand that means that countries could take advantage of significant flexibilities, if they choose to do so.
Ten years ago, Singapore and the United States signed a bilateral agreement. This agreement went on to be the template for many of the subsequent deals for Singapore. Under USSFTA, firms were granted extensive benefits, including some provisions not available elsewhere. For instance, the financial services and banking opening that happened as a result of USSFTA is extensive.
The bilateral US-Korea agreement (KORUS) has been quite significant. In particular, KORUS can be seen as the foundation for much of what is coming in the Trans-Pacific Partnership (TPP) (shown below).
: The two countries announced the imminent closure of a deal at the APEC meeting in Beijing in November 2014. Given the tight integration of these markets already, efforts to expand cooperation further may have significant economic benefits for companies in Asia.
Trans-Pacific Partnership (TPP)
: TPP is generating a great deal of interest from firms in the twelve member countries (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam). This is because the commitments in the TPP will be significantly broader and deeper than any existing agreement. In addition, the agreement covers all members equally, with only some differences in the implementation schedule.
The TPP, which is likely to be ready for signature in early 2015, includes 29 chapters that includes goods, services, investment, intellectual property rights, competition, government procurement, telecommunications, financial services, e-commerce, dispute settlement, labor and environment.
The primary purpose of such a wide-ranging deal is to make it easier for covered firms to make investments and ship goods and services between member countries on both sides of the Pacific. It is designed to facilitate supply chains.
Tariffs are set to fall to zero across (or nearly across) the board. This is especially important for agricultural products that typically face tariffs and are carved out from most FTAs. In addition, the TPP removes tariff peaks and tariff escalation that makes it harder for firms to process food into higher value items.
Regional Comprehensive Economic Partnership (RCEP)
: RCEP is just getting under way. This agreement was intended to knit together the existing ASEAN+1 deals and include all 16 parties in one, comprehensive FTA. Since negotiators are only entering the 6th round in early December, it is not entirely clear what the final agreement will do for companies.
It is highly unlikely, given the uneven nature of the ASEAN+1 agreements, that RCEP will be extremely ambitious. For example, tariffs are unlikely to fall to zero and coverage overall of goods may not exceed 90%. However, given that the Dialogue Partners (Japan, South Korea, China, India, Australia and New Zealand) are not well connected to one another under existing FTAs, even modest market opening in RCEP could lead to significant benefits for companies.
Free Trade Area of the Asia Pacific (FTAAP)
: The APEC meeting in Beijing featured many stories about an eventual Free Trade Area of the Asia Pacific. FTAAP would link together the 21 member economies of APEC. It is supposed to be built from the TPP and RCEP. But the pathway to get there is still unclear and likely to be quite some distance away.
In short, there are many different avenues for firms that want to take advantage of the benefits built into different FTAs. But making the most of available opportunities means understanding an-ever changing constellation of agreements.
Deborah Elms is Executive Director of the Asian Trade Centre in Singapore. Her research interests are negotiations and decision making, and her current research involves the Trans-Pacific Partnership (TPP), Regional Comprehensive Economic Partnership (RCEP) negotiations and global value chains.
FIA issues regular e-bulletins with analysis on relevant food and beverage industry issues across the region. To subscribe to this service, please click here.