Why have ASEAN Free Trade Agreements?
Many businesses in ASEAN countries look overseas for business expansion opportunities, especially since the consumer markets in South East Asia provide excellent opportunities for organic revenue growth. When businesses start expanding on foreign soil, local customers gain access to products with better quality and a wider choice of goods. In many cases, companies also setup satellite local offices that create employment opportunities for the local site.
The ASEAN Free Trade Agreements increase market access opportunities, reduce both tariff and non-tariff barriers to trade and facilitate a smoother flow of services, investments and traded goods.
In this article we shall look at the FTAs that all ASEAN countries (Myanmar, Malaysia, Thailand, Vietnam, Indonesia, Singapore, Philippines, Cambodia, Laos, Brunei) have signed.
What is a Free Trade Agreement?
An FTA is a legally binding agreement between 2 or more countries where all member parties commit to create more favourable conditions for cross border trade.
- Reduction or elimination of import duties/tariffs for products manufactured in member party countries
- Reduction or simplification of non-tariff barriers
- Increased incentives to engage in cross border trade
- Increased cooperation, transparency and efficiency
- Improvements to supply chain infrastructure
- Increased opportunities for foreign investments
- Simplification of procedures and processes
- Facilitation of manpower staffing for specific industries
ASEAN Free Trade Agreements
ASEAN Free Trade Agreements you may have already heard of are:
- ATIGA or ASEAN FTA (Form D)
- ASEAN – China FTA (Form E)
- ASEAN – Korea FTA (Form AK)
- ASEAN – India FTA (Form AI)
- ASEAN – Australia – New Zealand FTA (Form AANZ)
- ASEAN – Japan FTA (Form AJ)
Within ASEAN, many member parties also can have bilateral or multi-lateral agreements with each other.
Rules of Origin in ASEAN FTAs
For the purpose of claiming or applying for FTA benefits in traded goods, it is necessary to determine the correct country of manufacture as defined by the requirements of the legal text of an FTA. The rules of origin used to determine eligibility for preferential FTAs can vary from the rules that need to be used for non-preferential FTAs. It must be noted that some FTAs also specifically forbid simple processing activities from being deemed as manufacturing activities such as re-packing, labelling or simple assembling.
It must be noted that some FTAs also specifically forbid simple processing activities from being deemed as manufacturing activities such as re-packing, labelling or simple assembling.
Some rules of origin used in ASEAN FTAs are:
- Wholly Obtained or Produced – This rule usually only applies to naturally occurring products like animals, minerals or agricultural commodities
- Value Added (VA) or Regional Value Content (RVC) – Using this rule means that the manufactured part contains locally produced material above a specific threshold. The legal text of the FTA will provide a formula to use when making this assessment
- Tariff Shift or Change in Tariff Classification (CTC) – This rule involves ensuring that a substantial change has been made to the raw materials used to manufacture a product. This is determined by determining if the HS code of the finished product is different from all imported raw materials at the first 2 (CTC – Change in Tariff Chapter) , 4 (CTH – Change in Tariff Heading) or 6 digits (CTSH – Change in Tariff Sub-Heading)
- Special Manufacturing Process – This rule is used to determine country of origin for products that undergo specific production processes and is usually applicable for chemicals
- A combination of any of the above rules or others
What are Back to Back Certificates of Origin?
These certificates of origin are issued by the assigned authority in the intermediate country that re-exports FTA qualified products that were previously imported with a valid FTA. The intermediary does not do a re-validation of the qualifying status of the product.
What is Third Party Invoicing?
In third party or third country invoicing the company issuing the invoice for the sale is not physically located in the exporter or importer country.
What does Issued Retroactively mean?
If this statement is stamped or the option is ticked on an FTA form, it means that the FTA Form was applied after the cargo was loaded onboard the carrier, with different FTAs having different tolerances of 0 to 3 days grace.
What does De Minimis mean?
This term is used to indicate that foreign sourced material below specific thresholds can be ignored in the computation of a product’s rule of origin.
What does Cumulation mean?
If an FTA allows for cumulation, this means that raw material sourced from other countries can be treated as local content if the sourcing country is a member state of the same FTA.
What does Operational Certification Procedures mean?
OCPs refer to the portion of the legal text in an FTA that define how the FTA will be administered by countries. These OCPs can give guidance covering many aspects of FTA utilization such as how to make corrections to the Forms.
Applying for ASEAN FTAs: Exporter
Preferential Certificates of Origin are applied by exporters to Department of Foreign Trade or Customs directly. In order to start applying for FTAs on their exports, manufacturers usually have to submit detailed cost statements and other documents to demonstrate to Customs that their products do qualify for the rules of origin under the FTA. Some Customs authorities allow some degree of self-certification after basic documents are submitted.
Using ASEAN FTAs: Importer
For most countries using ASEAN FTAs, if the importer has not signed up to use electronic forms (where available), he/she will have to present a duly signed copy of the FTA Form at the time of import clearance in order to avail any benefits. If the FTA allows to retroactive claims or draw back the importer may be able to first clear Customs then present the form at a later date in order to enjoy duty savings. However, some countries do not allow it despite the terms of the legal text.
Electronic FTA Forms
In some countries it is possible to use electronic copies of the FTA forms. These forms are transmitted from origin to destination and if successfully received, the importer will not need a hardcopy form. In many cases this can reduce Customs clearance lead time as the importer will no longer have to wait for the exporter to courier the documents over.
Best Practices when using ASEAN FTAs:
- Exporters should ensure that they are using the correct HS code when submitting documents to authorities. Importers should also ensure that they are using the correct HS codes to import their products. Erroneous HS codes on FTA forms could result in authorities invalidating and rejecting FTA forms. There should not be conflicting information on any shipping document.
- Both exporters and importers should study the operational certification procedures and the FTA overleaf notes to ensure that they are complying with all the administrative requirements of using the FTA.
- Both importers and exporters should ensure that they meet other legal requirements such as document retention in a suitable format in a suitable location. When in doubt between conflicting periods of required retention between different agencies or legislation, the trader should use the longest period as the reference.