Impact of the world's largest fta on business

Impact of the World’s Largest FTA on Business

Oliver Massmann, Partner, Duane Morris Vietnam LLC

Background

ASEAN-China FTA World’s largest FTA Market potential - 1.7 billion people Substantial manufacturing activities Customs duties still significant

Background Progress of negotiations

Framework Agreement – 4 Nov 2002 Early Harvest Programme – agriculture products Agreement on Trade in Goods – 29 Nov 2004 Dispute Settlement Mechanism Agreement – 29 Nov 2004 Tariff Concessions – effective from 1 July 2005 Tariff free access by 2010 to 2015 Services and investments also to be included in

negotiations (later phases)

Qualifying for Tariffs Preferences To determine Customs Duty Rate

Tariff Classification (what is the tariff code?) Country of Origin determined by Rules of Origin

– Different ROOs for different purposes

Types of rates: – Normal rate – MFN rate – FTA rate

Trade in Goods

Two categories of goods Normal Track (“NT”) Goods

– “Appendix 1”-List Sensitive Track (“ST”) Goods

– Sensitive List (Tariffs to be reviewed by 2008) – High Sensitive List (no commitments)

Normal Track Goods

All goods except ST Goods Tariff reductions commencing 1 July 2004 Tariffs rates to be reduced to 0%

For ASEAN 6 and China – by 2010 For Cambodia, Lao PDR, Myanmar, Vietnam (“CLMV”) –

by 2015 NB: Tariff rates for “Appendix 1-Goods”: tariffs to be

eliminated by: 2012 for ASEAN 6 / China 2018 for CLMV

NT Tariff Concessions Overview

X = Applied MFN Tariff

Rate

ACFTA Preferential Tariff Rate (Not later than 1 January)

2005

2007

2009

2010

X > 20%

20

12

5

0

15% < x < 20%

15

8

5

0

10% < x < 15%

10

8

5

0

5% < x < 10%

5

5

0

0

X < 5%

Standstill

0

0

NT Tariff Overview Vietnam


Rate


2005 - 2006 2007 2008 2009 2011 2013 2015

X > 60%

60

50

40

30

25

15

10

0

45% < X < 60%

40

35

35

30

25

15

10

0

35% < X < 45%

35

30

30

25

20

15

5

0

30% < X < 35%

30

25

25

20

17

10

5

0

25% < X < 30%

25

20

20

15

15

10

5

0

20% < X < 25%

20

20

15

15

15

10

0-5

0

15% < X < 20%

15

15

10

10

10

5

0-5

0

10% < X < 15%

10

10

10

10

8

5

0-5

0

7% < X < 10%

7

7

7

7

5

5

0-5

0

5% < X < 7%

5

5

5

5

5

5

0-5

0

X < 5%

Standstill 0

NT Tariff Overview Camb / Lao / Myan


Rate


2005 - 2006 2007 2008 2009 2011 2013 2015 X > 60%

60

50

40

30

25

15

10

0 45% < X < 60%

40

35

35

30

25

15

10

0 35% < X < 45%

35

35

30

30

20

15

5

0 30% < X < 35%

30

25

25

20

20

10

5

0 25% < X < 30%

25

25

25

20

20

10

5

0 20% < X < 25%

20

20

15

15

15

10

0-5

0 15% < X < 20%

15

15

15

15

15

5

0-5

0 10% < X < 15%

10

10

10

10

8

5

0-5

0

7% < X < 10%

7 *

7 *

7 *

7 *

7 *

5

0-5

0 5% < X < 7%

5

5

5

5

5

5

0-5

0

X < 5%

Standstill 0

- The first date of implementation shall be 1 July 2005. * Myanmar shall be allowed to maintain ACFTA Rates at no more than 7.5% until 2010.

Sensitive Track Goods

Sub-classified in Sensitive List & High Sensitive List

Exempted from tariff concessions MFN rate applies Sensitive List to be reviewed by 2008 No agreement on tariff reduction of High

Sensitive List Goods

ST: Reciprocal Tariff Treatment

To qualify ST Good from exporting country for ACFTA preferential duty rate Tariffs of exporting country must be no more than

10% Applicable tariff rate to the ST good shall be the

tariff rate of the exporting country or the NT tariff rate for the same tariff line in the importing country whichever is higher and

provided that rate in not higher than MFN tariff rate applicable to good in the importing country


Post-ASEAN - China Country A (Exporting)

Country B (Importing)

ST Good ST - Tariff rate: 9%

NT Good MFN tariff rate: 10% NT tariff rate: 5%

Applicable rate: 9%


Post-ASEAN - China Country A (Exporting)

Country C (Importing)

ST Good ST - Tariff rate: 9%

NT Good MFN tariff rate: 0%

Applicable rate: 0%

Sensitive Track Goods (cont’d)

ASEAN 6, China up to 400 tariff lines at HS 6-digit level not exceeding 10% of total import value based on 2001 statistic

CLMV up to 500 tariff lines ASEAN: automobiles, electronic devices,

textiles, agriculture products rice China: tobacco, cars spare parts, paper

products

Rules of Origin (ROO) Wholly obtained rule

Includes products harvested, fished, planted etc. from a particular country

Minimum content rule 40 % minimum content rule (see next slide) Cumulative rule of origin Not including minimal operations:

– Transportation facilitation – Packaging – Ensuring preservation

Product specific rules of origin to be negotiated in January 2005

ROO – Formula For Minimum Content / Value Added Rule

Value of Non-ACFTA materials

+

Value of materials of Undetermined origin

x 100 % < 60% FOB Price

Therefore, the ACFTA content: 100% - non-ACFTA material = at least 40%

AICO - WHAT IS IT ?

What is the AICO Scheme? The AICO Scheme is the latest industrial

cooperation program of ASEAN to promote joint manufacturing industrial activities between ASEAN-based companies.

AICO – CONT.

A minimum of two companies in two different ASEAN countries are required to form an "AICO Arrangement".

AICO - CONT. What is an AICO Arrangement? An AICO Arrangement is a cooperative arrangement

consisting of a minimum of two participating companies from two different ASEAN countries. It is not a legal entity but merely an "umbrella association" under the scheme wherein the output of the participating companies will enjoy a preferential tariff rate in the range of 0-5%.

Rules of Origin (cont’d)

Direct consignment requirement in order to qualify for tariff reductions: Transit through ACFTA member states allowed Transit through non-member states possible, if:

– Geographical reasons / transport requirements – Products must not enter non-member state’s trade or

consumption – no operation other than unloading or reloading in

non-member state

Rules of Origin (cont’d)

Certificate of Origin required Form E Exporting country’s authorities responsible for

issuing the Form E PRC: local Entry-Exit Inspection and Quarantine

Bureau

Dispute Settlement Agreement

Only ACFTA parties (i.e. ASEAN member states and China) can be parties

Not private entities Applicable to all ACFTA-related disputes Parties to designate liaison offices

Dispute Resolution Agreement

Consultation Required prior to Arbitral Tribunal Request to be send by complaining party to party

complained against’ liaison office To enter consultation within 30 days (if urgent 20

days) after request 60 days (if urgent 20 days) to settle dispute

Dispute Resolution Agreement Arbitral Tribunal

30, max. 60 days to appoint three arbitrators Each party to appoint one, jointly appoint Chief

Arbitrator If unable to reach consent, Chief Arbitrator to be

determined by WTO Director-General or President of ICJ

Held in English language


Final report Objective assessment of the case including an

examination of the facts and the applicability of and conformity with the Framework Agreement

To be released within 120 day, max. 180 days (if urgent 60 days) after composition


Implementation 30 days (max. 45 days) for arbitral tribunal to

determine time frame for implementation of final report’s recommendations and rulings

Original arbitral tribunal to review implementation consistency


“Enforcement” Compensation: voluntary, to be consistent with

Framework Agreement Suspension of concessions or benefits Temporary in nature Neither is preferred to full implementation 30 days (max. 45 days) for arbitral tribunal to determine

the appropriate level of suspension of concessions / benefits

Suspension to be in affected sector, other sectors only if such suspension not practicable

Overview Dispute Resolution

120, max. 180 days (if urgent: 60 days) after composition to issue final report

Implementation

Proceeding of Arbitral Tribunal

30, max. 60 days to appoint three arbitrators

60 days to settle dispute (if urgent: 20 days)

Request for Appointment of Arbitral Tribunal

Consultation

max. 30 days (if urgent: 20 days) after request to enter consultation

Request for Consultation from Complaining Party

Enforcement

30, max. 45 days for arbitral tribunal report to determine the appropriate level of suspension of concessions/benefits

20 days to reach mutual agreement on adjustment

Determination by Arbitral Tribunal

Overview Dispute Resolution (cont’d)

Negotiations on compensatory adjustment

30, max 45 days for arbitral tribunal to determine time frame for implementation

Pre-ASEAN-China FTA

Entering China Duty Free A. Bonded Processing Arrangements

China

MFN Rate A: Bonded Processing

Arrangements • But must be re-exported • If re-imported into China -

subject to Custom duties

Finished Goods

0%

Raw Materials

China

CEPA 0%

HK / Macau

B. CEPA

B. CEPA • But HK & Macau not

manufacturing intensive countries

• High cost of manufacturing

China

Bangkok Agreement 0%

C. Bangkok Agreement

C Bangkok Agreement • Limited no. of goods

• Generally for lower end products

China

ITA 0%

D. Information Technology Agreement

D. ITA • Only IT products

• NB: royalties may still be on issue despite implementation of Decision 4.1

Post-ASEAN-China FTA

I. China Manufactured Goods

Post-ASEAN - China

Pre-ASEAN - China

China ASEAN

MFN Rate (Customs Duties)

0 %

II. ASEAN Manufactured Goods

Post-ASEAN - China

Pre-ASEAN - China

China ASEAN

MFN Rate (Customs Duties)

0 %

III. Linking FTAs: ASEAN-China & AFTA

Thailand

Malaysia

0%

Using AICO

0%

Post-ASEAN China

0-5% AFTA rate

Using AFTA

Pre-ASEAN China

MFN Rate

Without AFTA

Post-ASEAN China

Pre-ASEAN China

MFN Rate

0% Thailand

Without AFTA Using AFTA

Rest of ASEAN

0-5% AFTA rate

Malaysia

0%

Using AICO

0%

IV. Linking FTAs: ASEAN-China & AFTA

MFN Rate

0%

Vietnam/ Singapore

0-5% AFTA rate

Rest of ASEAN

China USA ASEAN

0% USSFTA /

BTA

V. Manufacturing for the US Market

VI. Manufacturing Using US Components

0% Vietnam/ Singapore

0-5% AFTA rate

Rest of ASEAN

China USA ASEAN

0% / MFN

VII. What Lies in the Future?

0% Semi-finished goods

Rest of ASEAN

China US, Japan, India, S. Korea, Australia

ASEAN

0%

Finished good

Rest of China

0% (not an import)

0-5% AFTA 0% AICO

Finished goods

0-5% AFTA

Planning Scenarios

1. No Existing Manufacturing in Asia

Issue: Where to locate manufacturing ? Where to source raw materials? Where are key markets? How to reduce indirect tax/

custom exposure Consider FTA networks / linkages → current & in future

ASEAN (AFTA)

SAPTA

Bangkok Agreement

Bangkok Agreement • Bangladesh • India • Republic of Korea • Lao People’s Democratic

Republic • Sri Lanka • China

SAPTA • Bangladesh • Bhutan • India • Maldives • Nepal • Pakistan • Sri Lanka

Negotiating • Canada - Singapore • Hashemite Kingdom of Jordon -

Singapore • India - Singapore • Korea - Singapore • Mexico - Singapore • Sri Lanka - Singapore • Chile - Singapore • New Zealand – Singapore - Chile

Concluded • US-Australia FTA • Australia-Thai FTA • Singapore-Australia FTA • Australian-New Zealand CER • Indo-Lanka FTA • Pakistan-Sri Lanka • Pakistan - China • Hong Kong-China CEPA • China-Macau CEPA • ASEAN (AFTA) • ASEAN - China Trade on Goods • Panama - Taiwan

Negotiating • Australia - Japan Trade and Econ

Agreement • Japan - Thailand • USA - Thailand • US – Taiwan • China – Australia • China – New Zealand • China – GCC countries

ASEAN Negotiating • ASEAN - China • ASEAN - Korea • ASEAN - Japan • ASEAN - India

Concluded • US - Singapore FTA • Japan - Singapore FTA • New Zealand - Singapore FTA • Australia - Singapore FTA • Europe Free Trade Association - Singapore • US - Vietnam BTA • Japan - Vietnam BIA • EU - Vietnam “Textile” Agreement • AFTA - Vietnam

Custom duties will in future be less of an issue for movt. of most goods between ASEAN and China BUT important to identify the applicable rules of

origin Rules of origin Beware Customs enforcement actions in China

2. Existing Manufacturing in Asia – Duplicate Production Lines Issue: Consolidation of manufacturing activities? If so, which manufacturing facilities are

redundant? Can alternative structures be used for

distribution?

China

ASEAN

ASEAN - China 0%

AFTA 0-5%

China Customers

ASEAN Customers

China

ASEAN

ASEAN - China 0%

AFTA 0-5%

China Customers

ASEAN Customers

Distribution WFOE

3. Existing Manufacturing in Asia – No Duplication Issue: How to maximize synergies What are the rules of origin to qualify for

tariff preference? → may require some tweaking to

manufacturing / sourcing activities to satisfy the applicable ROOs

Finished goods

AFTA 0-5%

ASEAN Customers

China ASEAN

0%

Components

China Customers

ASEAN - China

0%

Components

ASEAN Customers

China ASEAN

0%

Finished goods

China Customers

ASEAN - China

0%

Alternative Scenario

Thank You

Impact of the world's largest fta on business

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