Lower tariffs for Chinese goods

One simple fact that readers should know is this: a good number of our tariffs on Chinese imports have been reduced by way of the ASEAN-China Free Trade Agreement (ACFTA). The ramifications these tariff reductions have on businesses and the economy are significant. The importance and necessity, therefore, of knowing the provisions and the manner of implementation of the ACFTA signed five years ago this month is obvious.

Unfortunately for our business community, it is not yet common knowledge that Executive Order 613, issued last April 17, 2007, reduced tariffs on some 2,203 tariff lines under the “normal track” list of the country’s commitment under the ACFTA Trade in Goods Agreement. This is the second time the Philippines slashed tariff rates on certain products imported from China on account of the ACFTA, the last one made in early 2006 (per EO 485) for our late participation in the Early Harvest Program (EHP).

Before moving on, however, first a bit of history: five years ago the Philippines, along with the other nine ASEAN member countries, signed a Framework Agreement with China in the Cambodian capital of Phnom Penh in November of 2002 to establish the ACFTA. The Trade in Goods (TIG) Agreement of the ACFTA was signed two years after. The aim of the TIG Agreement is to create a Free Trade Agreement (FTA) for goods by 2010 between China and the original six ASEAN member countries, and 2015 between China and the four newer ASEAN members.

This would mean that tariffs on products traded between China and the ASEAN six members that are included in the mentioned “normal track” list will be reduced to zero percent come 2010 – which is barely three years away. Notably, EO 613 already provides for duty rates to be applied until 2008, the highest rate being eight percent. By 2009, the highest possible rate that any product in the “normal track” can receive would only be five percent, which preludes to a complete elimination by 2010. As an assurance that a constant and consistent glide path will be followed, products that currently enjoy zero percent tariff rates will be protected from any further tariff increases. Those already in the zero to five percent will remain at that level until these are brought down to zero percent by 2009. The TIG Agreement, however, allows for flexibilities for no more than 150 tariff lines in the normal track to retain duties until 2012.

Now that the list of products from China that would enjoy tariff preferences has been finalized, companies are encouraged to take advantage of this opportunity and prepare themselves for the demands of this new tariff situation. For companies wishing to take advantage of the preferential rates under the Agreement, companies should first establish their product’s compliance with the various criteria set under the Agreement’s Rules of Origin (ROO). The implementing document for ACFTA ROOs is the Certificate of Origin Form E, as distinguished from the ASEAN Free Trade Area (AFTA) Form D. Importers should therefore see to it that the sellers in China have met the appropriate technical rules in order to qualify for the preferential rates under EO 613. It would be good to have supporting documents (which may have to be duly translated) on hand at all times so as to be ready in the event that questions are raised on the eligibility of the imported product for preferential treatment.

Generally speaking there are three methods by which a product’s origin can be determined. The first is the value added criteria, which requires a minimum percentage of a product’s FOB value to have been sourced domestically or from a fellow FTA member. The second method is by way of a change in tariff classification, whereby originating status is conferred on a product classifiable under a tariff line that differs from the tariff line of its imported raw material components. The third method involves the designation of a specific process that imported raw materials should undergo before its finished product is given originating status.

The ACFTA ROOs are a combination of all three methodologies that are applied on a product specific basis. This departs from the conventional value-added criteria which ASEAN businesses and governments have been long accustomed to. Although some companies and governments with FTA experience may be familiar with the technical intricacies of this combined ROO methodology, learning curves are still generally steep. Mistakes in applying the ROOs may cause companies to lose their eligibility to avail of the lower rate on their products or be assessed penalties for non-compliance by Customs authorities in the event of an audit. Further guidance and practical information on the ROOs, therefore, would go a long way in ensuring any prospective gains that companies could reasonably expect from the lower tariff rates afforded by the ACFTA.

Also likely to be affected are domestic manufacturers in the Philippines who may be concerned that the lowering of tariff rates would lead to a deluge of competing products from China, thus carving out a share of the domestic market. This early, local industries may have to start looking into the arsenal of defenses provided by domestic and international rules that would better help them adjust to the impact of the ACFTA and ensure fairness. Examples of these are trade remedy measures (i.e., safeguard measures, antidumping measures, and countervailing measures). Notably, Article 9 of the ACFTA Trade in Goods Agreement provides specifically for safeguard measures.

An important message that accompanies the ACFTA implementation is that although tariff rates may have already been set for a decrease, companies would have to be more watchful and take considerable effort in familiarizing themselves with the rules of the ACFTA so as to gain added advantage over competitors. It would be advisable as well for companies to consider obtaining professional assistance in navig ating the ACFTA, preferably from organizations that have a comprehensive network and presence in China and various parts of the region.

(Jeremy I. Gatdula is a Principal for International Trade and Customs Services of Manabat & Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email [email protected] or [email protected]).