Asian FTAs: balancing the pros and cons for the automotive industry

Asia is at the forefront of Free Trade Agreement (FTA) activities. There are more than 500 FTAs in the region, some of which are in effect and the rest are in the midst of being implemented. The FTAs are meant to give equal benefits to signatory parties, or are they, asks Angelica Buan in this report, highlighting FTAs in ASEAN and other Asian countries.

FTAs with South Korea

Canada and South Korea’s nearly decade-long talks for a free trade agreement (CKFTA) have finally been settled to an affirmative conclusion. South Korea, the world’s 15th largest economy, is expected to boost Canada’s exports to Asia by at least 32% and vice versa.

As for tariffs, the Foreign Affairs, Trade and Development Canada organisation details that South Korea’s 8% tariff on vehicles will be eliminated immediately upon the agreement’s implementation while Canada’s lower 6.1% tariff on imports of South Korean passenger vehicles will be phased out in three annual cuts.

Nevertheless, the pact has been opposed by a few private sector groups led by Unifor, Canada’s 39,000-strong automotive workers union. Ford Motor (Canada) has also slammed the said CKFTA and warned of its adverse impact on the local automotive sector. The said sector is also reeling from competition with Mexican production since the North American Free Trade Agreement (NAFTA) between the US, Mexico and Canada came into effect in 1994.

Observers opine that Canada’s large vehicles, including vans, sedans, and SUVs, do not appeal to South Korean consumers and that the CKFTA is unlikely to encourage more vehicles being shipped into the Asian country.

However, other automotive makers with plants in Canada, including Toyota Motor, Honda Canada and GM Canada, have expressed their support for the deal.

Meanwhile, South Korea’s own automotive sector is wary of an impending FTA with China, which if implemented would unlatch the door for China’s low to mid-priced cars, as well as foreign cars from the likes of Volkswagen, Benz, and BMW that are manufactured in China.

The two countries recently held the tenth round of negotiations on the bilateral FTA since 2012. In earlier talks, China had hinted that it would close its local car market, and classify it as highly sensitive sector.

South Korea also has an FTA with the US. Signed in 2007, the KORUS-FTA is expected to generate more jobs and stimulate exports of American-made cars. However, like in Canada, a number of US car giants including Ford and Chrysler, and the United Auto Worker (UAW) union were against the KORUS-FTA, but it was eventually revised to gain the consent of automotive OEMs and workers groups.

Australia is also securing FTAs with its three largest export markets, including South Korea and China, as well as a pact with Japan. Nevertheless, Australia has also observed a trade imbalance with its South Korean FTA. Since Australia will eliminate duties on South Korean imports of vehicle, including tyres, once the FTA comes into force; while levies on automotive parts will be cut in phases of three to five years, local cars are likely to compete in sales against South Korean cars. Correspondingly, South Korea will immediately scrap the 8% tariff on automotive part imports from Australia. Against this backdrop, General Motors Holden and Toyota Australia are planning to close their Australian manufacturing operations by 2017.

Meanwhile, Australia is also set to finalise FTAs with Japan and China, within the year. The two-way trade pact with Japan (which, according to reports, will be less comprehensive than the KAFTA) will be worth around US$58 billion annually. A key proposition by Japan is the elimination of the 5% tariff on automobile imports into Australia. The latter country also has bilateral agreements with Singapore and Thailand.

ASEAN taking pot shots at FTAs

The ASEAN region is a hotbed for FTAs with more matured markets. Although ASEAN is not the axis of automobile production, key vehicle makers including Toyota, BMW, and Ford have set up production plants in the region.

The region’s solid investment policy for the automotive industry, competitive labour costs and the vast number of automotive components manufacturers have drawn interest for trade partnerships.

Moreover, the region has a sizeable consumer base for cars. By 2015, car ownership in ASEAN could reach close to 40 million and shoot up to 55 million by 2050, predicted the Frankfurtheadquartered Deutsche Bank.

Meanwhile, research firm Frost & Sullivan stresses the significance of ASEAN as a cluster, likewise projecting that the region is likely to be the fifth largest automotive market in the world by 2019.

Malaysia’s car sector shaping up

Malaysia’s 2013 FTA with Australia (MAFTA) places the Southeast Asian country at an advantage, with the zero-tariff on its local car Proton exported to Australia, which is its ninth largest trading partner that generated two-way trade worth US$17.7 billion in 2012. For Australian firms, the MAFTA will eliminate tariffs on automotive parts and components and on medium to large engine cars imported from Australia.

Along the same vein, Malaysia’s automotive sector posted record sales of 652,000 units in 2013. Local vehicle makers Perodua and Proton led the sales. Foreign cars such as Toyota, Nissan, and Honda also showed significant sales increases during the year.

The country’s National Automotive Policy (NAP) also provided incentives, initially to prop up the local automotive sector, after foreign car sales trailed close behind local car revenues.

But a newly rehashed policy is shaping Malaysia as the regional hub for energy-efficient vehicles (EEVs), to set it apart from Thailand, which produces pick-up trucks and other vehicles. Among other objectives, NAP is also geared to promote the country as manufacturing destination for foreign car and automotive parts firms as well as generating more jobs for local workers. By 2020, NAP expects to replace 20% of foreign workers with local manpower.

Detroit of Asia at risk of losing status

The Thai automotive sector is vital to the country as it accounts for 10% of the total GDP. It has a production capacity of 2.75 million vehicles and employs 500,000 workers. It even has a 2012-2016 Master Plan for the industry. What could tarnish its “image”?

Entangled in political haywire, Thailand is at the brink of losing its grip as an automotive manufacturing hub in the region. Known as the Detroit of Asia, Thailand is losing out on investment opportunities to Indonesia and the Philippines due to the latter two countries’ more stable politics, lower debt levels, and ample labour force. Economic analysts are also skeptical if Thailand will be able to beat its GDP of 2.9% last year.

According to the Board of Investments (BOI), Thailand has six FTAs with Australia, China, India, New Zealand and the ten member countries of ASEAN. These could have favoured Thailand as an investment destination; with exports of electronics, vehicles and automotive part, increasing significantly.

It also has ongoing negotiations for an FTA with the EU, but this is being held up due to the country’s fragile political situation.

Nonetheless, since the Thai auto industry is deeply ingrained and humongous, it continues to benefit from certain FTAs.

An example is the one with Australia (TAFTA). Reports indicate that Australia’s automotive imports from Thailand showed a drastic increase, from 5.4% between 2000-2004 to 17.2% in 2010. This has positioned Thailand as Australia’s second largest automotive source, after Japan. Meanwhile, Japanese car makers (that export to Australia) pumped up their investments into Thailand to maximise their production capacities in the region, instead of shipping from Japan.

On the other hand, the FTA has created an imbalance for Australia’s car sector. Industry insiders from Australia say that the TAFTA created a onesided benefit – to the detriment of its local car sector. With the TAFTA, Thai vehicles enter the Australian market without any restrictions, however, Thailand has imposed secondary restrictions, to totally prevent Australian vehicles from being sold into the Thai market.

Cars from Toyota andMazda that are shipped from Thailand are big sellers in Australia. Conversely, Australia-branded cars such as the Holden Commodore have only seen local patronage.

On an unequal footing

The Philippines inked its first bilateral FTA with Japan, the JPEPA, in 2006, and it came into force in 2008. It is also part of the ASEAN FTAs with China, India, South Korea, Japan, and Australia/New Zealand. To date, the country is involved in ongoing talks with possible FTAs with the EU and the European Free Trade Association (EFTA).

Similar to its regional kin, the agreements have been met by mixed reviews. For those opposing, the FTAs expose the country’s manufacturing sectors to unfair trade with China, Vietnam, Thailand, Japan, and other Asia Pacific neighbours.

The influx of cheaper commodities, in lieu of higher priced locally produced items (food, wearable, and consumer electronics) due to higher manufacturing costs, is a nail in the coffin for local producers who cannot compete, try as they may.

Already a hub for automotive assembly, parts and components, the Philippines anticipates a growing investment interest. According to the Department of Trade and Industry (DTI), the ASEAN economic community (AEC), to be set up in 2015, sets the stage for the country to become the next important Asian spot for retail and automotive parts exports, as well as aircraft maintenance and repair.

Meanwhile, provisions from JPEPA have drawn the ire of sectors affected by the imbalances it causes. With the deal, Japanese corporations are allowed to own land as well as assume certain businesses and operations, which are contrary to Philippine laws. Almost 200 tariff lines from the agreement have been crossed out by Japan while the Philippines excluded only six.

The automotive industry is among one of the vulnerable sectors that are being short-changed in the deal, according to local manufacturers, referring to the provision of allowing free entry of Japanese automobiles into the local market.

Manufacturers say that such move contradicts the Philippines effort to boost the local automotive industry, and a far worse scenario, could threaten some 500,000 workers in the plastic, glass, electronics fabrication, metal, and other related segments, out of their jobs. Completely built up (CBU) units, especially the Japanese automotive brands, will also be favoured under the agreement, considering that it is more feasible to import now than to assemble, say Philippine manufacturers.

Read PDF version here...


  Home | Terms & Conditions | Privacy Policy | Contact | Webmail | Site Map  

Copyright (c) 2014 All rights reserved