Institute of Social Science, The University of Tokyo International Workshop for FY2008 by Contemporary China Research Base “Trade Team” Date: November 11, 2008 13:00-17:30 Venue: Center Conference Room (Room No. 549)

FTA Strategies of ASEAN and China’s Advance Southward November 11, 2008 Japan External Trade Organization (JETRO) Asia and Oceania Division, Overseas Research Department Seiya Sukegawa

1

Table of Contents ASEAN: trying to intensify integration ASEAN+1 and the move to establish an extensive economic region The possibility of a sharp rise in imports from China due to the deregulation of AFTA rules of origin

2

FTA (free trade agreement) and EPA (economic partnership agreement)

EPA: Economic Partnership Agreement FTA: Free Trade Agreement EPA A mode (expanded form) of free trade FTA agreement. In order to further liberalize and International trade agreement with the purpose of reducing or eliminating tariffs on goods and service trade barriers between certain countries and regions. Reduce or eliminate tariffs on goods Reduce or eliminate service trade barriers

facilitate the flow of people, goods and money within the region, it eliminates national and border regulations and harmonizes different economic systems. Elimination of investment regulations

Cooperation (fostering industries, etc.)

Liberalization of the flow of people (employment, etc.)

Harmonization of intellectual properties systems and competition policies

Preparation of business environment

Other 3

EPA/FTA are tools to tap into emerging markets Emerging markets

Brazil: population: 183,990,000 growth: 5.4% (2007)

Association of Southeast Asian Nations (ASEAN)

Russia: population: 142,220,000 growth: 8.1% (2007) India: population: 1,123,970,000 growth: 9.0% (FY2007) GDP: 1,278,900 million dollars Population: 563,980,000 (2007)

China: population: 1.321,290,000 growth: 11.9% (2007)

EPA/FTA Export?

Entry OR

Export

Local production? Local production

Advantage

Avoids costs and risks associated with entry into the market

Realizes short lead time and avoids trade risks

Disadvantage

Transportation costs, lead time including customs clearing, certificates of origin, trade risks such as AD, exchange risks

Costs for entry into the market, operational risks

* ASEAN countries occasionally grant the benefit of tax exemption on industrial materials, capital goods (particularly for export products), etc. Industrial materials Capital goods Consumables Foods and beverages

Occasional benefits of reduction and exemption of taxes as an investment incentive policy

Reduced/eliminated only through EPA 4 Tariffs on end products can be eliminated only through EPA!

AFTA ASEAN Free Trade Area…Common Effective Preferential Tariff (CEPT) — Elimination of tariffs, non-tariff barriers within the region AFTA started in 1993 ASEAN6 Thailand, Singapore, Malaysia, Indonesia, Philippines, Brunei

0-5% tariff Some exceptions approved

2002

2003

0-5% tariff for all items 0% tariff for 60% of all items

2007

2010 0% tariff for all items

0% tariff for 80% of all items

Reduce tariffs of sensitive and highly sensitive lists to 0-5%

2007 0% tariff for 11 prioritized areas of integration

Vietnam Myanmar, Laos Cambodia

2006 0-5% tariff 2008 0-5% tariff 2010 0-5% tariff 2012

2015 0% tariff for all items (exceptions until 2018) [Sensitive and highly sensitive lists] Vietnam: 0-5% tariff until 2013 Laos, Myanmar: 0-5% tariff until 2015 Cambodia: 0-5% tariff until 2017

0% tariff for 11 prioritized areas of integration

Thailand Toyota Finished cars, diesel engines, lamps, steering columns, bumpers, body panels

Complementary system of automobile companies within the region Philippines Toyota Transmissions, constantvelocity joints, combination switches, meters Honda Manual transmissions, air inlet/emission parts, pedals

Honda Plastic parts, presses, outfitting goods, meters, cylinder blocks Nissan Press parts, pumps, camshafts Mitsubishi Engines, engine parts Isuzu

Diesel engines, press parts, engine parts

ASEAN Complementary system within the region

Mitsubishi Transmissions, axis propellers Isuzu Transmissions

Indonesia Malaysia

Toyota

Toyota

Gasoline engines, CKD parts for multipurpose vehicles, door lock frames, clutches, regulators, body panels

Steering links, radiators, engine computers, wiper arms Honda Dashboards, constantvelocity joints, bumpers Nissan Steering gears, suspensions Mitsubishi Gears, power steering

Honda Engine parts, underbody parts, automatic transmissions

(Reference) Prepared by JETRO based on materials provided by each company

Nissan Meters Mitsubishi Brakes, fuel tanks Isuzu Brake parts

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Reduction of CEPT by ASEAN countries Tariff reduction in AFTA (as of August 2008) Inclusion List (IL) Tariff rate 5% or less Tariff rate 0%

Total number of items Brunei

Over Percenta 5% ge of IL

Percent age of IL

Temporary General Exclusion Exception List (TEL) List (GEL)

Other

Sensitive /Highly Sensitive Lists (SL/HSL)

Reference

(AHTN)

10,702 8,732 12,331 8,873 8,298 8,301

9,924 8,627 12,235 8,827 8,298 8,301

9,924 8,620 12,169 8,751 8,298 8,288

100.0% 99.9% 99.5% 99.1% 100.0% 99.8%

8,472 6,900 10,112 7,321 8,298 6,643

85.4% 80.0% 82.6% 82.9% 100.0% 80.0%

0 0 32 76 0 13

0 7 34 0 0 0

0 0 0 0 0 0

778 96 96 27 0 0

0 9 0 19 0 0

2002 2007 2007 2007 2007 2007

Myanmar Vietnam

57,237 10,689 8,298 10,689 8,300

56,212 10,454 7,878 10,615 8,099

56,050 6,682 7,878 10,611 8,009

99.7% 63.9% 100.0% 100.0% 98.9%

47,746 707 5,783 524 4,547

84.9% 6.8% 73.4% 4.9% 56.1%

121 3,772 0 4 90

41 0 0 0 0

0 0 0 0 0

997 181 221 51 201

28 54 199 23 0

2002 2007 2002 2007

Total of CLMV countries

37,976

37,046

33,180

89.6%

11,561

31.2%

3,866

0

0

654

276

Indonesia Malaysia the Philippines Singapore Thailand Total of ASEAN six member countries Cambodia Laos

(Note) (1) Inclusion list (list of items to reduce tariff rate) (2) Temporary exclusion list (items that are not ready for reduction)     (3) General exception list (items exempted from tariff rate reduction )   (4) Sensitive list (items that are to be flexibly added to the inclusion list ) (5) Highly sensitive list (Source) ASEAN Secretariat (Consolidated 2008 CEPT Package)

7

Simple average tariff rates of ASEAN countries (2007) ASEAN (early member countries) Thailand

Malaysia

the Indonesia Singapore Philippines

ASEAN (later joined countries) Brunei

Vietnam

Laos

Cambodia

Myanmar

Overall average

10.0

8.4

6.9

6.3

0.0

3.6

16.8

9.7

14.2

5.6

Agricultural products

22.0

11.7

8.6

9.6

0.1

7.9

24.2

19.5

18.1

8.7

Animal products

28.1

0.5

4.4

21.3

0.0

0.0

20.1

24.9

27.8

10.7

Dairy products

15.8

3.4

5.5

3.9

0.0

0.0

21.9

8.5

25.8

3.4

Fruits, vegetables, plants

27.6

4.2

5.9

9.4

0.0

0.0

30.6

30.3

14.0

11.5

Coffee, tea

23.1

9.0

8.3

15.8

0.0

1.5

37.9

24.2

26.7

14.0

Grains, grain-based products

19.4

5.1

6.3

10.9

0.0

0.1

27.4

9.2

19.8

8.7

Rapeseed, fat, oil

19.1

1.7

4.0

5.6

0.0

0.0

13.4

12.0

9.1

1.7

Sugar, confectionaries

32.3

2.8

10.4

16.0

0.0

0.0

17.7

12.5

7.0

5.4

Beverages, tobacco

33.4

136.6

51.8

8.2

2.1

138.1

66.6

31.3

33.1

23.2

Cotton

0.0

0.0

4.0

2.6

0.0

0.0

6.0

8.0

7.0

0.8

Other agricultural products

10.3

0.6

4.3

3.4

0.0

0.0

7.8

9.8

15.5

3.1

Non-agricultural products

8.2

7.9

6.7

5.8

0.0

3.0

15.7

8.2

13.6

5.1

Fish, fish products

14.5

2.2

5.8

8.0

0.0

0.0

31.3

12.7

18.9

8.2

Minerals, metal

5.9

10.9

6.6

4.7

0.0

0.2

10.2

5.8

10.9

3.4

Petroleum

9.4

1.1

0.5

2.9

0.0

0.3

17.5

14.9

14.8

1.8

Chemical products

3.8

3.3

5.2

3.8

0.0

0.4

5.2

6.8

9.6

2.3

Wood, paper, etc.

6.8

10.7

5.0

6.9

0.0

4.4

17.2

14.1

11.8

6.5

Textile

8.1

10.5

9.3

9.3

0.0

0.9

30.4

8.9

9.6

8.4

Clothes

24.5

16.0

14.4

14.9

0.0

0.0

49.3

10.0

28.5

17.2

Leather, footwear, etc.

12.7

13.9

9.0

6.7

0.0

3.4

19.0

11.0

18.0

5.3

Nonelectrical machinery

4.7

3.6

2.3

2.3

0.0

7.0

5.4

6.0

14.6

1.7

Electrical machinery

8.3

6.5

5.8

3.8

0.0

14.4

12.8

6.8

24.2

4.3

Transport machinery

20.7

11.4

11.6

9.0

0.0

10.0

22.2

13.5

16.3

4.2

Other products

11.0

4.9

6.9

4.8

0.0

5.0

15.2

10.3

14.6

6.5

-

-

-

Import-weighted average tariff rates

3.6

4.7

4.0

4.2

0.0

5.1

12.7

(2006)

(2006)

(2005)

(2006)

(2006)

(2006)

(2005)

Note: Data for Thailand are as of 2006. Reference: World Tariff Profiles 2008 (WTO)

8

Utilization rate of AFTA among exports from Thailand to ASEAN countries

(Reference) Prepared by Seiya Suekgawa,JETRO based on materials from Thai Ministry of Commerce and the World Trade Atlas

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Table of Contents ASEAN: trying to intensify integration ASEAN+1 and the move to establish an extensive economic region The possibility of a sharp rise in imports from China due to the deregulation of AFTA rules of origin

10

“ASEAN+1” Free-trade area in East Asia achieved through FTA ASEANChina FTA (2010/2015)

ASEAN・EU FTA * Under negotiation

ASEAN-South Korea FTA (2010/2018)

ASEAN-Japan CEP

* Vietnam from 2016

USA・ASEAN FTA * Under consideration

ASEAN-India FTA (2012/2017) * Philippines from 2016

Effective from Dec. 2008 AFTA (ASEAN Free-Trade Area) (2010/2015)

Agreed Aug. 2008 Sign Dec. 2008

ASEAN+6 Concluded

Under negotiation

Agreed Aug. 2008 Sign Dec. 2008

Under consideration /research

ASEAN・CER (Australia-NZ) FTA * Under negotiation

* Remarks: Inside frames are the names of FTA Tariff elimination （early member countries/later joined countries)

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ASEAN-China FTA ◇ Tariff reduction schedule of the original member countries of ASEAN ◇ Tariff rate as of July 1, 2003 Premises (Note) Over 15% Early Harvest More than 5% – 15% or (agricultural and fisheries less products) Less than 5%

Sensitive List Sensitive Track

By Jan. 1, 2005

10%

5%

By Jan. 1, 2006

By Jan. 1, 2007

By Jan. 1, 2009

20%

−

15%

8%

5%

−

10%

8%

5%

Over 5% – less than10%

−

5%

5%

5% or less

−

Whichever is less: 40% of Highly the number of items on the Sensitive List Sensitive List, or 100 items

By Jan. 1, 2015

By Jan. 1, 2018

Eliminated

−

400 items (HS Code 6 digit) and within 10% of gross imports

By Jan. 1, 2012

Eliminated

5%

0-5% tariff rate for 40% of total items

15% or more – less than 20% 10% or more – less than 15%

By Jan. 1, 2010 Eliminated

− 20% or more

Normal Track

By Jan. 1, 2004

0-5% tariff rate for 60% of total items 12%

Current rate maintained Current rate maintained

Current rate maintained

5%

Eliminated (however, no more than 150 items will be under moratorium until 2012)

Completely eliminated

Eliminated Eliminated 20% or less

0-5%

Less than 50%

(Note) MFN is based on the rate as of July 1, 2003. Reduction of Normal Track tariff in 2005 started on July 20. (Reference) Prepared by JETRO based on the “Goods Trade Agreement Under the China-ASEAN Comprehensive Economic 12 Cooperation Framework Agreement”

ASEAN-South Korea FTA ◇ Tariff reduction schedule of the original member countries Tariff rate as of of ASEAN ◇ January 1, 2005 Premises (Note)

No later than Jul. 1, 2006

No later than Jan. 1, 2007

No later than Jan. 1, 2008

0-5% tariff rate for 50% of total items

No later than Jan. 1, 2009

No later than Jan. 1, 2010

Eliminated for more than 90% of total items

0% (however, 5% of items can retain their tariffs until

20% or more

20

13

10

5

0

15% or more – less than 20%

15

10

8

5

0

Normal Track

Completely eliminated 10% or more – less than 15%

10

8

5

3

0

Over 5% – less than10%

5

5

3

0

0

0

0

5% or less

S ensitive List

S ensitive Track

Highly S ensitive List

No later than No later than Jan. 1, 2016 Jan. 1, 2012

Within 10% of total items and within 10% of gross imports

Either 200 items or 3%, and within 3% of gross imports

Current rate maintained

Current rate maintained

20% or less

0-5%

Group A

Current rate maintained

50% or less

Group B

Current rate maintained

Reduce tariff rate by at least 20%

Group C

Current rate maintained

Reduce tariff rate by at least 50%

Group D

Current rate maintained

According to AKFTA Quarter Schedule

Group E

Current rate maintained

Exempted from tariff reduction (40 items) * HS Code 6 digit

(Note) MFN is based on the rate as of January 1, 2005. Reduction in 2006 started from July 1. Sensitive items are defined as within 10% of both the total number of items and imports (statistics of 2004). 13 (Source) Prepared by JETRO based on various information

Thailand’s China trade and FTA utilization rate 2005 Australia China India Japan

Thailand’s Trade growth with China （％） 70.0 60.0

Exports to China

50.0

Import from China

40.0 35.5 30.0

36.4

34.9

32.8

34.9 29.6

28.5 24.3

20.0 10.0

24.5

23.1

67.3% 6.7% 17.6% -

2007

62.6% 12.3% 18.1% -

66.2% 11.1% 14.0% 18.1%

First half of 2008 67.8% 11.2% 13.5% 20.4%

[Note] Because the EPA with Japan became effective in November 2007, the usage rate for 2007 was calculated based on the data from November to December. [Reference] Prepared by Seiya Sukegawa,JETRO based on materials from the Department of Foreign T rade, Thai Ministry of Commerce and the World Trade

60.6

57.9

2006

28.9

22.4

[Top five items FTA is used in terms of value in export to China] (1) cassava, (2) rubber, (3) kerosene, (4) polycarbonate, (4) bituminous oil, (5) fresh fruits



10.0 2.0

0.0 2000

01

< 02 輸入> 03

04

05

06

07 （年）

2005 Australia China India New Zealand

14.7% 0.2% 2.9% 14.8%

2006 13.8% 0.7% 2.8% 38.5%

2007 11.4% 2.3% 1.7% 37.7%

[Reference] Prepared by Seiya Sukegawa, JETRO based on materials from the Department of Foreign Trade, Thai Ministry of Commerce and the World Trade Atlas

[Top five items FTA is used in terms of value in import from China] (1) fruits, (2) ceramic tiles, (3) bags, (4) apples, (5) women’s clothing

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View of ASEAN countries towards China Q. ASEAN countries’ currently important partner countries. 80%

Would a close relationship with China benefit your country? Benefit Does not benefit Region/country ASEAN Laos 79 5 Singapore 75 4 Malaysia 74 1 Thailand 69 8 Vietnam 59 6 the Philippines 55 30 Indonesia 49 9 Cambodia 46 4 [Reference] The Gallup Organization, U.S.

China

Japan

U.S. 57.8%

42.7%

45.0%

42.7%

39.2%

37.9%

40%

32.7% 27.5%

25.3%

22.3% 16.5%

13.0% 12.8% 8.6%

60%

25.8%

29.7% 28.0% 23.3%

22.0%

20% 10.6% 3.6% 0%

Vietnam

the Philippines

Indonesia

Thailand

Malaysia

Singapore

Total

Q. ASEAN countries’ important future partner countries. 56.5% China

Japan

60% 48.2%

U.S. 39.6%

33.4% 40%

33.2%

32.2%

29.0%

26.4% 22.0% 21.7%

22.6% 18.9% 18.5% 14.9% 9.1%

19.1%

20% 13.4%

6.0% 3.2%

4.0% 3.1% 0%

Vietnam

the Philippines

Indonesia

Thailand

Malaysia

Singapore

Total

15

Reference: Poll on Japan in Major Six ASEAN Countries (conducted Feb – Mar 2008)

Table of Contents ASEAN: trying to intensify integration ASEAN+1 and the move to establish an extensive economic region The possibility of a sharp rise in imports from China due to the deregulation of AFTA rules of origin

16

Move towards the revision of AFTA rules of origin Revision and increase in flexibility of AFTA/CEPT rules of origin [Current conditions] Tightening

・ASEAN-South Korea FTA (AKFTA): Value added criteria (ASEAN-South Korea accumulated) 40% or Change of the 4-digit tariff code (CTH) ・ASEAN-Japan EPA (AJCEP): Value added criteria (ASEAN-Japan accumulated) 40% or Change of the 4-digit tariff code (CTH) ・ASEAN-China FTA (ACFTA): Value added criteria 40% (ASEAN-China accumulated) ・ASEAN Free-Trade Area (AFTA): Value added criteria 40% (ASEAN accumulated)   * (1) Change in tariff classification can also be applied to wheat flour, wood products, aluminum products, iron and steel (from fall of 2005).   * (2) Change in tariff classification can also be applied to items in the 11 prioritized areas of integration (from summer of 2007, excluding Myanmar). ・ASEAN-India FTA (AIFTA): Value added criteria (ASEAN-India accumulated) 35% and Change of the 6-digit tariff code (CTSH)

[The 20th AFTA Council] August 2006

“Rules of origin within the ASEAN region (CEPT) should have higher degree of freedom than the FTA with ASEAN dialogue partners (ASSEAN+1s FTA)” [The 21st AFTA Council] August 2007

Changed the AFTA rules to either the “cumulative value added criteria of 40% or change of the 4-digit tariff code (CTH)” [Introduction] Formulation of rules by items to be finished by the end of 2007. Rules are to be changed from January 1, 2008 Implemented

。Put into effect in virtually all member countries on August 1, 2008 (Rules of origin include De Minimis rule of 10% or less) 17

Rising possibility of the inflow of Chinese Products in accordance with the increasing flexibility of AFTA rules of origin

Change in tariff classification (in the case of a 4-digit code)

Invest

MFN: 10% AFTA: 5% MFN: 20% AFTA: 5%

Chinese-affiliated Company A

(China) Wooden cases HS ４４２１ ９０

(1) applicable◎

AFTA-CEPT Apply tariff rates

(2) applicable ◎ Assembly plant of Chinese-affiliated Company A

(China) Diodes HS ８５４１ １０ (China) Cone units HS ８５１８ 90

Speakers HS ８５１８ 22

(3) inapplicable×

(3)’ applicable◎

(Domestic procurement in Thailand) Cone units HS ８５１８ 90

MFN: 15% AFTA: 0% MFN: 10% AFTA: 0% MFN: 0% AFTA: 0% MFN: 10% AFTA: 1% MFN: 35% AFTA: 5% MFN: 20% AFTA: 5% MFN: 5% AFTA: 5%

*: If assembly plant of Company A (Thai company) is approved as a promoted company by the Board of Investment (BOI) in Thailand, import tariff will not be applied for parts procured from China, or refund measures are applied under BIS 18 Section 19. Exports from Thailand to ASEAN is available with AFTA-CEPT tariff rates.

Tariff rates for home appliances in ASEAN6 (TV set) Country Thailand

Regular tariff rate

20%

Malaysia 30%

Indonesia 15%

the Philippines 15%

Exported from 08 09 2010 11 Within ASEAN 5 5 0 Japan (bilateral) 10 5 0 Japan (AJCEP) 15 10 5 0 China 20 20 20 20 South Korea (Same with regular tariff rates) Within ASEAN 0 Japan (bilateral) 18.75 15.63 12.50 9.38 Japan (AJCEP) 27.27 24.55 21.82 19.09 China 12 5 0 South Korea 30 30 30 30 Within ASEAN 5 5 0 Japan (bilateral) 12.5 10.0 7.5 5.0 Japan (AJCEP) 12.5 10.0 7.5 5.0 China 15 15 15 15 South Korea 15 15 15 15 Within ASEAN 5 5 0 Japan (bilateral) 0 Japan (AJCEP) 0 China 8 5 0 South Korea 8 5 0

12

13

15

16

6.25 16.36

3.13 13.64

0 10.91

8.18

5.45

2.73

20

20

20

20

5

5

5 SL

2.5 2.5 15 15

0.0 0.0 15 15

15 15

15 15

15 5

15 5

5 SL 5 SL

Malaysia

the Philippines

Indonesia

April 1st

April 1st

January 1st

April 1st

January 1st

20

Remarks

20

Thailand

20

18

20

Japan

20

17

20

[Note] Tariff reduction date for each year differs by country.

Timing of tariff reduction

14

5 SL

25% B7 0 B10

It is possible for Chinese products to flow into ASEAN as “ASEAN products.”

[Note] China included the product in the Highly Sensitive List. Therefore, ASEAN actually does not need to grant the ACFTA preferential rate. [Source] Prepared based on information from the World Tariff, Japan-Thailand EPA and implementation arrangements, ACFTA and AKFTA. 19

Tariff rates for home appliances in CLMV (TV set) Country Vietnam

Regular tariff rate

40%

Cambodia 15%

Laos 20%

Myanmar 15%

Exported from 8 9 2010 11 12 13 14 15 16 17 Within ASEAN 5 5 5 5 5 5 5 0 Japan (bilateral) (No bilateral EPA) Japan (AJCEP) 35.56 31.11 26.67 22.22 17.78 13.33 8.89 4.44 0 China 40 40 40 40 40 40 40 40 40 40 South Korea 40 40 40 40 40 40 40 40 40 40 Within ASEAN 5 5 5 5 5 5 5 0 Japan (bilateral) (No bilateral EPA) Japan (AJCEP) (Same with regular tariff rates) China (Same with regular tariff rates because the agreement has not gone into effect) South Korea 15 15 15 15 15 15 15 15 15 15 Within ASEAN 5 5 5 5 0 Japan (bilateral) (No bilateral EPA) Japan (AJCEP) 20 20 20 20 20 20 15 15 15 15 China 15 15 15 10 10 5 5 0 South Korea 20 20 20 20 20 20 20 20 20 20 Within ASEAN 5 5 5 5 5 5 5 0 Japan (bilateral) (No bilateral EPA) Japan (AJCEP) 15 15 15 15 15 15 15 15 15 15 China 30 30 30 30 30 South Korea 15 15 15 15 15 15 15 15 15 15

18

Remarks

40 HSL 40 HSL(B)

X (exempted)

15 HSL(B)

15 B 20 SL

15 15％R(a) 15 HSL(B)

[Note] Tariff reduction date for every year is as follows. Timing of tariff reduction

Vietnam

Myanmar Cambodia

April 1st

April 1st

April 1st

Laos April 1st

[Note] Thailand has not signed AKFTA. China included the product in the Highly Sensitive List. Therefore, ASEAN actually does not need to grant ACFTA preferential rate. [Source] Prepared based on information from the World Tariff, Japan-Thailand EPA and implementation arrangements, ACFTA 20 and AKFTA.

Thank you very much for your attention.

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