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Group assignment:

International trade between Vietnam and ASEAN through ASEAN Free Trade area (AFTA)

Instructor: PhD. Dao Thi Bich Thuy Students: Mai Thanh Hien Kieu Phuong Dung Nguyen Thi Thuy Trinh Nguyen Thi Tung Mai Bui Hoang Linh Course name: International Trade Code: ECO 4451 Term: Fall 2010

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Abstract ASEAN Free Trade Area (AFTA) is an economic organization which Vietnam has been participating. This regional organization has brought to Vietnam new positive changes in economy. This report will summarize the establishment of AFTA and the development of its agreement related to Vietnam. Next, we will point out the opportunities and challenges Vietnam faces when participating and some achievements. Last but not least, we propose several recommendations to promote international trade between Vietnam and region.

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I. Background 1. The formation of AFTA ASEAN is one of the fastest economic growth regions in the world. However, before AFTA was launched, the efforts of ASEAN economic cooperation have not achieved desired objectives. ASEAN already has plans for economic cooperation such as: Preferential trade agreement (PAT) ASEAN Industrial Projects (AIP) The ASEAN Industrial Complementation (AIC) and plans to support industrial production with other labels (BBC) ASEAN Industrial Joint Venture (AIJV) These economic cooperation plans only affects a small part of ASEAN and internal trade and they are not enough to affect investment in block. 2. The establishment of AFTA In the early 90s, when the cold war ended, the changes in the political environment, international economics and economic sector has put ASEAN countries facing with many big challenges that were not easy to overcome without closer connections and joint efforts of the entire Association. These challenges were: - Firstly, the process of the world economic globalization was quite fast and strong, especially in the field of trade so the protection ism in the traditional ASEAN no longer had the support of policy planners in the country as well as international one. - Secondly, the formation and development of cooperative organizations, particularly new areas such as EU, NAFTA will become closed trade bloc, hindering the ASEAN goods when penetrating into these markets. - Moreover, changes in policies such as opening doors, and encourage widespread preference for foreign investors, along with a comparative advantage in natural resources and human resources of China, Viet Nam, Pakistan, Russia and other Eastern European countries have become attractive investment market more than ASEAN, requires ASEAN not only a moderate expansion of membership, but also a moderate further enhance regional cooperation.

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To cope with these challenges, in 1992, initiated by Thailand, ASEAN summit meeting in Singapore has decided to establish a free trade area (AFTA). AFTA would represent the efforts of ASEAN in transforming the region into a center of trade and the world's major investment in the next 15 years. AFTA Council consisting of all member states and a representative of ASEAN Secretary General is tasked to monitor, coordinate and review the implementation of the agreement and assist ASEAN economic ministers in all matters related. The AFTA agreement was signed on 28 January. When the AFTA agreement was originally signed, ASEAN had six members, namely, Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand. Vietnam joined in 1995, Laos and Myanmar in 1997 and Cambodia in 1999. AFTA now comprises ten countries of ASEAN. All the four latecomers were required to sign the AFTA agreement in order to join ASEAN, but were given longer time frames in which to meet AFTA's tariff reduction obligations. This is really a milestone in ASEAN economic cooperation to a new level. The main mechanism for AFTA tariff agreement is the Common Effective Preferential (Common Effective Preferential tariff - CEPT). In essence, CEPT is an agreement among ASEAN member countries to reduce tariffs within the 0-5% volume through the various tax reduction plans. Within 5 years after reaching the final tax treatment, the member states will process to remove the import quotas and other nontariff barriers. Duration of CEPT implementation of the countries is different. Specifically: Brunei, Indonesia, Philippines, Singapore, Thailand, from 1993 to 2003. Vietnam: 1996 to 2006 Laos, Myanmar and Cambodia from 1998 to 2008. To implement tariff reductions gradually, each country will have to classify all their goods into one of the following lists: Inclusion list (IL): Includes the items that will be cut or reduced tax until the completion of CEPT will have the tax rate about 0-5%. After CEPT agreement, ASEAN countries have to give their own IL to begin reducing their tax office since 1993. However, not all items in IL is reduced tax because there are some items before included in IL have the tax rate below 5%, even 0%.

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Temporary Exclusion List (TEL): Includes items havent been listed to reduce tariffs immediately because the ASEAN members must spend more time to adjust domestic production to adapt to environmental edge increasing international competition. After three years from participating in the CEPT, ASEAN countries have started gradual transfer of goods from TEL to IL, which is to start reducing tariffs with this item. The process moved from TEL to IL permitted to drag term of 5 years, each year they have to move 20% amount of goods. That means to the end of the eighth year, the IL has expanded cover the whole TEL, and TEL no longer exists. When putting each item on the IL, countries also show the schedule indicated reduction of that goods until completion of CEPT. General exclusion list (GEL): includes items do not have tariff reduction obligations. ASEAN member countries have the right to give a list of these goods to protect national security, public morals, human health, fauna, cultural values conservation, historical, archaeological ... GEL is not the list of import banned goods of the Government. Some items in GEL still have been import normally, but they cannot enjoy preferential tax rates as those found in the list of tax cuts. Besides, the ASEAN countries also signed series of agreements on uniform and recognized standards of goods between the member states, recognition of certification of origin of each other, strengthen cooperation in the field of customs, protection of rights intellectual property, industrial development and construction of the ASEAN Investment Area (ASEAN Investment Area AIA) 3. The objective of AFTA - Free trade area by removing tariff barriers within the region and ultimately nontariff barriers. This makes production of the ASEAN business have to be more efficient and more competitive on world markets. Also, consumers will have chances to buy the goods from the manufacturer quality effective in ASEAN, leading to an increase in intratrade.

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- To attract foreign investors into the region by creating a larger united market volume. - Make ASEAN to adapt to international economic conditions are changing, especially with the development of regional trade agreements (RTA) in the world. The objective of AFTA is trade liberalization among countries through the reduction to the minimum level of tariffs in the region and eliminate non-tariff barriers and attract foreign investment into areas, also encourage economic ASEAN has a broader orientation and more marketable than the regional economies in the field of production and market. 4. The participation of Vietnam On July 28, 1995, Vietnam officially became the 7th member of ASEAN and AFTA commitments involved. Time for AFTA complement of Vietnam is 2006. And Vietnam began to implement the tariff reduction schedule from joining AFTA on January 1, 1996 by giving the first 875 items in the implementation of the CEPT. All these items were located in the 0-5% tax bracket. In short, joining AFTA is the first approved for the Vietnamese economy and businesses to prepare for joining the world market. II. Development of international trade between Vietnam and ASEAN after joining AFTA 1. Trade structure Vietnam joined the Association of ASEAN from June 7 / 1995 and began implementation of the Common effective preferential tariff (CEPT) from 1/1/1996, this program ended 01/01/2006. Due to the economic development level of Vietnam is still low compared with some countries in the region, competitiveness of enterprises, many of the manufacturing industry and service ... and import duties but is still a source of budget revenues, the tariff reduction program of Vietnam was built on the following main principles: 1. Not cause a major impact the revenue budget. 2. Should be reasonable protection for domestic production. 3. Encourage to facilitate the transfer of technology, technological innovation, for domestic production.

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4. Cooperation with ASEAN countries on the basis of the CEPT Agreement to take advantage of incentives, to expand export markets and attract foreign investment. Under the CEPT Agreement, ASEAN member states give each other preferential tariff rates of 0-5%. This helps Vietnamese products to access a regional market that incorporates many substantial advantages: a population of more than 500 million, convenient transportation systems and relatively moderate requirements on product quality. Moreover, the reduction in import tariffs or duties lowers investment costs, thereby enhancing the competitiveness of Vietnamese products in the regional market. Nevertheless, influences of free trade often are two-sided. On the one hand, free trade helps to create large markets and encourage production and exports. On the other hand, if the domestic economy as a whole is not strong and competitive enough, many economic sectors may forfeit even in the home market. Put simply, the home market will shrink and lo