AEC 2015 Prospects: Part one: Overview and trade in goods

AS THE day of reckoning for the Association of Southeast Asian Nations (ASEAN) Economic Community (AEC) draws closer, our clients have been asking how further integration will impact doing business and operating in a regional environment given the diversity of culture, political platform, scale of market and geography.

Though many companies have long engaged in cross-border operations in the region, the larger market access envisioned under the AEC raises questions about what to expect and how to adjust. To answer these, we are rolling out a five-part series in this column to not only condense explanations on the ASEAN’s various agreements but also to pinpoint opportunities and challenges in 2015 and beyond.

This first installment will provide an overview of the opportunities, challenges and the overall big picture scenario in the AEC before delving into the nitty-gritty of trade in goods -- particularly what to expect in terms of tariff cuts as we move toward a single regional market and production base. Next week, Part Two will explain how to qualify for lower or zero tariffs by making sense of tariff codes and rules of origin. Parts Three and Four will go on to discuss services liberalization, starting with the Philippines’ commitments and then those of other key ASEAN members. Part Five will conclude with a look at envisioned enhancements to the flow of investment within the region.

OVERVIEW
The AEC is due to be officially realized by Dec. 31, 2015, five years ahead of the original deadline, following an acceleration agreement signed by ASEAN leaders in Cebu. However, in that same city just last February, Department of Trade and Industry Assistant Secretary Ceferino S. Rodolfo emphasized that the AEC is actually virtually upon us already.

Speaking to participants at the ASEAN Economic Forum organized by SGV & Co. and the Sun.Star media group, Mr. Rodolfo pointed out that more than 90% of tariffs among the ASEAN-6 (Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand) have already been at zero since 2010. The other members -- Cambodia, Myanmar, Laos, and Vietnam (CMLV) -- are likewise undertaking tariff cuts albeit at a slower pace.

After all, the idea underpinning the blueprint is to phase in the initiatives depending on the development of each member. This is in keeping with AEC’s goal to achieve not just a single competitive production base integrated with the rest of the world, but also one that engenders equitable economic development. By tailoring the initiatives to each member’s capabilities, the integration project does not pit ASEAN members only as competitors but also as complements.

Taking on this mindset of complementarity will help companies unlock the ability to imagine the full potential of the AEC. The question is no longer solely about what business will be lost to competitors but, instead, what gains can be reaped from new alliances.

Some firms have long recognized this. They import inputs such as intermediate goods and services from neighboring suppliers, allocate operations across their ASEAN subsidiaries, and leverage the region’s combined consumer bases as a larger selling platform. This has been the case in the electronics, automotive, and consumer products industries even back in the 1990s.

Moving forward, the AEC can be expected to enhance the use of such linked supply chains and cooperative strategies with the freer flow of capital, investments, services, and -- not least of all -- goods. Capital flow and demographic shift could also be enhanced with a single market and production base.

TRADE IN GOODS
For 2015 specifically, opportunities relating to the single market and production base can be gleaned from combing through the countries’ tariff commitments in the annexes of the ASEAN Trade in Goods Agreement (ATIGA).

Our research shows that the bright spots for 2015 are two-fold: first, increased market access to the lesser developed but fast-growing CMLV, which are beginning to ease more into the AEC; and second, a lowering of tariffs on sensitive agricultural products like rice and sugar among the more affluent ASEAN-6. In short, firms’ regional strategies will be enhanced with the inclusion of more members and more sectors into the integration project next year.

The CMLV market is particularly promising because it is a valuable addition to the market of the ASEAN-6, which had pursued integration more aggressively. The International Monetary Fund expects Vietnam’s Gross Domestic Product to grow by 5.4% in 2014 and 2015, while Cambodia’s economy is forecast to expand by a swifter 7.2%-7.3%.

A key change anticipated in 2015 is Vietnam’s commitment to cut even further tariffs on imported automotives and motorcycles, thus creating an opportunity, say, for car companies to export units from the Philippines instead of putting up a factory in Vietnam. Vietnam’s tariffs on imported vehicles are slated to fall to 35% in 2015 as part of a yearly cut in the tariff, which is meant to drop to 0% by 2018 according to news reports. Already, Vietnam’s 2012-2014 tariff schedule shows that import duties which stood at 70% in 2012 have been cut by 10 percentage points each year ending at 40% for 2014.

Furthermore, according to the Philippines’ Tariff Commission, Vietnam has committed to eliminate its existing tariff rate quotas (TRQs) in three tranches leading to 2015 with flexibility up to 2018. Vietnam imposes TRQs on eggs, cane sugar, tobacco, and salt.

Cambodia’s tariff schedule, on the other hand, shows that various goods imported with 5% tariffs will enjoy a 0% to 5% rate come 2015, signaling possible elimination of, or at least cuts in, duties. These goods include Philippine key exports such as wiring harnesses, chemicals, bananas, mangoes, seaweed, and many others.

Laos, for its part, had committed to implement tariff cuts on sensitive agricultural produce back in 2013, but it is slated to slash tariffs even further in 2015 for a host of vegetables and fruits such as onions, cucumber, sweet corn, cassava, and papaya. Myanmar, meanwhile, has pegged the tariff for certain rice varieties at 5% for the next year.

Similarly, the Philippines and other ASEAN members have committed to slash tariffs on rice and sugar. In the Philippines, rice tariffs will fall to 35% from 40% in 2015 under Executive Order (EO) 894, making it cheaper to import rice from ASEAN members like Thailand and Vietnam that are large rice producers. For sugar, the tariff imposed by the Philippines on ASEAN imports will fall to 5% from 10% in 2015 under EO 892.

Companies that work with these commodities would also do well to check tariff cuts in other ASEAN countries scheduled for 2015, as this could translate into opportunities to either export such goods or set up processing factories that rely on them as input.

Indonesia, for instance, has committed to slash rice tariffs to 25% in 2015 from 30% in 2014. It has also committed to cut tariffs on cane sugar to 5% from 10%, while for refined sugar, Indonesia’s commitment is to bring tariffs down to 10% from 20%

Besides tariff cuts among the 10 ASEAN members, there may be other opportunities in store in the six markets with which ASEAN has free trade agreements, namely: Australia, New Zealand, India, China, Korea, and Japan, which together account for a hefty portion of world trade.

Businesses equipping themselves with information may have already won half the battle as preparation can spell the difference between gains and losses. The next concern moving forward will be the execution steps across the region. A case in point is how to avail of such preferential tariffs amid the various rules on origin imposed by Customs authorities, a topic which will be tackled in the next part of this series.

Cirilo P. Noel is the Chairman and Managing Partner of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.
 
source:  Businessworld