Last Aug. 14, 2009, yet another free trade agreement (FTA) that would shape the course of trade in the Philippines, the Association of Southeast Asian Nations (ASEAN), and India took flight from Bangkok. As with the case of FTAs preceding it, the event took place without much fanfare. ASEAN Trade Ministers signed on to the ASEAN-India FTA Trade in Goods (TIG) Agreement then later went on to discuss other matters of interest to the region. The event even barely made the front page of newspapers.
One can easily overlook the fact that, behind the scenes, this FTA had to go through a very fine sieve of dispute and negotiation prior to enactment. The signing of the TIG Agreement comes six years after the Framework Agreement for an ASEAN-India Free Trade Agreement was signed, and not before intense negotiations, deadlocks, and compromises on the rules of origin, product coverage and tariff schedules. At one point, reports circulated that India and certain ASEAN members were already prepared to leave the table as neither side wanted to concede.
One may also fail to appreciate that, beyond the horizons, this new FTA is set to make its implications felt – gradually at first, with a likely crescendo in a decade’s time. With the signing of the TIG, ASEAN and India trade officials expect to raise the level of ASEAN-India trade from $47.4 billion in 2008 to $50 billion by 2010 in a 1.7 billion strong market. Proactive businesses would therefore do well to begin browsing through this FTA’s voluminous pages to identify future opportunities and risks. Just for starters, India (just like China) is a vast market with specific pecularities, a formidable production base that can ship out competing products very efficiently, and a world class service delivery facility manned by highly skilled professionals.
As a clearer indication of how this FTA could potentially impact us, our Philippine negotiators took every effort to negotiate a longer timeframe of tariff reductions exclusively for Philippine products. Notably, the Philippines was able to secure the longest tariff reduction period among the original ASEAN–6 (comprised of Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand). The only countries with longer implementation periods are Cambodia, Laos, Myanmar and Vietnam (collectively known as “CMLV”).
The ASEAN-India FTA is slated to take effect on 01 January 2010 and covers 90 percent of trade between ASEAN and India. This means that tariffs on 90 percent of goods crossing ASEAN and India borders will be reduced gradually overtime. Because of this, it is easy to misinterpret the FTA as an instantaneous stroke of liberalization that producers should fear and importer should rejoice over. Very much to the contrary, importers and producers could both derive benefits from the FTA for as long as they formulate strategies that are grounded on a clear understanding of the rules.
It is worth noting that there will not be a sudden reduction of tariffs starting Jan. 1, 2010. The reductions are to be effected under different categories and tranches. The TIG Agreement provides for two Normal Track (NT) reduction schemes, one Sensitive Track (ST), and one Highly Sensitive Track (HST).
Tariffs for products under the NT will be gradually reduced to zero percent starting 2010 to 2016 for ASEAN (excluding the Philippines, Cambodia, Laos, Myanmar and Vietnam) and India. As mentioned, the removal of NT tariffs between the Philippines and India has been given a longer timeframe of until 2019. Tariffs on trade of NT products from India to Cambodia, Laos, Myanmar and Vietnam (CLMV) will be eliminated by 2016, while tariffs on NT products from CMLV to India will be removed by 2021.
Ten percent of trade between ASEAN and India will be allowed under the ST, on which tariffs will only be lowered to five percent. A very limited number of products will be allowed under the HST on which only minimal reductions will be made due to political and economic sensitivities. India has designated five products for the HST, namely crude palm oil, refined palm oil, pepper, black tea, and coffee. Tariffs on these products will only be reduced until a range of 40 to 50 percent by 2019.
Qualification for preferential tariff treatment under the ASEAN-India Agreement will be guided by the combination of a minimum 35-percent value added threshold, a change in tariff heading criteria, and product specific rules. This combination method for rules of origin is particularly tricky and could be the source of future disputes when tariff rates drop lower, and revenue collection targets move higher.
An early appreciation of the ASEAN-India FTA and its precise ramifications, particularly on market access and broader product competition, is an imperative for businesses with the foresight to trade competitively into the next decade. You are encouraged to read through the text which is accessible through the official website of ASEAN, and get professional guidance in interpreting it.
(Raphael B. Madarang is a Manager for Business and Financial Advisory Services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
The views and opinions expressed herein are those of Raphael B. Madarang and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email manila@kpmg.com.ph or rmadarang@kpmg.com).