Japan's FTA policy and movement of Japanese Companies towards the

FTA era in East Asia

December 8,2009

Japan External Trade Organization (JETRO)Asia and Oceania Division, Overseas Research

Department

Seiya Sukegawa 1

Table of Table of ContentsContents

Cultivation of a good economic relationship with East Asia emerging markets

AFTA’s impact on Japanese affiliated manufacturers in Asia

Exploitation of FTA by Japanese affiliates and the problems they face

2

■Contribution of East Asian economy to the world economic growthH

alf th

e w

orld

dem

and is cre

ate

d in

East A

sia年4.9 4.5 4.7 4.9 5.1

28.926.5

26.326.6

27.4

8.88.1 8.2 8.5 8.9

13.515.1

14.113.4

12.1

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

米国 韓・豪・NZ インド

中国 日本 ASEAN10

5.76.6

8.0 7.6

6.8

4.8

4.24.1

5.3

5.3

5.6 5.8

3.7

5.1

7.1

4.54.5

5.8

7.9

7.6

8.4

8.0

5.1

0.4

4.65.7

6.3 6.6

6.5

0.0

2.0

4.0

6.0

8.0

10.0

〔Source〕Prepared by Seiya Sukegawa based on IMF World Economic Outlook( Oct.2009）

％

World economic growth rate（PPP base）

Contribution ratio to the world economy growth (PPP base)

3

USA

CHINA JAPAN

INDIAKOREA・AU・NZ

USA

KOREA/AU/NZ

INDIA

CHINA

JAPAN

ASEAN

China：①1.3Billion②9.0％

GDP：1.5Trillion US$

FTA

4

EPA/FTA are tools to tap into emerging markets

Association of Southeast Asian Nations (ASEAN)

Export Local production

Advantage Reduced costs and risks associated with entry into the market

Shortened lead time and less trade risks

Dis-advantage

Transportation costs, lead time including customs clearing, certificates of origin, trade risks such as AD, exchange risks

Costs for market entry, operational risks

Em

erging marketsExport?

OR

New Investment

Tariffs on end products can be eliminated only through EPA!

India： ①1.2Billion②7.3％

ASEAN：①583Million②4.6％

Australia/ NZ：①26Million②0.8％

New Investment/ Expansion

①Population②Economic growth rate

India

Australia

Korea

（Under negotiation）

Mexico

Switzerland

Chile

GCCPeru

■ J apan’ s FTA/ EPA partners

Share(%)World Total 9,206 100.0ASEAN 2,455 26.7China 3,099 33.7Korea 324 3.5Hong Kong 238 2.6 Share(%)Taiwan 412 4.5 ASEAN 2,455 26.7India 158 1.7 Vietnam 236 2.6Oceania 95 1.0 Thailand 903 9.8North America 1,234 13.4 Singapore 228 2.5Latin America 286 3.1 Malaysia 420 4.6Europe 819 8.9 Philippnes 230 2.5Africa 26 0.3 Indonesia 438 4.8〔Source〕TOYOKEIZAI（2009）

No. of Companies

No. of Companies

■Number of J apanese affiliates manufacturers outside J apan（2008）

5

Under negotiationIn Effect

40.1

39.6

53.9

41.3

29.6

39.5

27.3

26.5

51.6

11.7

11.5

5.2

13.0

18.4

11.9

12.1

23.0

14.6

37.2

37.8

31.5

32.1

34.0

38.8

52.3

41.2

24.4

4.0

4.1

2.7

5.7

7.5

3.2

2.8

5.2

2.2

3.5

3.5

2.9

4.2

2.1

4.6

3.9

1.3

3.1

0.85

0.85

0.69

0.32

2.67

0.63

0.94

1

0.89

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

総 数

ＡＳＥＡＮ 計

タイ

マレーシア

シンガポール

インドネシア

フィリピン

ベトナム

インド

進出国（現地） ASEAN 日本 中国本土 その他アジア 米国 欧州 その他

Where do Japanese manufacturers in Asia procure from?

Ratio of intra-region procurement in ASEANASEAN

Intra-region procurement ratio

↓

51.8%

51.1%

59.1%

54.3%

48.0%

51.4%

39.4%

49.5%

n=612

585

156

140

55

80

127

27

27

6

TOTAL

ASEAN Total

Thailand

Malaysia

Singapore

Indonesia

Philippines

Vietnam

India

Local

〔Source〕Survey of J apanese- Affiliated Firms in Asia（FY 2007 Survey）by J ETRO

ASEAN JAPAN CHINA Other Asia USA Europe Others

Table of Table of ContentsContents

Cultivation of a good economic relationship with East Asia emerging markets

AFTA’s impact on Japanese affiliated manufacturers in Asia

Exploitation of FTA by Japanese affiliates and the problems they face

7

ASEAN Free Trade Area-Common Effective Preferential Tariff (CEPT)>>ASEAN Trade in Goods Agreement…Signed on February 26, 2009

ASEAN6Thailand,Malaysia,Singapore,Indonesia,Philippines, Brunei

0-5% tariff for IL(with some exceptions)

0-5% tariff for IL0% tariff for 60% of all items

AFTA started in 19932002

2003

2010

0% tariff for IL*

Vietnam 0-5% tariff for IL

2006

0% tariff for IL

(exceptions until 2018)

20152007

0% tariff for 80% of IL*

0-5% tariff for SL and HSL

AFTA

8

Joined AFTA in 1995 0% tariff for 80% of IL*

0-5% tariff for SL/HSL by 2013

(Note) IL: Items on the list of tariff reduction and eliminationSL: Items on Sensitive list HSL: Items on Highly Sensitive list* Items that were shifted to SL or HSL are not included

Itemnumber

liberalizationrate

Burunei 8,300 99.1%Indonesia 8,737 98.8%Malaysia 12,335 99.2%Philippines 8,980 99.5%Singapore 8,300 100.0%Thailand 8,300 100.0%ASEAN6 54,952 99.4%Vietnam 8,300 98.3%CLMV 35,589 98.8%ASEAN Total 90,541 99.2%

■ AFTA liberalization rate（item base）

12.76%

3.21% 2.89% 2.39% 1.91% 1.87% 1.74% 1.59%0.97% 0.79%

0%

2%

4%

6%

8%

10%

12%

14%

1993 2001 02 03 04 05 06 07 08 09

■ AFTA- CEPT average rate（ASEAN6）

〔Source〕ASEAN Secretariat 〔Source〕ASEAN Secretariat

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

98 99 2000 01 02 03 04 05 06 07 08 09上

インドネシアフィリピンブルネイベトナムマレーシアASEANASEAN（除シンガポール）

（資料）商務省外国貿易局、World Trade Atlasより作成

CY'07 CY'08

①Passenger vehicle（1500～under3,000cc）

①passenger vehicle（1500～under3,000cc）

②Auto parts ②Auto parts③Passenger vehicle（Under 1500cc）

③Commercial vehicle

④Parts for Motorcycles ④Parts for Motorcycles

⑤Commercial vehicle ⑤Passenger vehicle（Under 1500cc）

AFTATop5

Products

■Utilization rate of AFTA among exports from Thailand to ASEAN countries

■Top5 products exported through AFTA

〔Source〕Prepared by Seiya Sukegawa based on information by the Ministry of Commerce of Thailand

9

Unit:%,No.of Companies

PreferentialTariff Margin

Validresponces

ASEAN 5.2 339Indonesia 4.3 66Singapore 5.8 19Thailand 5.3 152Philippines 5.6 36Vietnam 6.3 26Malaysia 5.2 39

South West Asia 6.2 34Oceania 5.9 17

■How much margin do they expect on preferential tariff when utilizing FTA?

IndonesiaPhilippinesBuruneiVietnamMalaysiaASEANASEAN(exclude Singapore)

〔Source〕Prepared by Seiya Sukegawa based ondata from Ministry of Commerce, World Trade Atlas

09 1st half

MFNTariff

PreferentialTariff Margin

Thailand 11.7 40.8 1.5 39.4Indonesia 7.8 25.0 1.8 23.4Malaysia 8.8 21.4 1.4 20.0Philippines 7.8 19.3 1.8 n.a.Vietnam 11.6 29.9 17.9 12.1

ImportContry

MFNTariff(TotalAverage)

Automobile and it's parts

AFTATariff

〔Note〕Automobiles and parts :HS87MFN rate is as of 2008 except for the Philippines ( 2007)

〔Source〕Prepared by Seiya Sukegawa based on Consolidated CEPT Package2008

■ Reduction of tariff by AFTA（2009）

〔Source〕Surveyof J apanese- Affiliated Firms in Asia and Oceania（FY 2008 Survey）

ItemCountry/Region 2000 2009 Change 2000 2009 Change 2000 2009 Change 2000 2009 Change

ASEAN 17 14 ▲ 3 14 10 ▲ 4 8 7 ▲ 1 4 2 ▲ 2Thailand 7 6 ▲ 1 5 4 ▲ 1 4 3 ▲ 1 2 2 -Malaysia 2 ▲ 2 2 ▲ 2 1 1 - 1 ▲ 1Philippines 2 1 ▲ 1 3 2 ▲ 1 1 1 - -Indonesia 5 4 ▲ 1 3 2 ▲ 1 2 2 - -Singapore - - - 1 ▲ 1Vietnam 1 3

△ 2 1 2

△ 1 - -

ItemCountry/Region 2000 2009 Change 2000 2009 Change 2000 2009 Change 2000 2009

ASEAN 9 7 ▲ 2 10 6 ▲ 4 17 12 ▲ 5 79 58 ▲ 21Thailand 5 6

△ 1 5 3 ▲ 2 7 6 ▲ 1 35 30 ▲ 5

Malaysia 1 1 - 1 1 - 3 3 - 11 6 ▲ 5Philippines 1 ▲ 1 2 1 ▲ 1 3 2 ▲ 1 12 7 ▲ 5Indonesia 1 ▲ 1 2 1 ▲ 1 3 1 ▲ 2 16 10 ▲ 6Singapore - - 1 ▲ 1 2 0 ▲ 2Vietnam 1 ▲ 1 - - 3 5

△ 2

（Note）Data as of May 2009

（Source）Handbook of Home appliances

Refrigerator Washing machine Ventilator Microwave oven

TotalChange

Rice cooker Electric fan Air conditioner Total

Change in numbers of J apanese electric/ electronic production basis in ASEAN

10

11

Finished cars, diesel engines, lamps, steering columns, bumpers, body panels

Diesel engines, press parts, engine parts

Isuzu

Plastic parts, presses, outfitting goods, meters, cylinder blocks

Honda

Press parts, pumps, camshafts

Nissan

Engines, engine partsMitsubishi

Thailand

Gasoline engines, CKD parts for multipurpose vehicles, door lock f rames, clutches, regulators, body panels

Toyota

Brake partsIsuzu

Engine parts, underbody parts, automatic transmissions

Honda

Brakes, fuel tanksMitsubishi

Indonesia

MetersNissan

Transmissions, constant-velocity joints, combination switches, meters

Toyota

Manual transmissions, air inlet/emission parts, pedals

Honda

Transmissions, axis propellers

Transmissions

Mitsubishi

Philippines

Steering links, radiators, engine computers, wiper arms

Toyota

Dashboards, constant-velocity joints, bumpers

Honda

Steering gears, suspensionsNissan

Gears, power steeringMitsubishi

Malaysia

(Reference) Prepared by JETRO based on materials provided by each company

ASEAN

Toyota

Complementary network of automobile

manufacturerswithin ASEAN

Isuzu

■Change of competitiveness after implementing ＡＦＴＡ- ＣＥＰＴTrade specialization coefficient in ASEAN intra- regional trade

（Calculation method）Trade specialization coefficient=net export(export-import)/total trade(export+import)

（Indication of coefficient）Closer to 1 : More competitive

(export is larger than import)Closer to -1 : Less competitive

(export is smaller than import)Zero : Neutral

(export = import)

-0.80

-0.60

-0.40

-0.20

-

0.20

0.40

0.60

0.80

TotalM

achinery and equipment

General equipm

ent Electrical equipm

ent Transport equipm

ent Precision instrum

entsTotalM

achinery and equipment

General equipm

ent Electrical equipm

ent Transport equipm

ent Precision instrum

entsTotalM

achinery and equipment

General equipm

ent Electrical equipm

ent Transport equipm

ent Precision instrum

entsTotalM

achinery and equipment

General equipm

ent Electrical equipm

ent Transport equipm

ent Precision instrum

entsTotalM

achinery and equipment

General equipm

ent Electrical equipm

ent Transport equipm

ent Precision instrum

ents

Indonesia Malaysia Philippines Thailand Vietnam

CY2003

CY2008

12〔Source〕Prepared by Seiya Sukegawa based on Institute for International Trade and Investment ( ITI)data

ASEAN+6（CEPEA）

ASEAN+3（EAFTA）

13

Under negotiationConcluded

Under consideration/research

AFTA (ASEAN FreeTrade Area)(2010/2015)

ASEAN-India FTA

(2013/2018)* Philippines

from 2018

* Year of tariff elimination is shown in each frame. (the year of tariff elimination in early member countries /the year of tariff elimination in later joined countries)

“ASEAN+1” Free-trade area in East Asia achieved through FTA

Effective from Dec. 2008

Signed in Aug. 2009Effective from Jan.2010 (planned)

China Korea Japan

India

ASEAN・EU FTA

* Under negotiation

ASEAN・CER (Australia-NZ) FTA

ASEAN-Japan CEP

ASEAN-South Korea FTA (2010/2018)

* Vietnam from 2016

ASEAN-China FTA

(2010/2015)

Signed in Feb. 2009Effective from Jan. 2010(planned)

〔Source〕Survey of J apanese- Affiliated Firmsin Asia and Oceania（FY 2008 Survey）(conducted Sep- Oct 2008)

(n=856) No. % (n=111) No. % (n=91) No. %

1st Thailand 266 31.1 Thailand 42 37.8 Thailand 31 34.12nd Vietnam 130 15.2 Indonesia 19 17.1 Vietnam 22 24.23rd India 102 11.9 India 16 14.4 China 12 13.24th Indonesia 93 10.9 Vietnam 15 13.5 Malaysia 6 6.65th Malaysia 54 6.3 Philippines 7 6.3 Indonesia 5 5.5

(n=58) No. % (n=39) No. % (n=28) No. %

1st Thailand 23 39.7 Thailand 16 41.0 Thailand 11 39.32nd Malaysia 8 13.8 Vietnam 8 20.5 India 5 17.93rd Vietnam 6 10.3 India 8 20.5 Indonesia 4 14.34th China 5 8.6 China 3 7.7 Australia 3 10.75th Indonesia 4 6.9 Indonesia 2 5.1 Philippines 2 7.1

Motor vehicles andmotorcycles

Electric machinery andelectronic equipment

General machinery

Total Motor vehicle andmotorcycle parts and

accessories

Electric and electronic partsand components

■Optimum base for machinery production in 5- 10 years

(n=884) No. % (n=110) No. % (n=95) No. %

1st India 337 38.1 India 54 49.1 China 42 44.22nd China 242 27.4 Thailand 37 33.6 India 31 32.63rd Thailand 239 27.0 Indonesia 31 28.2 Vietnam 30 31.64th Vietnam 222 25.1 Vietnam 28 25.5 Thailand 29 30.55th Japan 163 18.4 China 25 22.7 Europe 27 28.4

(n=60) No. % (n=40) No. % (n=31) No. %

1st India 26 43.3 India 29 72.5 India 12 38.72nd Europe 18 30.0 Vietnam 17 42.5 Indonesia 6 19.43rd Vietnam 14 23.3 Indonesia 10 25.0 Vietnam 6 19.44th USA 13 21.7 Thailand 10 25.0 Thailand 5 16.15th China 10 16.7 Middle East 10 25.0 Middle East 5 16.1

Electric and electronicparts and components

Motor vehicles andmotorcycles

General machinery

TotaMotor vehicle and

motorcycle parts andaccessories

Electric machinery andelectronic equipment

■Promising market for machinery in 5- 10 years

14

Produce in Thailand

and export to India

by FTA

FRAMEWORK AGREEMENT FOR ESTABLISHING FTA BETWEEN INDIA AND THAILAND （ Oct.

2003 ）

Concentrates production of transmission in India, and exports to Thailand through EH

ToyotaTransportation MachineryTransportation Machinery

Closed the air-conditioner factory in Singapore and shifted production to ThailandStarted exporting air conditioner from Thailand to India through Thailand-India EH

SanyoElectric MachineryElectric Machinery Stopped local production of TV in India and started

importing from Thailand through EH

Sony

Stopped production in India and shifted to ThailandApplying for EH

Japanese air-conditioner manufacture

Early Harvest started in Sep.2004

（（ Source) Prepared by JETRO based on Source) Prepared by JETRO based on newspapers and interviewsnewspapers and interviews

Manufactures 21-inches TV in India, and import 29-inches TV from Thailand

Sharp

General MachineryGeneral Machinery

Started exporting rice polishers from Thailand to India as the tariff on rice polishers (HS843780) was lifted

Satake （ Higashi-hiroshima ）

Dissolved the manufacturing affiliate in Malaysia and shifted the production of CRT to ThailandPromotes concentration of production in Thailand with an intension of exporting to India 。

Funai

Procures parts of pickup tracks from India and manufactures in Thailand

Tata

15

Response of Japanese affiliates to Thailand-India Early Harvest

■Drastic reorganization of TV production base by Sony

＜＜ BackgroundBackground ＞＞ ①Termination of production In “India” India-Thailand Early Harvest Concluded: Oct. 2003 Tariff reduction: from Sep. 2004

India

ThailandMalaysia

CRT:2.2 milVietnam

CRT:0.1 mil

CRT:0.38 mil

CRT:0.1 mil

CRT:0.3 mil.LCD:1.1 mil.

CRT:0.55 mil.LCD:0.4 mil.Will stop productionin Mar.2010 ③CRT:0.9 mil.

Stopped production in 2008 ②

CRT:1.9 mil.LCD:0.01 mil.

CRT:0.9 mil.

CRT:n.a.②Termination of production in “Vietnam” Flexible application of rules of origin of AFTA　　 Started ： Aug. 2008 Liberalizaion of foreign investment in import/wholesale business 　　 Started ： May. 2008

③Termination of production In “Thailand” ASEAN-India FTA　　 Concluded ： Aug. 2009　　 Tariff reduction: from Jan. 2010Export Global

Productionbase

〔 Source 〕 Production volume data is based by Fuji Chimera Research Institute

16

Export

Export

Stopped productionin Jul.2004 ①→ import from Thailand

2002

2005

2008

2010

Import from Thailand

(Unit: number of production)

CRT TVCRT TV LCD TVLCD TV

Table of Table of ContentsContents

Cultivation of a good economic relationship with East Asia emerging markets

AFTA’s impact on Japanese affiliated manufacturers in Asia

Exploitation of FTA by Japanese affiliates and the problems they face

17

Uni t No. of Compani es ：％、

Currentry inuse

Consideringusing

No plan touse

Currentryin use

Consideringusing

No plan touse

Export Import

23. 0 23. 3 53. 7 19. 7 24. 4 55. 9 670 635

Valid responsesExport Import

18

■Half the affiliates do not utilize FTA/ EPA

■Major reasons for not utilizing FTA/ EPA

Unit: %

Thailand

No. of respondents 146 55Less than 1% 50.0 36.41～3％ 32.9 43.63～5％ 8.2 10.95～7％ 4.8 3.67～9％ 0.7 1.89～10％ 1.4 1.8Over 10％ 2.1 1.8

Average 1.9 2.2

ASEAN

■Cost of managing investment incentives (compared with import value of raw materials)

Export ①No advantage of FTA as import tariff is already reduced (37.6%)

②There is no FTA/EPA with the destination of export (22.9%)

③No advantage of FTA as general tariff of importing country is low (19.9%)

Import ①Already exempt from tariff by investment incentives (48.9%)

②Volume of local sale is small (13.4%)

③There is no FTA/EPA with the exporting country (13.1%)

〔Source〕Survey of J apanese- Affiliated Firms in Asia and Oceania（FY 2008 Survey;conducted Sep- Oct 2008)

Problem with Form D

Problems in utilizing FTA pointed out by Japanese firms

Companies must specify FOB price on COO It is required to indicate FOB price on AFTA COO. When the trade is done through the third country, it enables importers

to compare price on invoice and original FOB price and reveals the profit margin of the third country.

Problem with Japanese EPA

In some cases FTA preferential tariff is higher than MFN rate Negotiation of FTA was based on the tariff table as of the start of the

negotiation. During the long negotiation process, some countries gradually reduced MFN tariff, and consequently FTA preferential tariff rate for some items turned out to be higher than MFN rate.

In some EPAs, it is agreed to apply whichever rate that is lower.

HS codes used in the agreement and at the customs are different Agreement is based on HS code 2002, while the customs use HS

2007. Some countries refuse to apply preferential rate because of the inconsistency of HS code. Companies bear risk and cost of managing two different codes.

Mexico and Malaysia have started organizing the codes, and it is expected that others follow.

Each country uses different document to certify regional value content

Problem with Japan-ASEAN

Comprehensive EPA

19

Nov.2007 FY'08 FY'09 FY'10 FY'11 FY'12 FY'13 FY'14 FY'15 FY'16 FY'17

5,422 5,599 6,027 6,305 6,420 6,629 6,780 6,826 7,418 7,467 7,5831,578 2,220 2,070 2,156 2,140 2,360 2,221 2,219 1,843 1,860 1,8542,734 1,915 1,637 1,273 1,174 745 733 689 473 407 297

71 71 71 71 71 71 71 71 71 71 71J TEPA tariff

J TEPA tariff rateJ TEPA tariff

incommensurable

2,7341,915 1,637 1,273 1,174 745 733 689 473 407 297

1,5782,220

2,0702,156 2,140

2,360 2,221 2,2191,843 1,860 1,854

5,422 5,599 6,027 6,305 6,420 6,629 6,780 6,8267,418 7,467 7,583

0

2,000

4,000

6,000

8,000

10,000

JTEPA tariff rate>MFN tariff rate JTEPA tariff rate=MFN tariff rateJTEPA tariff rate＜MFN tariff rate incommensurable

Number of items of which preferential tariff rate by J TEPA is higher than MFN rate

〔Source〕Prepared by Seiya Sukegawa based on the information by the Ministry of Commerce of Thailand

（Number of items）

Items with higher prefer-

ential tariff rate

20

Unit：No.of items

Share Share Share Share

Year2004 145 2.3%

05

06

07

08 259※ 4.7%

09 2,810 46.7% 2,967 53.8% 2,810 45.1%

2010 2,686 48.7% 3,490 58.0%

11 3,368 61.1% 3,511 58.4%

12 3,389 61.4% 4,604 76.6%

13 4,475 81.1% 4,747 78.9%

14 4,499 81.6% 4,845 80.6%

15 4,597 83.3% 5,191 86.3%

16 4,932 89.4% 5,527 91.9% 5,131 93.0%

17 5,115 92.7% 5,870 97.6%

2018 5,346 96.9%

Total itemnumber

5,786 92.8%

5,209 94.5%

5,516 6,014 5,515

5,081 92.1%

6,237

2,469 44.8%

4,916 89.1% 5,637 90.4%

600 9.6%

2,588 43.0% 837 13.4%

JAPAN Korea China（AJCEP） （JTEPA） （AKFTA） （ACFTA）

Change in number of tariff- eliminated items through Thailand’ s FTA/ EPA with J apan, Korea and China

21〔Source〕Prepared by Seiya Sukegawa based on these FTA/EPA Agreement

22

Thank you very much for your attention.