AANZFTA - replacing the noodle bowl of Asian Trade Agreements

On January 10th 2010 the Australia-ASEAN-New Zealand Free Trade Agreement (AANZFTA) came into effect. This Free Trade Agreement between Australia, ASEAN and New Zealand that will create a common market by eliminating between 90-100% of tariff barriers within the region.

It covers the substantial reduction or elimination of tariffs on Australian products including livestock, produce, resources, pharmaceuticals, clothing and footwear, machinery and some services and the movement of people.

The reductions are gradual and will be completed by 2020. At that time both Australia and New Zealand would have eliminated 100% of tariffs in the region. The region’s growing importance to Australia cannot be overstated. At present the ASEAN market covers 20% of Australia’s two-way trade, a figure that is growing 10% annually.

Rules of Origin

The fundamental way in which Australia will cement integration into the region’s trade is through the rules of origin (ROO) requirements impact on the supply chain.

The ROO outlines the amount of the final product that has to originate from the exporting country in order to fall under the agreement. In a bilateral agreement this simply means that the majority of components must come from the exporting country. The beauty of a regional agreement is that the majority of components can come from any one of the countries party to the agreement. It therefore acts as an incentive for businesses to seek inputs regionally furthering integration and potentially reducing transportation costs.

Sound complicated? It may be, but it pales in comparison to the ‘Noodle Bowl’ of bilateral agreements that has now taken hold in Asia. While the AANZFTA makes flexibility of the ROO a clear priority it is operating on a backdrop of 167 separate bilateral agreements in the wider Asian region.

The motivation for such agreements is clear: while many multilateral negotiations have collapsed, Asia is the backbone of global economic growth and stands to gain enormously from intra-Asian trade.

But is this motivation misguided? Each agreement requires time, money, bureaucracy and paperwork to get off the ground. Multiply this by 167 and is trade easier or more liable to distortion? The most likely outcome is that businesses just won’t bother.

But this doesn’t concern us – or does it? The message is clear. Australian businesses are in prime position to gain from regionalism. By engaging with ASEAN as a region Australia bypasses the ‘Noodle Bowl’ scenario for now. As far as Australia’s other trading partners go – let’s just say that noodles are not off the menu entirely.

Amy Doyle – International Market Analyst

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