Opening the doors to trade in Southeast Asia
Rebecca Needham looks at the new Free Trade Agreement with ASEAN and how companies can maximise the benefits.
Encompassing twelve countries, 550 million people and with a combined GDP of over NZ$2.7 trillion, the recently signed ASEAN/Australia/New Zealand Free Trade Agreement has the potential to unlock significant economic benefit for all who are party to it.
The scenario for New Zealand is particularly compelling: ASEAN is our third largest trading partner (after Australia and the European Union) and our fastest growing market, out-pacing trade growth even with China.
Known among official circles by the catchy acronym AANZFTA, the agreement creating the ASEAN/Australia/New Zealand Free Trade Area is the most recent of a growing number concluded with New Zealand’s Asian trading partners.
Signed in February this year, it is expected to enter into force by January 2010, or as soon as it is ratified by Australia, New Zealand and at least four ASEAN countries.
So what should New Zealand companies do to take full advantage of this increasingly comprehensive free trade coverage of the Asian region?
Not all FTAs are created equal
One of the most important things a company can do to maximize the benefits of free trade regimes is to increase their knowledge of them, says Mr Huang Shi Yang, Senior Manager, Worldtrade Management Services (WMS), PricewaterhouseCoopers (Malaysia) Sdn Bhd.
“Not all free trade agreements (FTA) are created equal”, says Mr Huang, who helps businesses around the region develop appropriate FTA strategies. There are differences in tariff reduction schedules, Rules of Origin (ROO), market access liberalization and numerous other areas.
“Companies need to understand how each FTA best fits their business model”, he says.
According to briefings by New Zealand trade officials earlier this year, for Kiwi companies looking to Southeast Asia, the AANZFTA is in most cases a far better agreement than earlier ones with the region. For example the Thai CEP does not cover services, whereas many of New Zealand’s key services sectors have been covered in the AANZFTA.
Tariff reductions key for merchandise trade
In terms of how companies view free trade agreements, Mr Huang says there is a major difference between the focus for manufacturers compared with the service industries.
“For merchandise trade the greatest benefits lie in reduced tariffs, and these are relatively straightforward and easy to identify,” he says.
Under the AANZFTA, for example, New Zealand will benefit from the elimination of 99 percent of tariffs on exports to the four key markets in ASEAN—Indonesia, Malaysia, the Philippines, and Viet Nam.
Furthermore, from day one of the agreement’s entry into force, a full 70 percent of New Zealand’s current exports to these key markets will be duty-free, according to New Zealand High Commissioner to Malaysia David Kersey, speaking at a recent AANZFTA briefing in Kuala Lumpur.
This means that substantial benefits will kick in immediately, with the remainder of reductions phased in over time, says Mr Kersey. (Click here to check how your tariff rates are affected under the AANZFTA).
Services and Investment increasingly important
In the past FTAs were all about duty concessions, but this is no longer the case.
Services and investment are becoming increasingly significant for free trade agreements, says Mr Huang, mirroring their growing importance in the export economy.
“In services and investment, however, the barriers are much wider and more complex”.
With services, the key liberalization is in restrictions that hinder the establishment and operation of a commercial presence in the country concerned.
In the AANZFTA services negotiations, New Zealand's highest priority was for securing improvements in education services (as it was for the FTA with China).
Real gains were made, according to officials, with the ASEAN countries going further for New Zealand than they have undertaken in respect of their WTO services commitments under the General Agreement on Trade in Services (GATS).
The agreement with ASEAN also helps New Zealand companies investing in the region, such as Fisher and Paykel in Thailand, who will benefit from new and additional protections, including the potential for recourse to binding investor-State arbitration procedures.
The advantages of being big
Size is another fundamental determinant of a company’s approach to free trade agreements, says Mr Huang. Multinationals, like Fonterra, generally have dedicated personnel looking after international trade and are better able to leverage the benefits offered by FTAs, including those offered by regional procurement models. And they are usually as concerned with compliance issues as much as tariff reductions.
Fonterra, which in 2008 accounted for a quarter of all New Zealand’s exports by value, also keeps in close contact with trade officials during New Zealand’s FTA negotiations.
According to Fonterra’s CEO Andrew Ferrier in a statement he made to mark the AANZFTA signing ceremony, ASEAN accounted for 25 percent of all the company’s exports from New Zealand in the 2008 financial year.
The FTA with ASEAN is a significant step for New Zealand’s dairy industry, said Mr Ferrier, as it will eventually eliminate tariffs (which typically range up to 10 percent in key markets) on almost all of New Zealand’s dairy trade into the region. It will also remove the risk of trade barriers being introduced in the future.
Small to medium companies (SMEs) on the other hand, tend to be primarily concerned with immediate benefits offered by FTAs, utilizing them on a piecemeal basis rather than as a company wide policy, says Mr Huang.
For most SMEs, FTAs are not a big priority, he says, although they can offer real growth opportunities if leveraged properly. Mr Huang gives the example of a Malaysian baby clothing manufacturer who faced rising labour costs and high tariffs on exports around the region.
Utilising the ASEAN-China FTA, the company is now able to both source an expanded product range from China as well as import these products directly into their ASEAN markets at reduced tariffs. The company has grown significantly as a result, and now can focus its energies on value-added activities such as brand-building, marketing and promotion, while still manufacturing some key products in Malaysia when there are advantages in doing so.
According to New Zealand’s Trade Commissioner to Malaysia, Grant Fuller, the reality is that many New Zealand companies are relatively small, and don’t have the resources to dedicate to trade issues.
“The sudden proliferation of FTAs has created a knowledge gap”, says Mr Fuller, “and as an industry group, SMEs will need significantly more assistance before they are able to catch up”.
- by Rebecca Needham
Photos:
1) Port of Singapore by William Cho
2) Bangkok, Thailand by Rebecca Needham
2) Petronas towers Kuala Lumpar by Rebecca Needham
Read more:
Click here for further information about the AANZFTA.
Article uploaded September 2009.