Trade War – How to get out of the crossfire while retaining benefits from FTA(s)

19/06/2019, 09:48 AM

Trade War – How to get out of the crossfire while retaining benefits from FTA(s)

The Round Table Discussion on the impact of the US-China Trade War and Free Trade Agreements on ASEAN Businesses took place on 11th June 2019 at ATIM’s office together with AC Trade Advisory and ATIM’s valued clients.

This Article is written based on presentations of experts from AC Trade Advisory, opinions/perspectives of lawyers from ATIM LAW FIRM.

Background

The ongoing trade tensions between the US and China have escalated since the beginning of 2018 and are probably going to persist for some time. A so-called new cold war between the two economic heavyweights may be on the horizon where both sides have been imposing tit-for-tat tariffs on almost all goods categories and increasing non-tariff barriers that tend to be harder to identify.

Additional import tariffs on goods and materials lead to increase in production costs which in turn lead to increases in product prices for end consumers, lower consumer demand and in general a more difficult environment for businesses to operate in.

In order to survive and generate business growth, businesses have been exploring ways to minimize these negative impacts of the trade war by diversifying their production bases and shifting to alternative manufacturing locations that are not subject to tariffs. ASEAN is an attractive alternative out of China and / the United States due to the key reasons that the trade bloc has a sizable workforce with low labor costs, is the 5th largest economy in the world, has a mature ASEAN Free Trade Area (AFTA) and an extensive free trade agreement (FTA) network which includes the ASEAN-China Free Trade Area (ACFTA), and has an amicable relationships with both the US and China.

Vietnam in the spotlight

Among the ASEAN states, Vietnam is considered as one of the most attractive destinations to set up a manufacturing location due to its prime position with a strategic mix of major FTAs in the Asia Pacific. Vietnam, either by itself or through ASEAN, has signed FTA(s) with almost all major economies in the region including China (ACFTA); Hong Kong (AHKFTA); Japan (AJCEP, VJEPA, Comprehensive & Progressive Trans-Pacific Partnership (CPTPP)); Korea (AKFTA, VKFTA); Australia and New Zealand (AANZFTA, CPTPP); India (AIFTA); Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan (EAEU); and Chile (VCFTA, CPTPP)[1]. Out of all the FTAs that Vietnam is a signatory party of, its ratification of the CPTPP is one of the most important international trade developments in recent times as there are 11 members which include powerful economies such as Japan, Australia, New Zealand, Mexico, Canada and Singapore etc. Vietnam is also in the midst of finalizing its bilateral FTA with the European Union. All these trade developments make Vietnam the top-of-mind investment destination for businesses so as to optimize their import tariff costs when they trade internationally.

According to Vietnam government statistics, the first quarter of 2019 saw an 86.2% rise of registered investments in Vietnam. Manufacturing and processing sector accounted for 77,7% of the total capital invested, of which Hong Kong is the largest foreign investor with 40,7%[2].

The foreign investment picture looks pretty bright for Vietnam in the near future. We are seeing an ever-increasing number of investments coming in and sooner than later more and more made-in-Vietnam products going out to the global market with reduced or even zero import tariffs.

Are Free Trade Agreements Really Free?

FTAs benefit businesses as it reduces or -eliminates tariff that allow products to be exported to new markets at a more competitive price.

But the benefits of FTAs to grant preferential customs duties can only be realized if they are proactively applied and the products meet the criteria set within each FTA. Products which are last manufactured in any of the signatory member countries are able to enjoy the preferential custom duties only if they satisfy the unique rules of origin (ROOs) of each FTA .

While FTAs bring duty reduction benefits to the importers when importing products from another FTA signatory country, the importing customs authority granting such duty benefits will be scrutinizing on whether the products are complying all the requirements of the FTAs, particularly the rules of origin during importation and during post importation audits. Although their checks and audits on FTA claims are usually centered around the preferential origin of the products, they may also extend to other areas such as anti-dumping investigations, customs tariff classification of goods, custom valuation etc. Any violations or non-compliances found through these proceedings could result in additional tariffs, administrative penalties, civil penalties, or even worse, criminal charges against both individuals and corporations involved.

What should businesses do to avoid the impact of more tariffs from the trade war while minimizing the risks aforementioned?

For importers/exporters whose global value chain involves China and/or the US markets, now is the time to find ways to mitigate the risks and losses from the trade war instead of accepting status quo or simply expecting the trade war to end soon.  Businesses should review their global value chains as the 1st step to be carried out immediately so as to assess the impact of the trade war on their operations. For the 2nd step if the negative impact is deemed significant enough, businesses should then consider diversifying or adjusting their global value chains such as shifting their manufacturing location, targeting new customer markets etc.  with the consideration of the use of FTAs. These are the key factors which support businesses in making informed investment decisions.

In order for businesses to enhance, if not maintain their competitiveness for their international trade operations under such uncertain and dynamic international trade environment, being aware of free trade agreements and other international trade and customs regulations in various country markets are all the more critical than ever before. Businesses with such knowledge and practical know-hows to apply them will be in good positions to thrive going forward.

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