An Overview of FTAs in ASEAN and What They Mean for E-commerce

Katrina B. & Benedict L

An Overview of FTAs in ASEAN and What They Mean for eCommerce

Businessmen shaking hands over an agreement

Importing and exporting goods can be daunting for SMEs, especially considering the cost and the complexity of the process. At times, however, doing so could offer the best chance for growth.

Consider a clothing supplier in Thailand that has been struggling with increased competition: The market is saturated with plenty of other suppliers selling similar-looking clothes, encouraging local retailers to push for lower prices. Some retailers are also manufacturing their own clothes with less common designs.

To widen his/her market, the supplier begins looking for retailers overseas. He begins discussions with small boutiques and online stores in the Philippines.

While selling clothes to the Philippine retailers makes financial sense for the Thailand-based supplier, they all have to factor in the cost of tariffs and shipping.

That’s where free trade agreements (FTAs) come in. An FTA lowers or eliminates tariffs for certain goods between countries involved in the agreement, reducing the costs of importing and exporting goods.

How eCommerce Can Benefit From Free Trade Agreements (FTAs)

Clothing suppliers and online stores are part of Southeast Asia’s growing eCommerce ecosystem. With the potential to reach US$200 billion1 by 2025, the region’s digital market is a growing force to be reckoned with. But a few things hold the bloc back from being a behemoth eCommerce market.

One hindrance is the diversity of trade policies among ASEAN countries, each of which has its own eCommerce laws, shipping policies, and customs clearance rulings. To find a list of customs documents, duties and tariffs that eCommerce merchants should be aware of in Southeast Asia, check out our Southeast Asia customs clearance guide. Others include the lack of a region-wide payments facility and logistical infrastructure.

Fortunately for eCommerce players in Southeast Asia, ASEAN has an FTA in place among its member states to facilitate increased regional trade by addressing laws and shipping policy. It’s also been working on an eCommerce agreement that will lower the barriers to entry in this sector.

Plus, ASEAN has FTAs with the world’s five largest eCommerce markets2—China, Japan, South Korea, Australia, and India—as well as New Zealand. Individual ASEAN countries also have their own FTAs with other countries or regions around the world.

In this article, we’ll look at the benefits and provisions of these FTAs, and briefly talk about progress that has been made towards an ASEAN eCommerce agreement.

ASEAN’s Free Trade Agreements

First, let’s define a few terms:

Free Trade Agreements (FTAs)

FTAs are treaties between two or more economies to reduce or remove trade barriers and bring about closer economic integration, as defined by Enterprise Singapore3. While each country has its own tariff rules, FTAs can reduce or even eliminate tariffs on certain goods.

(Tip: check out this ASEAN Tariff finder4 for more information.)

For online retailers, FTAs have the potential to make cross-border eCommerce more convenient and less expensive. The reduced or eliminated tariffs help lower the costs of goods, be they raw materials or final products. This could translate into more competitively priced end products and increased quality5 from access to better quality factors of production.

Free-on-board (FOB)

FOB, when following FTA definitions6, refers to the cost of the product, including cost of delivery either to the port or the site of final shipment abroad. This is not to be confused with the International Commerce terminology7(Incoterm) definition which we’ll touch on a little bit later.

When calculating FOB, the origin of the goods is important as it helps to determine the Regional Value Content (RVC) which will be discussed below. The example below shows an example of how FOB is calculated when applied to the ASEAN Free Trade Agreement (AFTA)

Figure 1: Example of FOB Calculation in FTAs:

FTA: ASEAN Trade in Goods Agreement

Product: Biscuit made in Singapore

Infographic showing how customs valuation is calculate using the FOB method
Source: Adapted from Customs SG Handbook on Rules of Origin

However, Free-On-Board, when following the International Commerce terminology8 (Incoterms), states rules about who is responsible for transporting the goods, responsible for the cost of transport, and also responsible for insuring the goods in transit.

According to the International Chamber of Commerce, FOB “means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onward.”

In other words, FOB means the seller is responsible for transporting the goods to the named port and loading it on the ship specified by the buyer. The seller is responsible for the costs of transport only to the ship. When the goods are on the ship, the risk and costs associated with transporting the goods transfers to the buyer. The seller is also not obliged to insure the transport of the goods beyond that point.

Regional Value Content

Regional Value Content (RVC) is the percentage of a good’s content that originates from a region. Using figure 1 as an example, content that originates from the manufacturing country, or countries party to the FTA, like flavouring essence in Singapore is considered originating material.

Non-originating content would be material that originates from a non-member of the FTA, like sugar from Australia as Australia is not a party of ASEAN Trade in Goods Agreement (ATIGA).

FTAs that require a minimum percentage of RVC provide a formula for calculating it. When calculating, the RVC take note that different FTAs may have different ways of calculating them. For example, here is the formula given by ATIGA:

Direct and Indirect valuation methods for regional value content for ASEAN free trade agreements
Regional Value Content: Indirect Method of Calculation

Applying the indirect method to the biscuit example from Figure 1, we’ll first identify the values involved:

  • The FOB Value is $15 in total

  • The value of non-originating material is $2.50

The $2.50 non-originating material value represents the value of the sugar from Australia. It counts as a non-originating good because, in this case, Australia isn’t a party to the ASEAN Trade in Goods Agreement, which is the free trade agreement we’re wishing to trade the biscuit under.

The other ingredients, direct labor and overheads all come from Singapore and Malaysia, which are ASEAN member states. This makes them count as originating goods

With this, we’ll have:

Regional Value Calculation Formula for ASEAN free trade agreements
Regional Value Calculation: Sample Calculation

This would make the RVC of our biscuit 83%.

Harmonised System (HS)

With many products shipped everyday and around 5,300 different product descriptions, a method to identify the goods being shipped is needed. The HS is an international tool9 developed by the World Customs Organization for classifying products.

It uses a six-digit code system to classify goods. The first two digits (HS-2) provide the chapter of goods classification, like coffee, tea, spices and mate. The next two (HS-4) provide sub-groupings, like coffee. The last two (HS-6) provide specific classifications, like roasted coffee, non-decaffeinated.

Infographic breaking down how the Harmonised Commodity Description and Coding System works
Source: World Customs Organisation and UN Trade Statistics

Need to find a HS code for your products? Try this search engine9 that helps you find HS codes based on product descriptions. However, note that different countries have different extensions to the six-digit HS code – so it’s best consult your country’s Customs bureau or a local customs broker. For example, in Singapore, one can find the HS codes in the Singapore Trade Classification, Customs and Excise Duties document10.

For eCommerce products like clothes, here’s a sample four-digit product code:

  • 6206: Blouses, shirts and shirt-blouses; women’s or girls’ (not knitted or crocheted)

Further classification:

  • 620610: Blouses, shirts and shirt-blouses; women’s or girls’, of silk or silk waste (not knitted or crocheted)

  • 620620: Blouses, shirts and shirt-blouses; women’s or girls’, of wool or fine animal hair (not knitted or crocheted)

Now that we’re on the same page, let’s have a look at the different free-trade agreements that ASEAN countries have made both within the region and with other countries.

ASEAN Free Trade Area (AFTA) and ASEAN Trade in Goods Agreement (ATIGA)

Free trade within ASEAN means eCommerce players in each member-state have almost unfettered access to a large market comprising its neighboring countries.

The ASEAN Free Trade Area (AFTA) eliminates tariffs on trade among ASEAN members for goods originating within the region. The AFTA was enhanced to become the ASEAN Trade in Goods Agreement (ATIGA) in 2010, which mandates that member countries remove import duties on 99 percent of products in the inclusion list. This applies only if the product is in the inclusion list of both economies involved in a trade.

In order to qualify for these tariff exemptions, goods need to satisfy conditions set out by the FTAs Rules of Origin (ROO)11. ROO’s specify certain conditions that need to be met in order for the goods to be considered originating from that country or region.

These usually include which countries the materials were sourced from and how much the materials were processed when the goods were manufactured. Under the ATIGA, a product may also be classified as originating within ASEAN if it meets at least one of these conditions set out in the ROO:

  • produced in an ASEAN member-state using materials originating from ASEAN countries

  • has a regional value content (RVC) of not less than 40 percent of FOB

  • if using non-originating materials for production, the product must have undergone a change in tariff classification at the four-digit level under the HS code. This is known as Change in Tariff Classification (CTC)

For example, for eCommerce fashion businesses, it’s worth checking out the originating criterion for textiles and textile products12.

Some good news: in August 2018, ASEAN economic ministers amended the ATIGA to allow certified exporters to self-certify13 the origin of their exports, paving the way for preferential treatment of their goods. This eliminates the cost and hassle of applying for a Certificate of Origin.

For more information on AFTA and ATIGA, you can read the full text of the ATIGA14. You can also see the product list and applicable tariff schedules14 for each country.

For details and nuances regarding the other FTAs that ASEAN is involved in, you can refer to the table below to find them. Links to their full text can also be found at the end of the table.

Sources: Adapted from International Institute for Sustainable Development, Updated with statistics from World Population Prospects 2017 revision

You can links to the full text and Rules of Origin for each of these FTAs below:

  • ATIGA’s full text14 and ATIGA’s Rules of Origin15on Chapter 3, Article 25 onwards15

  • ACFTA’s full text16 and ACFTA’s Rules of Origin17

  • AKFTA’s full text18and AKFTA’s Rules of Origin19

  • AJCEP’s full text20 and AJCEP’s Rules of Origin21

  • AIFTA’s full text22 and AIFTA’s Rules of Origin23

  • AANZFTA’s full text24 and AANZFTA’s Rules of Origin25

What does it Mean for eCommerce Businesses?

eCommerce businesses and SMEs can enjoy lower import duties by applying for tariff concessions covered by FTAs. This allows businesses to increase their margins or reduce the prices of their goods. As one of the main drivers for eCommerce sales from consumers is price, lower prices could potentially increase international eCommerce sales.

FTAs can also help eCommerce businesses in ASEAN engage new markets at lower costs by improving access to some of the biggest global markets. Large markets such as China, India, Japan, and Australia – New Zealand are now more accessible for both international eCommerce sales and as potential sources of better supplies.

How to Apply for Tariff Concessions

SMEs and eCommerce companies can follow these steps to apply for tariff concessions under FTAs:

  1. Find out whether an FTA exists between your country and the one you want to sell to.

  2. Identify your goods’ product codes under the Harmonised System.

  3. Determine whether your products are covered by the FTA’s tariff concessions.

  4. Check your products’ eligibility for tariff concessions – for example, whether or not the goods satisfy the FTA’s rule of origin.

  5. Comply with documentary requirements outlined in the FTA and by the related countries’ Customs bureaus.

  6. Lodge an application, together with the documentary requirements, through the Customs bureau.s

While FTAs can help eCommerce businesses by lowering export costs, ASEAN leaders have identified more barriers that hamper Southeast Asian e-tailers from expanding to neighboring markets in the region. Aiming to lower these barriers and improve eCommerce trade policy, ASEAN is working on the ASEAN Agreement26 on Electronic Commerce, which it hopes to finalize by the end of 2018.

Supporting eCommerce Businesses Across ASEAN

The ASEAN Agreement on Electronic Commerce will cover different aspects of eCommerce, including logistics, consumer protection, modernizing the legal framework governing eCommerce, and more. It will promote freer movement of eCommerce goods across the region—perhaps even leading to the creation of an eCommerce FTA.

In addition, the agreement aims to address a major hindrance to the growth of eCommerce in the region, the lack of access to online payment methods27. This is done by aiming to enable smoother, more cost-effective cross-border payments across the region.

By supporting eCommerce in Southeast Asia, the region will help companies, especially SMEs, expand their markets and grow their businesses internationally.

FTAs enable eCommerce merchants and SMEs to access better markets to sell to and better sources of supply, which can provide more cost savings. ASEAN’s focus on supporting eCommerce through future policies will also serve to benefit eCommerce in the region for years to come. To make better use of these FTA’s consider working with a logistics service provider with regional customs clearance expertise in Southeast Asia like Janio.

To find more on the latest news on logistics and eCommerce in Southeast Asia, consider signing up for our Janio newsletter.

If you’d like to find out more about how we can solve your SEA eCommerce cross-border delivery needs, come and have a conversation with us.

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References:

  1. Think With Google: e-Conomy SEA Spotlight 2017: Unprecedented growth for Southeast Asia’s $50B internet economy
  2. Which 50: Australia Is APAC’s 4th Largest Ecommerce Market – But India Is Catching Up
  3. Enterprise Singapore: Free Trade Agreements
  4. ASEAN SME
  5. VOX: Consumer benefits of trade agreemnts: Evidence from EU trade policy 
  6. ASEAN: Rules of Origin
  7. Incoterms Rules 2010
  8. Harmonized System 
  9. HS Code
  10. Singapore Trade Classification
  11. ASEAN: Rules of Origin
  12. RoO for Textiles
  13. RoO Self certification
  14. ASEAN: ATIGA
  15. ATIGA’s Rules of Origin
  16. ASEAN China FTA
  17. ACFTA’s Rules of Origin
  18. ASEAN Korean FTA
  19. Trade in Goods
  20. AJCEP Japan
  21. Rules of Origin EPA
  22. India FTA
  23. India ROO ASEAN FTA
  24. AANZFTA Legal Text
  25. AANZFTA’s Rules of Origin
  26. ASEAN Agreement on eCommerce
  27. McKinsey: Imagining eCommerce for Southeast Asia
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