Trade Outlook for 2016

Last year was quite extraordinary for anyone interested in trade policy.  Things were happening at the global, regional, and bilateral levels and involved most of the countries in Asia.  What will 2016 look like for trade?

The year ahead promises to be quite exciting.  The global or regional economy might be less robust, but there are ample opportunities for companies to use new trade arrangements or to promote specific policy outcomes that can affect their bottom lines.  Many of the trade changes that are coming into effect across Asia will provide new avenues for companies to generate growth and to explore new market opportunities. 

As always, come see us at the Asian Trade Centre for more details on how your firm can use trade agreements and trade arrangements to your advantage and how we might work together to influence trade policy outcomes for the future.

Implementation of the ASEAN Economic Community (AEC):  The AEC came into force at the start of the year.  During 2016, firms should spend time figuring out how to take advantage of existing commitments made by various ASEAN members.[i] 

Government officials have promised to implement the entire set of AEC pledges during 2016.  Many domestic level regulations, laws and procedures have not yet been brought into compliance with ASEAN commitments.  The gaps are particularly large in services and investment and often at the local or provincial levels.

In the diverse context of ASEAN, some members have more enthusiastically embraced the AEC and have made on-the-ground changes as required.  The level of commitment varies across the region, across local provinces, and across sectors or types of commitments.  (As prior Talking Trade posts have noted, please ignore optimistic assessments of levels of implementation drawn from ASEAN’s Scorecard exercise.)

The best use of the AEC, however, may be that companies can use AEC commitments as a platform for engagement with local officials.  If an ASEAN member state has already made a specific commitment, companies can encourage compliance with these existing pledges. 

ASEAN Blueprint 2025:  ASEAN has already started turning its attention to a new set of requirements for the next ten years.  The Blueprint practically promises everything to everyone.  Hence, it also provides an opportunity for savvy firms to help define specific areas where change would be most helpful.

For example, ASEAN could usefully discuss a range of non-tariff barriers.  Up until now, negotiations over various types of barriers like incompatible or inconsistent standards or regulations over things large and small have proceeded slowly.  Firms could help ASEAN focus on the critically important non-tariff obstacles that are hampering trade in a time of economic slowdown in the region.

Clearly, ASEAN will need to do more work to open up services markets and, especially, to think hard about licensing requirements that make it difficult or impossible for companies to provide services across the region.  Given that ASEAN’s own stated objective is to create a market with a free flow of services, these types of barriers to an increasingly important aspect of trade are deeply problematic. 

But ASEAN government officials are often uncertain about their own services markets and have an unclear understanding of the kinds of barriers to trade in services that firms actually face.  Hence, in 2016, it would be extremely helpful for firms to provide specific input to ASEAN about which obstacles should be addressed first in the road to Blueprint 2025.

Regional Comprehensive Economic Partnership (RCEP):  Officials in the 16 member countries[ii] involved in the RCEP negotiations have suggested that the trade negotiations will conclude in 2016. 

For now, there are three rounds scheduled.  The first will take place in Brunei next month.  The Asian Trade Centre has been working to get stakeholder outreach sessions in place for the April meetings in Perth, Australia, and New Zealand in mid-year.  Companies should think about what sort of outcomes would be most helpful in this trade arrangement that brings together all the economies in Asia into one agreement. 

RCEP will, likely, not be terribly ambitious which means that the most highly sensitive goods will not be opened with new, deep tariff cuts (or perhaps tariff cuts at all).

But this does not mean that RCEP will not bring benefits to many firms, even for agricultural trade, textiles, and manufactured goods.  Any agreement that links together 16 of the most important markets in the world can provide benefits for companies. 

Even if the tariff cuts and coverage for goods are relatively thin (and this may not ultimately be the case if officials seize opportunities to bold in 2016), RCEP also includes a range of other issues that also matter, including services, investments, e-commerce, intellectual property rights, and so forth.  The final commitments in some of these areas may ultimately be much more ambitious than market liberalization for goods. 

More important for firms—officials basically have one shot at this agreement.  It is quite rare for governments to sit down in the future and engage in a wholesale revision of an existing agreement.  Whatever comes out of the RCEP process is likely to be the trade agreement across Asia for at least the next decade.  Hence, company engagement with governments at the level of individual members and the group is critical to crafting the best possible deal for the future.

Trans-Pacific Partnership (TPP):  The Talking Trade blog posts have covered the TPP negotiations quite extensively.  Negotiations in this ambitious, sweeping agreement that links together 12 countries[iii] across the Pacific finished in October.  The year ahead will be largely focused on the domestic level ratification procedures needed to bring the agreement into force.

For most firms active in or across TPP member markets, this agreement should bring substantial benefits.  For non-members, the TPP can also have strong impact. 

Firms should spend time in 2016 evaluating the consequences of TPP entry into force, since much of the TPP commitments also start on the date of entry into force.  This includes not just the dropping of tariffs on roughly 90 percent of all goods to zero on that date, but also most of the changes in services, and investment.  Many of the commitments in areas like intellectual property rights or government procurement procedures will also take effect immediately.

Companies need to know what is in the agreement and think hard about what these new commitments may mean for their own firm, for their suppliers, customers and even for their competitors.  Some firms will need to start changing their supply chains in anticipation of new benefits and consider (or reconsider) investment decisions ahead of TPP entry into force.

Bilateral agreements:  While most Asian governments have been focused on regional trade negotiations and commitments, some have continued to sign and will be implementing bilateral trade agreements in 2016.  The most important may be China/South Korea and South Korea/Vietnam.  If the European Union solves an issue domestically with the investment provisions of FTAs, trade agreements with Singapore and Vietnam are finished and more are being negotiated with ASEAN members like Philippines. 

Multilateral or global trade:  Just before the end of the year, the World Trade Organization (WTO) managed to quietly kill off more than a decade of mostly fruitless negotiations in the Doha Development Agenda.  But it did so without consensus from 160+ member states on what, exactly, ought to be done instead.  Hence, 2016 should be a year of intense discussions and dialogue on the multilateral trade front as officials scramble to create a new agenda for global trade.

In short, 2016 promises to be an extremely active year again on the trade front.  There are many opportunities for companies to shape the agenda on the local, regional and even global level and to address many of the specific roadblocks and barriers that impede trade.  We are looking forward to it!

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

[i] ASEAN: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.

[ii] RCEP: Australia, Brunei, Cambodia, China, India, Indonesia, Japan, Korea, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, Thailand, and Vietnam.

[iii] TPP:  Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam. 

Witnessing the Birth of the ASEAN Economic Community (AEC)

The ASEAN Economic Community (AEC) became official on January 1, 2016.  The launch of the AEC represents a high water mark on ASEAN’s decades-long quest to create a stable, more integrated region.

Many ASEAN members are enthusiastically promoting the region and AEC benefits by noting that the market size of the 10 member states collectively add up to US$2.6 trillion with over 622 million people.  As a region, the Secretariat has noted that ASEAN is the third largest economy in Asia and the seventh largest in the world.

While there are multiple elements to the AEC, most firms are interested in promises to create a “free market for goods, services, investment, skilled labor and freer movement of capital.” 

In general, in ASEAN, soaring rhetoric often obscures a rather less glamorous reality on the ground.  Veteran watchers in the region will shrug knowingly and say, “Well, it’s the ASEAN Way—eventually they will get round to doing things properly and certainly, the potential is there.” 

The language of the AEC suggests strong parallels with the European Union, but this was never the intention.  ASEAN is not a common market, does not intend to pool sovereignty, and has a microscopically small institutional structure and matching budget to manage a complicated structure and many commitments.

So what has ASEAN accomplished and where does it go from here?

The primary benefit of ASEAN has been the elimination of tariffs on goods.  This was largely finished in 2010, but note that there are still some gaps in coverage.

Tariffs cannot be viewed in isolation in a trade agreement without simultaneously considering rules of origin (ROOs).   This is because it is possible to open a market completely at zero tariffs (duty free), but create such difficult or onerous rules of origin that hardly any products actually qualify for zero duties. 

ROOs are necessary in a free trade agreement like the AEC because countries want to make sure that only ASEAN businesses benefit from lower tariffs and not firms from non-ASEAN countries. 

Originally, ASEAN used a simple ROO, 40% regional value content (RVC).  This meant that as long as 40% of the content of the item being shipped across an ASEAN border into another ASEAN country come from within ASEAN, it would qualify for ASEAN preferential tariff rates.  However, this simple rule is not always easy for firms to use and, over time, ASEAN included new options as well, including change in tariff classification (CTC) and process rules.  (Note that many of the ASEAN+One free trade agreements use different variations of ROOs.)

With the fall in tariffs, a much more serious problem in ASEAN has been the proliferation of non-tariff barriers (NTBs).  NTBs can include a wide variety of mechanisms, not all of which are designed explicitly to keep out foreign products. 

For example, rules on the labeling of products can be legitimately about providing consumers appropriate information about the content of a good, but can also be done in such a way to place an unfair burden only on imported products.  Other NTBs include other health and safety regulations, as well as import quotas and other quantitative restrictions.

Although ASEAN members promised to eliminate NTBs by 2012 for the original ASEAN 6 members and by 2015 for the CLMV countries, progress has been very slow. 

Opening markets for goods only works if products can transit borders, so ASEAN added trade facilitation to the agenda very early.  The most visible element of ASEAN’s facilitation agenda is the commitment to the ASEAN Single Window (ASW).  This is a very ambitious project aimed at seamless transfer of goods across customs’ authorities in all 10 members. 

The original deadline called for national single windows to be implemented in all 10 members by 2012 in order for the ASW to be ready for the AEC prior to 2015.  However, with the launch of the AEC, not all 10 ASEAN members had national windows in place, and plans to integrate customs across the region are delayed.

The AEC promised to deliver free flow of trade in services.  A fascinating, hard-hitting paper out from the World Bank and ASEAN Secretariat shows how far away the region has been from meeting this goal.  The report notes that ASEAN’s last four years of negotiations in services failed to deliver liberalization. 

Overall, ASEAN shows levels of restrictions in services that are more than 60% above global averages and worse than any region but the Gulf States.  Discretionary licensing regimes create the largest obstacles to the free movement of services and without a renewed focus on regulatory barriers, the situation may not improve in the future. 

Investment liberalization has also proceeded slowly, with limited commitments from many member states.  Many of the current pledges are not likely to be seen as commercially meaningful.

While skilled labor is meant to move freely as well through the use of mutual recognition agreements (MRAs), these arrangements are in place for just eight industries (like architecture, accounting and nursing).  Within these industries, few people have actually moved using an ASEAN MRA, since individuals must clear all domestic immigration and visa hurdles as well as any necessary licensing or regulatory barriers that apply.

In short, the AEC launch does not signify the creation of true common market in Southeast Asia.  It does not meet its own stated objectives for free movement of goods, services, investment, skilled labor and freer movement of capital (where the deadline remains 2020). 

However, while simultaneously trying to finish up commitments in the AEC and handle negotiations with its Dialogue Partners in the Regional Comprehensive Economic Partnership (RCEP), ASEAN officials were boldly crafting a new vision for the future.  The new ASEAN Blueprint 2025 promises to continue the path towards ever-greater economic integration in the future.

The first objective of Blueprint 2025 is to complete all unfinished business from the AEC by the end of this year.  Then, officials will turn their attention to a wide range of deeper integration objectives, including fostering greater resilience; supporting equitable and inclusive growth; furthering poverty reduction; facilitating productivity enhancement; improving prospects for good governance; continuing with connectivity expansion; encouraging sustainability; and spreading green technology.  Stay tuned!

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

A New Awakening? The WTO and Star Wars

Last week two beloved institutions attempted to hit the reset button.  Both institutions started strong, capturing a certain kind of magic that included hope and optimism.  Both appeared to have taken wrong turns in mid-life that left many feeling alienated or just uninterested.  The weekend represented a new “toss of the dice” to rekindle the agenda for the future. 

It is likely too soon to tell how successfully both institutions managed their reboot. The early measures showed one group dominating headlines and generating staggering sums of money.  The other barely rated a mention in leading newspapers and websites. 

The franchise hauling in revenue, of course, is Star Wars.  The launch of The New Awakening  generated more than $500 million in ticket sales in the opening weekend. 

By contrast, the World Trade Organization (WTO) held a ministerial last week in Nairobi, Kenya, that limped to a finish line after a delay.  The biggest story from the event was something that did not happen—the final ministerial statement did not reaffirm the importance of the Doha Development Agenda (DDA).

Early signs may ultimately be misleading, of course.  The new Star Wars picture may rapidly vanish from public view, particularly with a planned zillion more sequels in the pipeline.  The WTO might take advantage of opportunities created by quietly killing off a plot line that was advancing nowhere.

The parallels between the two were striking.  Without spoiling too much of the plot, consider:

The latest Star Wars movie was not so much a refresh of the original than a remake of the 1977 movie (with a dash of the next two films thrown in).  It begins with a teenager wearing what appears to be linen struggling to eke out an existence on a barren desert planet.  Into this situation, insert one squat, round droid that becomes attached to our teenage hero. 

This droid is—wait for it—carrying a vital set of plans that are critical to the survival of a ragtag resistance force.  But the evil Dark Side knows that the droid is present and destroys the village.  Our teenage hero shows off an impressive range of skills, narrowly escapes with the droid and the plans, and is thrust into a galactic battle to save humanity. 

How does our hero escape the village carnage?  In a beloved spacecraft that, despite the passage of time and a complete lack of use for decades, still manages to leap off the ground and outrun all the existing aircraft (which are, strangely, also using exactly the same models and technology as before).   It flies to planets that are either all green and lush with trees or all snowy white and angular. 

Without giving away the limited plot of the movie, the adversary is using EXACTLY the same primary weapon that our ragtag group of heroes have faced twice before with eerily similar weaknesses.

The WTO has been stuck in a similar time warp.  The Doha Development Agenda (DDA) was first outlined decades ago.  It was launched with much fanfare in November 2001 in Doha, Qatar. 

The DDA represented a new hope.  Following the success of the Uruguay Round negotiations, the new WTO institution had a mandate to pursue trade agreements that went beyond tariff cutting for goods.  The very methods used to reach agreement would be new, with regular consultations that included every member. 

But as years turned to decades, the DDA remained stagnant.  The negotiating methods proved difficult to manage as the number of members soared to over 160 and the diversity of membership increased. 

The agenda got stuck in amber.  Basically, every time the organization might have tried something new, it got sent back to a desert planet to scavenge for spare parts.  Some members argued that nothing new could be attempted without first fixing old issues.  Given that every member has an effective veto over the actions of the army, the entire machinery ground to a halt. 

Technology, time and attention moved on while officials argued over tariff cutting formulas for agricultural goods.  This is not to argue that tariff cuts or agriculture are not important, but it is a bit like relying on a 40 year old spacecraft to outrun new competitors. 

The battle lines in the WTO got ever more complicated, as members organized themselves in various and proliferating groupings.  Perhaps the WTO could have used a droid with a map, or even a fragment of a map, to keep the effort on track.  Unlike Star Wars, WTO members cannot count on a villain wearing helpful black cape and face mask made from a trashcan.  Members probably could not agree on what adversary they are even trying to fight. 

Since the Dark Side in Star Wars seems unable to create a new approach to weapons or spacecraft or immense battle weapons, the rebel alliance refought old battles.  Something similar happened in the WTO as officials spent endless hours circling exactly the same territory over and over again.  They could not advance any other element of the agenda until tariff discussions for agriculture were completely addressed. 

The WTO’s version of victory last week was not a satisfying massive implosion of a planet with an enveloping roar, but was instead the accession of Afghanistan and Liberia to the grouping.   A subset of 53 members reached agreement on an extension of product coverage for information technology products (ITA2). 

Also, members agreed to limit the use of export subsidies and credits for agriculture in non-legally binding ways.  This sounds like a major accomplishment, but actually likely applies to very few.  Members can still subsidize agriculture (and lots of other things), just not directly for the purpose of exporting agricultural goods to other WTO members.  

The most relevant paragraph and meaningful element of the final declaration from Nairobi reads:

30. We recognize that many Members reaffirm the Doha Development Agenda, and the Declarations and Decisions adopted at Doha and at the Ministerial Conferences held since then, and reaffirm their full commitment to conclude the DDA on that basis. Other Members do not reaffirm the Doha mandates, as they believe new approaches are necessary to achieve meaningful outcomes in multilateral negotiations. Members have different views on how to address the negotiations. We acknowledge the strong legal structure of this Organization.

This is not exactly a light saber thrust through the heart, but in diplomatic terms it shows that change is finally coming to the WTO.  What shape it will take is not yet clear, particularly as decisions still have to be taken by consensus.

If this were Hollywood, the WTO just set itself up for the next movie—will our rebel alliance manage to achieve compromise in the future?  Will the battle be rejoined a fourth time with the same type of evil master weapon?  Will the ragtag alliance simply fold, content to sit back and hear legal disputes based on violations of rules written back when Luke Skywalker was a younger man?  Will our heroes be outgunned by a newly organized Dark Side with cutting-edge technology? Or will the parties find new battlefields entirely?  Stay tuned.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Using the Trans-Pacific Partnership to Foster Value Chains

APEC Currents December 2015

Companies are increasingly structuring or restructuring their value chains to take advantage of new opportunities. In a value chain world, firms have been using advancements in technology and transportation to fundamentally restructure their existing operations.  Companies can increasingly locate exactly the right “slice” of an operation in exactly the right geographic location. Even the smallest firms in remote locations can plug into chains and deliver goods or services to other companies or directly to consumers. 
 
New trade agreements, and particularly the Trans-Pacific Partnership (TPP), should make it even easier for companies to create or contribute to value chains across the member countries.   
 
The TPP brings together 12 countries:  Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam. The agreement is complex and broad with 30 chapters and includes many changes at the domestic levels for member countries.
 
Under the agreement, companies can gain substantial benefits from being located in TPP member countries and selling goods and services into other TPP member markets. 
 
The most obvious change in a post-TPP world will be the reduction of tariffs. On the date of entry into force of the agreement, 90% of all goods tariffs in all 12 members will drop overnight to zero.  The remaining tariffs will also drop, over time, with many eventually becoming duty free.
 
The tariff reductions mean that firms may no longer have to contend with tariff peaks—specific items or sectors where tariffs can easily reach 30, 50, or 150%. In many of these markets, companies hoping to export products have not been competitive.  With the reduction in tariffs, new TPP markets should now be attractive to many firms.
 
Dropping duties to zero also improves the prospects for firms to add value to products at home.  In the past, tariff escalation meant that low tariffs might apply to raw and unprocessed materials like raw coffee beans. But once processed, like roasted coffee beans, firms might face higher tariffs. Worse still, ground coffee might draw higher tariffs yet and a bottled coffee drink could have had tariff rates so high as to be completely impossible for firms to compete with locally produced bottled beverages.
 
After the TPP is implemented, however, all tariffs may drop to zero, including reductions in processed goods. This is especially critical for food manufacturers who can take advantage of duty free access for raw, roasted, and ground beans as well as bottled coffee. Firms can shift into higher-value sectors now and are not limited to exporting only unprocessed goods and raw materials to remain competitive.
 
The rules of origin (ROOs) in the TPP are the same for all products across all 12 member countries. This means that once a product qualifies for preferences in one country, it automatically is eligible for preferences such as reduced or zero duties in all members.
 
The TPP also allows cumulation across TPP member markets. This lets firms add up (or cumulate) the materials and inputs for any given good from across all 12 TPP markets.  For example, a firm that produces packaged soups can add up vegetables, broth and noodles added from TPP markets like Australia or Malaysia to “count” towards meeting the overall rule of origin for soup exported to Canada, Japan or the United States. 
 
Cumulation across a dozen participants means that the TPP is likely to be more helpful for companies than bilateral free trade agreements agreements where firms can only include the contents sourced from the two partners. Bilateral deals also only work for selling the finished goods back to the partner.
 
Each product or tariff line has a specific rule of origin attached.  Firms will need to research their product categories to determine how best to meet TPP origin criteria. (Soup 21.04 requires a change in tariff heading, so nearly all soups should easily qualify as “TPP originating.”)
 
The changes in tariffs are to be accompanied with new procedures in customs. For instance, TPP members are going to make a host of changes designed to speed up and reduce costs at the borders. 
 
Many firms will be eligible for self-certification of origin, eliminating the need for time-consuming trips to chambers of commerce or other bodies to obtain a certificate of origin (CO).  Customs officers will grant firms advance rulings that will clarify the specific rules of origin to be applied to particular products and ensure that these classifications will not shift for a year. As noted earlier, once a product qualifies for benefits, it qualifies under the origin criteria for entry into all 12 member markets.
 
The agreement also includes specific rules for express shipments and other expedited delivery processes. Customs officials are to allow pre-arrival processing and guaranteed release within specific time periods. 
 
Supply chain and logistics companies themselves may also benefit directly from TPP changes.  This is because the agreement also opens up services sectors for easier access to TPP firms. 
 
Other key services may include back office processing of all types, legal services, HR, accounting, transportation, warehousing, or construction.  The method of opening service sectors is also important, as member governments promised to allow TPP member participation in services sectors automatically, unless an individual government has specifically exempted a service from market opening. The actual numbers of reservations lodged by member governments are relatively modest.
 
TPP firms also have significantly improved investment opportunities in member countries, including market opening and better protection of investments.
 
The TPP also contains the first agreement on e-commerce. For smaller firms, this chapter may be particularly important as small companies can more easily plug into supply chains using e-commerce. 
 
Note that firms need not automatically be registered, headquartered or file taxes in a TPP member country in order to count as a TPP firm—what matters is largely where, in geographic space, production takes place.  The final products must also be sold into TPP markets.  It is not possible to use the agreement and qualify for benefits into non-member markets. 
 
As an example, a company cannot create soup in Singapore using largely TPP content and sell this with zero tariffs into the EU. The EU is not a participant in the TPP and none of the provisions of the agreement apply for items destined for European markets. Soup destined for the Japanese or Australian markets, however, is eligible for TPP benefits since Japan and Australia are partner countries.

TPP negotiations are complete, but domestic procedures must be completed before the deal will be implemented. In general, officials created three means to bring the agreement on line.  First, if all 12 members finish domestic procedures within 2 years, the deal takes effect 60 days after the last member agrees to implementation. If, however, all 12 have not agreed within 2 years of final signing, then the TPP can automatically take effect in 26 months if at least 6 members representing 85% market share (in practice, the United States, Japan and four other members) have completed their domestic procedures. Finally, if the internal approvals process drags on longer than two years, the TPP can come into effect 60 days after the 6th member (at least) finishes domestic procedures for implementation.
 
The agreement provides potentially significant benefits for qualifying firms and products.  Companies may find that existing supply chains should be altered or adjusted to allow specific products to qualify for TPP benefits into TPP member markets. Some changes in sourcing of inputs and raw materials may be necessary to reach the necessary level of content for the agreement to be applicable.
 
This complex trade deal, however, will also require an investment by companies that intend to use the agreement into understanding specific provisions.   Firms must determine which benefits may or may not apply. But the payoff from successful use of the TPP could be substantial.
 
The release of the TPP texts also allows other APEC economies to study the agreement carefully and consider how similar rules and procedures might be implemented in different settings.  For example, some of the provisions currently found in the TPP might be usefully picked up in the ongoing Regional Comprehensive Economic Partnership (RCEP) negotiations. APEC members may also want to think about how rules that help foster value chains could be incorporated into a potential Free Trade Area of the Asia Pacific (FTAAP). 
 
Finally, since the benefits of the TPP could be substantial for many companies, excluded parties may need to examine their own domestic rules and regulations with a keen eye towards improving competitiveness conditions on the ground.  Firms are mobile and will move to take advantage of opportunities for growth and expansion wherever they find them. Countries that have an uncertain or risky policy environment or expensive, time consuming or complicated procedures in place may not be well positioned to compete going forward. 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Lipstick, Bicycle Chains and Durians: All Free Trade Agreements Are Not The Same

Free trade agreements (FTAs) have been mislabeled—they ought to have been called preferential trade agreements (PTAs) instead.  The agreements are not so much about “free” trade as they are about giving preferences or benefits to member state firms that non-member firms do not receive.  The net effect might be more “freeing” but this is not the same thing as giving the same set of benefits for everyone. 

We can argue about whether or not granting different access to various partners is helpful or harmful.  Rather than engage in a philosophical discussion about the merits of global vs. regional vs. bilateral trade deals, this post highlights differences in one important element of existing trade agreements:  various tariff preferences granted for specific products into just one country.  Showing how existing trade agreements signed by Vietnam handle the same limited set of products like lipstick, bicycle chains and durians helps illustrate variations across FTAs.

The primary outcome of existing FTAs has been to grant member firms lower tariffs than non-members receive.  FTAs may do lots of other economic things, including opening up markets for services or investment or creating new commitments or rules for intellectual property rights or competition policy.  But most of the focus and use of existing FTAs has been to receive lower tariffs (that can be thought of as a tax on imports) than firms could receive before an FTA came into existence.

Whenever we assess “quality” of an FTA, a key element is the extent to which the agreement provides new market access for firms by lowering tariffs on goods.  Countries can agree to make no new commitments at all—the existing tariff on imported goods in a category remains unchanged (at the MFN level that applies to all WTO members).  Or countries can agree to lower tariffs in certain product categories.  They can do so all at once at the very beginning of the deal or they can do so gradually over time (in even stages or in “lumpy” reductions where a tariff might drop a little bit up front and steeply at some distant time). 

More ambitious deals generally offer 1) deeper tariff cuts on 2) more products in 3) a shorter time frame.  Because FTAs are the result of negotiations, the content of any individual FTA varies—all parties have to agree on the final commitments.

As newer agreements get signed, the old agreements are not retired.  Instead, companies can opt to use whatever deals provide the most useful benefits for their products.  For many products, FTAs provide no difference in tariffs as the MFN rate is already 0.

But for other items, FTAs do provide benefits that can vary by agreement.  To see how this works in practice, consider specific products that firms may want to export to Vietnam.  Vietnam has multiple agreements in force, mostly centered on ASEAN.  The country has enthusiastically been signing new deals, including the TPP and a bilateral agreement with the EU and another with South Korea, but these have not yet taken effect.

A company that wants to ship lipstick into Vietnam from a country with no existing FTA has to pay the MFN rate of 20%.  But firms in ASEAN can ship lipstick into Vietnam with no tariff at all using ATIGA.  The ASEAN-China agreement (ACFTA) also allows Chinese companies to ship lipstick duty free to Vietnam. 

As with any FTA, firms do have to meet rules of origin (ROO) criteria to be eligible to receive lower tariffs.

Korean companies currently have no benefits for lipstick in their ASEAN-Korean FTA (AKFTA).  This means that, while many Korean products receive lower tariff rates on products using this agreement, lipstick exporters are out of luck and must pay the MFN rate of 20%. 

Japanese exporters are granted a slight duty reduction at 20% in the ASEAN deal (AJCEP) but a bilateral agreement between Vietnam and Japan gives Japanese companies an improved deal at 14.5% (VJEPA). 

Australian and New Zealand (AANZFTA) companies get access to the lipstick market of Vietnam with a 10% duty and India receives (AIFTA) a reduction to 20%. 

Under the TPP, the 11 parties in the agreement can look forward to 0 duties, but only after the current rate drops in four equal installments across 4 years.  Hence, in relatively short order, Japanese, Australian and New Zealand companies can expect to receive the same 0 duty preferences that their ASEAN competitors already receive.  Since the TPP will grant better benefits than existing deals, firms should start using the TPP.  For American or Mexican or other TPP lipstick companies that only had MFN rates before, the post-TPP preferences are especially important.

Vietnamese customers might be asking whether all these trade deals mean that they can expect to pay less for lipstick in the future.  The answer is that they might—if firms decide to pass the tariff savings through into lower prices.  Firms could also opt to keep the savings in the form of higher profits or greater shareholder returns. 

It’s also possible that lipstick manufacturers will not take advantage of FTAs, as the market in Vietnam is not attractive enough—for whatever reason—to ship lipstick no matter how high or how low the tariffs might be on the product.

The same uneven set of benefits can be seen for other firms shipping goods to Vietnam.  Bicycle chains are surprisingly complicated, with multiple categories of chain.  For a roller chain of expanded metal (HS73151111), the MFN rate is 40%.  ASEAN firms pay a 5% duty.  Chinese firms pay 20%.  Korean firms have no specific benefits under AKFTA and pay 40%.  Japanese firms (under both the ASEAN agreement and the bilateral deal), Australian and New Zealand firms all pay 35%.  Indian firms are charged 36%.  TPP members will pay 0 duty in four years.

Durians and many other fruits are subject to an MFN rate of 30%.  But ASEAN, Chinese, and Korean farmers can ship durians duty free now.  Japanese firms get better benefits under the ASEAN agreement than the bilateral (20% vs. 22.5%).  Australia and New Zealand are currently subject to 10% tariffs on durians and Indian companies pay 20%.  Post-TPP entry into force, however, members will pay 0 duties immediately for durian shipments to Vietnam.

The examples show the differences across trade agreements.  For most products where the existing MFN rate is higher than 0, ASEAN already grants duty free access to Vietnam.  Some of the existing trade agreements match these 0 tariff rates or at least provide lower tariff levels than non-FTA members receive.  Since the TPP is both broader and deeper than existing agreements for Vietnam, firms should expect better benefits (or tariff cuts that match ASEAN) for nearly all products either on entry into force of the agreement, or in the near term. 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***