Home » Across Borders » Trading in the future: Zero Tariffs under AFTA

Just recently, the Philippines has been reported to express opposition on further plans for liberalization and regional integration under the ASEAN Free Trade Agreement (AFTA). A recent proposal for a more liberalized trading scheme was presented during the Senior Economic Officials Meeting (SEOM) in Kuala Lumpur, Malaysia last March 10, 2003.

The proposal, among others, recommended further liberalization of strategic sectors such as electronics, consumer goods and tourism. In particular, it was suggested that tariffs on various goods related to these industries, both upstream and downstream items, be eliminated.

AFTA Common Effective Preferential Tariff Scheme (CEPT). In general, AFTA involves the removal of obstacles to free trade among the 10-member states of ASEAN. This involves the lowering of tariff rates and the removal of quantitative restrictions (QRs) and other non-tariff barriers that limit or prevent the entry of imported goods. While the intent of AFTA is to create an integrated market among ASEAN’s close to half billion people, the ultimate objective is to increase the region’s competitive edge as a production base for the world market.

The main instrument for making ASEAN a free trade area is the Common Effective Preferential Tariff Scheme (AFTA-CEPT), which hopes to reduce intra-regional tariffs and remove non-tariff barriers. Specifically, the goal is to reduce tariffs on all manufactured goods to 0-5% by the year 2003. By year 2010, the original six members – Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore and Thailand – will realize the free trade area with 100% of their inclusion list at 0% tariffs.

The Philippines has committed itself to lower its tariff rates for ASEAN goods to 0-5% by end 2003. In recent years, however, the Philippines has been having difficulty complying with certain CEPT commitments involving products in the plastics, textiles, electrical machinery, industrial chemicals, fertilizers, ceramics and other industrial goods. Last December 2002, the government reportedly invoked an ASEAN protocol, which exempted the petrochemical industry.

Exclusions and Exceptions under CEPT. While the general impression at present is that all products originating from member states of ASEAN enjoy the 0-5% tariff starting 2004, there are exclusions and exceptions under the CEPT Scheme. Under the scheme, all manufactured products, including capital goods and processed agricultural products, and those falling outside the definition of “unprocessed agricultural products” are covered.

There are, however, three instances when a product may be excluded, as follows:

  1. General Exceptions. A member state may exclude a product, which it considers necessary for the protection of its national security, the protection of public morals, the protection of human, animal or plant life and health, and the protection of article of artistic, historic or archaelogical value.
  2. Temporary Exclusions. These exclusions involve products deemed sensitive by a member state. The exclusion however is on a temporary basis.
  3. Unprocessed Agricultural Products. These are agricultural products defined as: (1) agricultural raw materials and unprocessed products, and (2) products which have undergone simple processing with minimal change in form from the original products.

Rules of Origin – FORM D Certificate of Origin. Under AFTA-CEPT, there is a set of criteria to determine the country of origin of a product for purposes of availing of the special rates. To prevent transshipment of goods originating from non-ASEAN states, it is not enough that the goods were exported from a member state.

The rule on country of origin is based on the concept of “substantial transformation”, which assigns origin to the country where the last substantial transformation occurred. Substantial transformation may be roughly defined on the basis of a change in tariff heading, achieving a threshold of proportion of value-added, or on the basis of certain manufacturing processes. Under AFTA, the basis of substantial transformation is based on a 40% threshold level of the value of the product. In other words, at least 40% of the value of the imported product must be considered as originating from ASEAN to avail of the preferential tariff rates under AFTA-CEPT.

In the Philippines, the Bureau of Customs (BoC) is the sole government agency tasked to oversee the implementation of the preferential tariff treatment under AFTA-CEPT. In particular, the Export Coordination Division, OCOM or the Export Division of the Port concerned are the units tasked to evaluate whether a particularly product qualify for ASEAN CEPT treatment and if necessary, issue the corresponding FORM D Certificate of Origin (CO).

Planning for the Future under AFTA. In the last decade, we have seen how multinational companies have restructured their whole supply chain and manufacturing facilities across the ASEAN region to avail of the benefits under the AFTA. These companies are now starting to reap the benefits of advance planning in terms of greater efficiencies and streamlined operations resulting in lower-priced products for the region.

On the other hand, many domestic companies are now finding it extremely difficult to compete with products manufactured by these multinational companies that have long planned for trading under the concept of a free trade area. To the extent possible, the Philippine government has extended its helping hand on affected domestic industries. This is, however, a temporary relief and in the future, domestic companies will have to face the reality of a zero-tariff ASEAN by year 2010.

The author is an international trade and customs lawyer, and a licensed customs broker. He is also a partner of the law firm of David Leabres Uvero Gaticales Sto. Tomas. For comments or inquiries, he may be contacted at worldtrade@skyinet.net or at (632) 4002145 / 4050021.

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