Written by Ricia O. Octavo, 2 August 2007
Globalisation, bilateral and multilateral trade agreements, such as the World Trade Organisation (WTO), General Agreement on Tariffs and Trade (GATT) are just few of the international trade developments worth mentioning which have affected our economy radically. More and more nations have taken hold and grasped international trade as if it has been there for ages.
A number of nations though, are still reluctant and lobby against it. But with the growing competition in the global market, many countries in the long term will be left with no choice but to adapt to the realities and mechanics of international trade.
Free trade has always been construed as a zero-sum game that tilts in favor of developed nations when, in essence, its importance actually lies in helping businesses to build a strong base to compete.
Specifically, there are substantial savings opportunities such environment offers companies. Reduction and even elimination of customs duties and opportunities in supply-chain management are among the options that companies may explore for savings. To be sure, some firms may already be utilising these agreements, though not in an efficient manner and, thus, exposing them to adverse consequences and penalties.
To date, significant free trade agreements (FTA) like the Association of Southeast Asian Nations (ASEAN)-Korea FTA (AKFTA), which was signed most recently by President Gloria Macapagal-Arroyo, ASEAN-Japan FTA, ASEAN-Australia/New Zealand FTA, ASEAN- India FTA and EU-ASEAN FTA can all offer duty savings to importers and exporters.
Free trade area commonly refers to a group of two or more common customs territories in which tariffs and other restrictive regulations of trade are eliminated on substantially all exchange of products originating from the participating countries. Usually, trade barriers are reduced, if not eliminated completely for over a period of time. Previous FTAs only cover trade in goods, but trade agreements now also include trade in services, investment and intellectual property rights.
When taking advantage of FTA benefits, certain important factors should be considered.
First would be: what products are covered in the agreement?
In a trade pact, parties involved would usually submit a comprehensive list of tariff lines (products) that may be included and excluded from tariff reduction. Said list is subdivided into two main areas, namely: the normal and sensitive list.
In the case of products listed in the normal list, tariff duties would be reduced gradually until they are totally eliminated. An example would be in the case of the AKFTA, where 70% of Korea’s duties have been eliminated and are expected to go further down to 95% by 2008 and 100% by 2010. As for the six more developed ASEAN countries, tariff would be reduced by 50% in 2008 and 90% in 2009 and 100% eliminated in 2010. As to products listed under the sensitive/highly sensitive list, imposition of tariff duties on said products would be deferred. Examples of said products would include, among others, iron, steel, rubber, plastic, chemical, automobile, textile and apparel.
Second factor to be considered is the actual amount of duties that can be saved. Hence, the Most Favoured Nation (MFN) rates should be compared to the rate levied on the items with preferential treatment. If MFN rate on certain products is very low or already at 0%, there is little or no benefit left in claiming preferential treatment. Moreover, internal revenue taxes (e.g., VAT excise tax) payable on imported goods will not be removed as a result of FTAs.
Third factor to consider is the origin of the product to determine the applicable tariff treatment. The "country of export" does not necessarily mean the "country of origin." The country of origin may be the country where the product was sourced or produced or where substantial transformation (i.e., change in tariff classification) of the product occurred.
For example, under the ASEAN Common Effective Preferential Tariff (CEPT) arrangement, products originating from Southeast Asia enjoy preferential treatment over products imported or sourced from outside the region. For instance, cotton overcoats imported from Malaysia would enjoy a CEPT rate of 5%, but would be subjected to higher duties if imported from a non-ASEAN country.
The last factor is to determine if the trade flow of the importer is in compliance with customs rules and regulations. This means that importers should make it a point to keep themselves updated on all developments and issuances released by the Bureau of Customs.
In conclusion, given the tax benefits available under various FTAs, companies should start looking at these arrangements seriously if they want to become more competitive in their pricing. It is simply a matter of identifying which trade agreement would suit their needs and requirements.
