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AFTA Text
AFTA Text
AFTA Text
Narmin
Banu
Emil
Amun
slide 1, 2 - INTRODUCTION
slide 3 - BACKGROUND
The creation of the ASEAN Free Trade Area (AFTA) was agreed at the 1992 ASEAN Summit in
Singapore. The member countries of the Association of Southeast Asian Nations (ASEAN)
embarked on the formation of a free trade agreement (FTA) under the name of ASEAN Free
Trade Area (AFTA) in 1993. Several motives behind the establishment of AFTA may be
discerned. First, ASEAN policy makers thought that an expansion of intra-ASEAN trade would
promote economic development of the ASEAN countries as the expansion of exports would
result in output growth and the expansion of imports would improve productive efficiency. In
particular, the creation of a large unified ASEAN market through AFTA would enable producers
in ASEAN to exploit the benefits arising from the economies of scale. Second, a rising trend of
regional trade agreements (RTAs), which include FTAs and customs unions, in the world put
pressure on ASEAN members to form an FTA, as they saw that such a trend would result in
discrimination against their products in their export markets. Faced with difficulties in
multilateral trade negotiations in the Uruguay Round of trade negotiations under the auspices
of the General Agreement of Tariffs and Trade (GATT), many countries in the world including
European countries and the United States turned to RTAs with like-minded countries in order to
obtain the benefits of trade liberalization. Third, the rise of China as an economic force was
seen as a strong threat to the ASEAN members in terms of export competition and attracting
foreign direct investment, which would contribute to economic growth. The formation of AFTA
was considered effective for dealing with this threat.
The AFTA program was initiated in 1992 to create an integrated market among ASEAN’s close to
half a billion people making the ASEAN economies more efficient and competitive, and attract
investments into the region. The ultimate objective of AFTA is to increase ASEAN's competitive
edge as a production base geared for the world market. A critical step in this direction is the
liberalization of trade in the region through the elimination of intra-regional tariffs and non-
tariff barriers. This will have the effect of making ASEAN's manufacturing sectors more efficient
and competitive in the global market. At the same time, consumers will source goods from the
more efficient producers in ASEAN thus expanding intra-ASEAN trade. As the cost
competitiveness of manufacturing industries in ASEAN is enhanced and with the larger size of
the market, investors can enjoy economies of scale in production. In this manner, ASEAN hopes
to attract more direct foreign investments into the region. This will, in turn, stimulate the
growth of support industries in the region for many direct foreign investments.
Inclusion List.
Products in the Inclusion List are those that have to undergo immediate liberalisation through reduction
in intra-regional (CEPT) tariff rates, removal of quantitative restrictions and other non-tariff barriers.
Tariffs on these products should be down to a maximum of 20% by the year 1998 and to 0-5% by the
year 2002. The new Members of ASEAN have up to 2006 (Viet Nam), 2008 (Laos and Myanmar) and
2010 (Cambodia) to meet this deadline. By the year 2000, there would be 53,294 tariff lines in the
Inclusion List representing 82.78% of all tariff lines in ASEAN. Some products which are common in most
Member States are : machinery equipment, electrical equipment, and iron and steel products.
Products in the Temporary Exclusion List can be shielded from trade liberalisation only for a temporary
period of time. However, all these products would have to be transferred into the Inclusion List and
begin a process of tariff reduction so that tariffs would come down to 0-5%. Starting on 1 January 1996,
annual installments of products from the TEL have been transferred into the Inclusion List. By the year
2000, there would remain 9,674 tariff lines in the TEL representing about 15.04% of all tariff lines in
ASEAN.
Sensitive List.
This contains unprocessed agricultural products, which are given a longer timeframe before being
integrated with the free trade area. The commitment to reduce tariffs to 0-5%, remove quantitative
restrictions and other non-tariff barriers is extended up to the year 2010. The new members of ASEAN
have up to 2013 (Viet Nam), 2015 (Laos and Myanmar) and 2017 (Cambodia) to meet this deadline. By
the year 2000, there would be 370 tariff lines in the Sensitive List making up 0.58% of all tariff lines in
ASEAN.
Slide 9 -
ASEAN’s trade and investments have fluctuated since 2010 (e.g. the post-
recession recovery, see Figure 2.4). This was a result of a general cyclical
downturn in trade and an overall moderation in the global economy. Trade
picked up in 2017 as advanced economies started to recover and instabilities
in the markets subsided with expectations of gradual policy normalisation.
However, in 2018 trade tensions aggravated global uncertainties and stifled
the economic expansion. Growth rates of nominal GDP, trade in goods,
trade in services, and FDI normally move together, with slight variations for
FDI. Hence, along with the downturn in economic activities following the
rising trade and investment protectionism among major economies, trade in
goods and services (as well as investments) also dipped in 2018.
At the same time, the share of intra-ASEAN trade in goods and services
stayed relatively stable between 2010 and 2018, declining only slightly in the
second half of the decade. The intra-regional share of trade in goods fell
slightly to 23.0% in 2018 from 25.1% in 2010, while the intra-regional share
of trade in services was down from 18.4% in 2010 to 15.7% in 2018. For FDI,
the intra-ASEAN share stayed within 15%-22% from 2010 to 2018, with the
share in 2018 (15.9%) slightly higher than 2010’s 15.1%.
The free flow of goods has long been an important aim of ASEAN economic
integration. In fact, the creation of an ASEAN Free Trade Area (AFTA) in 1992
predated the launch of the AEC Blueprint 2015 in 2007. ASEAN and its
individual Member States have increasingly become stronger players in
global trade. The region’s trade in goods has markedly increased from USD 2
trillion in 2010 to USD 2.8 trillion in 2018, or 7.2% of global trade, placing
ASEAN – collectively – as the fourth largest trading economy in the world.8
Except for 2015 and 2016, exports of goods consistently rose during this
period, reaching USD 1.4 trillion in 2018. At the same time, imports of goods
showed a similar path and reached USD 1.4 trillion by 2018. Imports have
been consistently lower than exports, which made ASEAN’s trade balance
positive throughout the observed period (see Figure 3.1).
Collectively, ASEAN internally is the largest market for its total trade, at
23.0% in 2018; followed by China (17.2%), the EU (10.2%), and the US
(9.3%). The shares of intra-ASEAN merchandise exports and imports in 2018
was 24.2% and 21.7% of ASEAN’s total exports and imports, respectively.
Other significant markets for ASEAN exports in 2018 were China (13.9% of
ASEAN’s total exports), followed by EU-28 (11.2%), the US (11.2%), and
Japan (7.9%). For ASEAN imports, the largest sources after intra-ASEAN were
China (20.5%), EU- 28 (9.2%), Japan (8.4%), and the US (7.4%). Figure 3.2
shows how the composition of ASEAN’s exports market and import sources
changed between 2010 and 2018.
While the intra-ASEAN shares in total exports and imports did not change
much between 2010 and 2018 (from 25.2% to 24.1% and from 25.0% to
21.8%, respectively) in absolute terms, intra-ASEAN exports increased by
30.6% over this period to reach USD 345.2 billion in 2018, and intra-ASEAN
imports by 26.8% to reach USD 302.3 billion.
Well embedded in global value chains, the region is also one of the largest
globally in terms of trade in goods. ASEAN has a 7.2% share in global trade in
goods (ranked fourth after the EU, China, and the US) and a 6.8% share in
global trade in services, and ranked fourth after the EU, the US and China.
With strong economic fundamentals and a fast-growing market, ASEAN is
also an attractive investment destination. In 2018, ASEAN received USD
154.7 billion, or 11.9% of total global FDI inflows, the highest in its history,
ranking third after the EU and the US. The region is also among the largest
global investors, with outward investments amounting to USD 69.6 billion –
6.9% of the world total.
Slide 17 - Impacts of ASEAN on International
Trade:
The international trade environment is becoming vastly complex, with
increasing prevalence of anti-globalisation agendas such as the current
China-US trade actions, alongside other countries’ countermeasures. The
ever-growing number of both bilateral and regional free trade agreements
(FTAs) also increases the complexity for companies looking to reduce duty
costs. In recent years, we have seen authorities in Asia increasingly focus on
enforcement of cross-border tax and customs regulations. The heightened
frequency of audits and aggressiveness of these authorities are creating
challenges for businesses. This is compounded by authorities utilising digital
technology and data to identify target companies and review for non-
compliance. On the other hand, there are trade liberalisation measures such
as FTA signings which create opportunities for businesses. For example,
Indonesia and Australia signed a bilateral FTA in March this year. It allows
the reduction or elimination of import tariffs on 99 percent of Australia’s
exports to Indonesia, by value, and elimination of import tariffs on 100
percent of Indonesia’s exports to Australia. However, conditions apply and
require careful management. With the implementation of the World Trade
Organisation (WTO) Trade Facilitation Agreement (TFA) in many countries,
businesses can also look forward to increased simplification and
harmonisation of export and import processes. All Association of Southeast
Asian Nations (ASEAN) countries have already ratified the TFA. However,
progress on implementing commitments differs. For example, Malaysia’s
current rate of implementation is about 94 percent, while Vietnam’s current
rate is about 26 percent. Among others, there are provisions for expediting
the clearance of goods and the issuance of advance rulings which businesses
can take advantage of to create trade certainty for their operations.
Businesses can also tap into the rapid development of digital technology,
such as trade data analytics and robotic process automation technologies, to
identify and address both trade opportunities and inefficiencies.
ASEAN is a high-growth region, given the growing economic affluence and
rapidly rising middle class over the last decade. It appears many companies
from various industries, including clothing, furniture and electronics, are
shifting their operations to lower-cost ASEAN countries such as Vietnam and
Thailand, which have adequate production facilities and a good network of
FTAs in place. With escalating trade tensions, this trend of companies
shifting sourcing or export production to ASEAN could accelerate. This can
potentially drive greater growth and job creation in ASEAN. When one
country in ASEAN is chosen as the investment destination, we see that as
not just a win for that country, but a win for ASEAN overall, as that
investment will likely create opportunities for other ASEAN locations as well,
due to their economic interconnectivity and proximity.
Each ASEAN country is unique with varied strengths and challenges, with
differences in terms of business environment, corporate tax regime,
availability of investment incentives, skilled resources, infrastructure,
operating costs and supply chain capacity, which businesses should consider
prior to investing in ASEAN. Importantly, while ASEAN governments have
worked together and achieved some level of success in trade integration in
the region, each ASEAN country still has different systems and laws. This is
further complicated by the fact that local practices may be inconsistent with
the law. For example, we have seen instances where government authorities
denied the provision of investment incentives and tax refunds without
providing reasons, even though legislative requirements appear to have
been met. Deep local knowledge is crucial for businesses to successfully
navigate the practices ‘on the ground’. It also allows businesses to assess
which countries best meet their specific investment needs and whether the
local risks or uncertainties are manageable.
There are nearly 300 regional trade agreements and numerous bilateral
trade agreements in force around the world. It is a challenging task in its
own right to keep track of all the agreements, let alone have a deep
understanding of all the rules and obligations. However, while the increasing
number of FTAs brings complexity, it also brings huge potential benefits. Key
benefits are the elimination and reduction of tariffs and increased
connectivity, which grant greater market access to companies. Most ASEAN
countries have eliminated intra-ASEAN import duties on over 99 percent of
their tariff lines under the ASEAN Trade in Goods Agreement (ATIGA). This
gives companies manufacturing within ASEAN and with goods that meet the
rules of origin market access to over 650 million people. Some ASEAN
countries have also signed an increasing number of FTAs with countries
outside of ASEAN. One example is the signing of the Comprehensive and
Progressive Agreement for the Trans-Pacific Partnership (CPTPP). It brings
together 11 countries from both sides of the Pacific, representing about 14
percent of the global economy. The agreement has entered into force for
seven of the countries. Under the CPTPP, sourcing and manufacturing in
certain ASEAN countries – Singapore, Vietnam, Brunei and Malaysia – can
provide companies with market access into Australia, Canada, Japan, Mexico
and New Zealand. These ASEAN countries can be used as a cost-effective
base for export of goods to other parts of the world.
As a region, ASEAN has in the last decade been enjoying strong foreign
direct investment (FDI)-driven economic growth. This strong FDI inflow is by
no means accidental. ASEAN governments have long been proactive in using
fiscal policy tools such as tax incentives to attract FDI. Every ASEAN country
has established numerous incentive schemes, which provide a wide range of
options for foreign investors investing in respective countries. These
schemes have been implemented through, among other ways, the setting
up of special or designated economic zones, granting additional tax
allowances and credits to investments, providing tax exemptions and
concessionary tax rates, personal tax reductions, as well as indirect tax and
customs incentives.
The United States, the European Union and Japan continued to be ASEAN’s
largest export markets. Japan, followed by the U.S. and EU, were the largest
sources of ASEAN imports. During the first half of 2002-2003, ASEAN-6 trade
with major markets as a whole increased by 11.71 percent for exports and
6.91 percent for imports. However, ASEAN exports to the U.S. and India and
imports from Canada and India declined during the same period.