Modern Plastics | World Tour | May 1st, 2004
Free trade agreements and the transformation of global trade
By Stephen Moore
The Cancun round of WTO negotiations in Mexico last year ended in disarray, prompting countries to seek other means of freeing up trade.
With WTO-initiated multilateral liberalization of trade facing significant delays-primarily due to disagreement over agricultural policies-countries are opting to forge regional or bilateral free trade agreements (FTAs) to accelerate better access to international markets (see box). Roughly 300 are expected to be in place globally by the end of 2004, according to Nilsuwan Leelarasamee, chairman of the Rules of Origin Committee at The Federation of Thai Industries (Bangkok). Nilsuwan was speaking at the Asian Plastics Forum (APF) held in Bangkok in March.
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These initiatives are producing substantial tariff cuts, outright tariff elimination, lowering of non-tariff barriers, facilitation of trade, and helping manufacturers access larger markets.
Conversely, if one country has a particular advantage over its partners, such as access to competitively priced resin or superior logistics capabilities, processors in partner countries may suffer unless safeguards that protect domestic industries from sudden surges in imports are part of the agreement.
FTA agreements can vary in their scope, and consequent effects on different market segments. Agriculture, for example, may be exempted, to the detriment of processors of food packaging. There is also compliance with local product standards in target markets at issue.
For their part, plastics processors need to pay close attention to ’rules of origin’ in some FTAs, particularly those concluded with the U.S., according to Nilsuwan. In order to qualify for tariff-free access, they must prove a minimum local content value of at least 40%. If processors use resin that is neither locally sourced, nor imported from the FTA partner, products with low added value, such as commodity packaging films, may not qualify. And even if resin is produced locally, the value of any raw materials such as ethylene or even crude oil not produced locally, will be considered.
One FTA in action
The implementation of the ASEAN Free Trade Area (AFTA; see box) has already affected the ASEAN region’s processors. With tariff barriers virtually eliminated, multinationals such as Unilever, Johnson & Johnson, and Procter & Gamble have relocated production from Indonesia and Malaysia to Thailand to serve the entire ASEAN region. As a result, processors of packaging in the former two countries lost business.
In the automotive sector, Thailand also stands to win, thanks to the comparative scale of the industry compared to those in Indonesia, Malaysia, and the Philippines. The Big Three carmakers in the United States (Ford, GM, DaimlerChrysler) have bases in Thailand, and a total of 14 assembly plants operate with production capacity of more than 1 million units/yr. Combined new vehicle sales in ASEAN’s so-called Big Four markets of Indonesia, Malaysia, the Philippines, and Thailand reached 111,175 units in January according to consultant Automotive Resources Asia Ltd. based in Bangkok, Thailand. This translates to annualized production of around 1.3 million vehicles.
Malaysia’s auto industry has long been protected by high tariffs, and obtained a reprieve under AFTA to reduce vehicle import tariffs to 20% by 2004, and 5% by 2008. They had been as high as 300%. The government then took a backward step and introduced excise taxes on imported cars to offset the reductions, and in the end, car prices remained unchanged. Malaysian passenger car production declined 18% in 2003.
One speaker at APF proposed a strategy of cooperation so that all ASEAN countries could benefit equally from AFTA. Didie W. Soewondo, president of Indonesian industry association INAplas, called on nations to collaborate on specific projects such as a jointly invested shrink film plant in Malaysia owned by Filipino, Malaysian, and Bruneian investors to serve the region, as well as China. He also called for similar joint projects such as pesticide-impregnated film for banana packaging in the Philippines, and polyolefin plants in Indonesia. Soewondo further called for simplification and harmonization of customs procedures, and product standardization.
ASEAN suffering from migration of business to China
Callum Chen, president of the Malaysian Plastics Manufacturers Assn. (MPMA), also called for more cooperation, rather than competition, in ASEAN. "If we compete among ourselves, we will become more divided and push more investment to China," he stated.
Malaysian processors have borne the brunt of a transfer of electronics production to China. Television production in 2003, for example, was down 6%, while air conditioner production declined 10%. Chen added that ASEAN processors should focus on upgrading in order to compete with Japan, the U.S., and Europe, rather than China.
"We have the production and English-language skills. What we lack are marketing and product development skills." He also called for a total elimination of resin import duties in ASEAN now, rather than by 2010.
Despite progress made through AFTA, Teng Theng Dar, CEO of Singapore trading firm Intraco Ltd., cautioned that ASEAN still has considerable work to do to create a true single market. "Multinationals have never seen ASEAN as a single market," he said, "but rather a fragmented one where excess red tape hinders cross-border flows."
"If the West is the boardroom, India is the back office, and China is the factory, but where is ASEAN?" added Teng. "Somehow, we have to remake and reposition ASEAN, but time is not on our side." Teng urged ASEAN processors not to compete against each other on product or price, but to compete globally through partnerships and networks.
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Free trade agreements proliferate
The U.S. recently concluded an FTA with Australia, which is itself working on FTAs with China and Thailand. For its part, Singapore has FTAs in place with Chile, New Zealand, and the U.S., and is negotiating one with South Korea.
Japan, meanwhile, wants to expand the scope of its FTA negotiations with several Asian countries, including South Korea, Thailand, and Malaysia, with the aim of concluding comprehensive economic partnership agreements (EPAs). These would cover a broad range of economic activities, including taxation, investment, and acceptance of workers, whereas FTAs focus only on trade issues. Thailand is currently also holding FTA talks with India, Bahrain, and Peru.
In Southeast Asia, AFTA has lowered tariffs for the six more-advanced member nations (Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand) to a maximum of 5% as of 2003. Lesser-developed economies such as Vietnam, Myanmar, and Cambodia will join AFTA in phases by 2010. In the longer term, ASEAN and China plan to form an ASEAN-China FTA by 2012 that would affect 1.7 billion consumers (based on current populations).