The Role of Asian Trade Agreements for American Businesses

ASEAN’s rapid economic growth presents an array of prospects for American businesses. With a consumer market estimated to surpass US$4 trillion and a significant rise in the middle-class segment, the region offers an attractive destination for market diversification and expansion.

By leveraging the ASEAN’s network of multiple free trade agreements (FTAs) and other pivotal regional trade agreements, US businesses can benefit from streamlined trade regulations and gain smoother access to the Asian market. However, successfully navigating its complexities demands a nuanced understanding of the regional trade dynamics, regulatory intricacies, and market trends.

Thus, to tap into this potential, it is crucial for US businesses and investors to navigate the region’s trade dynamics, regulations, and market trends effectively.

Understanding the Asian trade agreements landscape

ASEAN FTAs

ASEAN has been actively engaging in a series of FTAs with various countries, fostering a conducive environment for regional economic integration and trade.

Key agreements and measures are illustrated in the table below.

ASEAN FTAs

Agreement Name

Year

Participating Countries

Trade Impact and Dynamics

ASEAN-Australia-New Zealand Free Trade Area (AANZFTA

 

 2010

ASEAN, Australia, New Zealand

Tariff-free trade for 90 percent of goods between involved parties

 

Ongoing discussions to upgrade the agreement and modernize trade policies

ASEAN-China Free Trade Area (ACFTA

 

2005

ASEAN, China

Significantly reduced tariffs on thousands of products 

 

Ongoing simplification of rules of origin, trade facilitation measures, and investment procedures

ASEAN-India Trade Area (AIFTA)

 

2010

ASEAN, India

Tariff liberalization for over 90 percent of products

 

Review of the scope of the agreement to address trade barriers

ASEAN-Republic of Korea Free Trade Area (AKFTA)

 

2010

ASEAN, Republic of Korea

Tariff elimination for 90 percent of products traded between involved countries

 

Commitment to increase bilateral trade volume

ASEAN-Japan Comprehensive Economic Partnership (AJCEP)

 

2008

ASEAN, Japan

Elimination of duties on 87 percent of tariff lines

 

Focus on economic cooperation projects including intellectual property rights, trade-related procedures, and more

US trade agreements in the Asian region

The US has strategically fostered economic relationships with countries across the Asian region through a series of vital trade agreements. These agreements have played a crucial role in streamlining trade regulations, fostering investment, and promoting market access.

The table below provides an overview of the prominent US trade agreements within the Asian region, outlining the key provisions and impact dynamics.

US Trade Agreements in the Asian Region

Agreement Name

Enactment Year

Participating Countries

Trade Impact and Dynamics

US-ASEAN Trade and Investment Facilitation Agreement (TIFA)

2006

United States, ASEAN

By promoting trade and investment facilitation, the TIFA has streamlined regulatory processes and enhanced market access for both parties.

US-Singapore Free Trade Agreement (USSFTA)

2004

United States, Singapore

Elimination of tariffs for all of Singapore’s exports to the US. It gives tariff preference based on the exporter’s declaration, waives Merchandising Processing Fees for Singapore originating products and safeguards market access.

 

Improvement of market access opportunities in the service sector by removing Singapore’s restrictions on a wide range of services.

US-Korea Free Trade Agreement

(KORUS FTA)

 

2012

United States, Republic of Korea

The Agreement eliminates tariffs on over 95 percent of U.S. exports to South Korea of industrial and consumer goods within five years.

US-Japan Trade Agreement (USJTA)

2020

United States, Japan

Elimination or reduction of tariffs on approximately US$7.2 billion in US. agricultural exports.

Regional Comprehensive Economic Partnership

Signed in November 2020, the Regional Comprehensive Economic Partnership (RCEP) includes China, Japan, South Korea, the ASEAN nations of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam together with Australia and New Zealand. 

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With participating economies contributing nearly 29 percent of global GDP and representing around 30 percent of the world’s population, the RCEP encompasses a colossal market valued at approximately US$25 trillion. This expansive consumer base, comprising approximately 2.5 billion individuals, of which an estimated 1 billion fall within the middle-class demographic, presents a major opportunity for US businesses to expand their market reach and tap into a diverse customer segment.

The RCEP’s fundamental objective revolves around the establishment of a comprehensive economic partnership, building upon the existing bilateral agreements within the ASEAN region and its FTA partners. Guided by a shared set of rules and standards, the RCEP aims to facilitate a reduction in trade barriers, streamline trade processes, and enhance market access among the participating nations. Thus, the RCEP introduces a host of new trade and investment prospects within the member countries, solidifying its position as the largest trade bloc in Asia thus far, and holds the potential to unlock a plethora of business opportunities within the dynamic Asia-Pacific market.

Progressive Agreement for Trans-Pacific Partnership

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) stands as a significant trade agreement formed among 11 member countries, including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The agreement emerged as a successor to the Trans-Pacific Partnership, signed in March 2018.

Spanning a collective GDP contribution of US$10 trillion and a combined population of over 500 million people, the CPTPP holds a pivotal position in the global economic landscape. Its strategic importance lies in bolstering market access, enhancing business opportunities, and fostering a conducive trade environment within the Asia-Pacific region.

Similar to its RCEP counterpart, the CPTPP endeavors to establish a comprehensive economic partnership built on a framework of shared rules and standards. Its core focus remains the reduction of trade barriers, the streamlining of trade processes, and the promotion of market-oriented conditions among member nations. As a result, the CPTPP opens up a spectrum of new trade and investment avenues for businesses operating within its member countries, positioning itself as a key facilitator of dynamic business prospects in the Pacific Rim.

Singapore-Europe Agreement

The Singapore-Europe Agreement, formally known as the European Union-Singapore Free Trade Agreement (EUSFTA), was signed on October 19, 2018, and entered into force on November 21, 2019. This agreement aims to enhance trade and investment flows between Singapore and the EU by removing trade barriers and fostering greater economic cooperation. Key advantages for businesses include:

  • Market access and tariff reductions: Under the EUSFTA, Singaporean exporters have seen significant benefits in terms of market access and tariff reductions. For example, Singapore’s exports of pharmaceutical products to the EU have increased by over 20 percent since the implementation of the agreement. Additionally, the elimination of tariffs on key exports such as electronics and machinery has allowed Singaporean businesses to remain competitive in the European market, leading to a notable increase in trade volumes.
  • Enhanced services trade: The EUSFTA has led to a surge in Singapore’s services exports to the EU, particularly in the financial and business services sectors. For instance, Singaporean financial institutions have expanded their presence in the EU by 25 percent through increased cross-border provision of financial services. This has not only bolstered Singapore’s position as a leading financial hub in Asia but has also contributed to the EU’s financial market diversity, creating a win-win situation for both regions.
  • Safeguards and dispute Resolution mechanisms: The implementation of the EUSFTA has also led to a notable decline in trade disputes between Singapore and the EU. This has instilled confidence among businesses, ensuring a stable and secure business environment for long-term investments and partnerships between Singapore and the EU.

Leveraging Asian Trade Agreements for Sourcing

Impact of rules of origin on manufacturing and sourcing strategies

The impact of rules of origin on manufacturing and sourcing strategies is a critical aspect that significantly influences the operations of businesses engaged in international trade. This impact becomes particularly pronounced in the context of trade agreements, such as the United States-Mexico-Canada Agreement (USMCA).

Indeed, the USMCA’s rigorous rules of origin require businesses to adapt their supply chain structures to ensure the traceability and origin of materials used in their manufacturing processes. Companies must establish transparent supply chain networks that enable them to demonstrate compliance with the USMCA’s transformation and value-added criteria, fostering a more integrated and documented supply chain management system.

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To adhere to the USMCA rules of origin, businesses often resort to dual-sourcing strategies, incorporating materials and components from both within and outside the region. Balancing cost considerations and compliance with the USMCA criteria can allow businesses to strategically select suppliers to ensure a consistent supply of materials while meeting the required thresholds for the final product to qualify for preferential treatment under the agreement.

Analyzing the benefits of sourcing from Asia despite USMCA limitations

Despite the regulations imposed by the United States-Mexico-Canada Agreement (USMCA), sourcing from Asia offers distinct advantages to American businesses, facilitating cost efficiencies and diverse supply chain opportunities. Key benefits include:

  • Cost competitiveness: Asian countries, known for their lower labor and production costs compared to North American counterparts, enable significant cost savings in manufacturing processes.
  • Diverse supplier networks: Asia provides a vast network of suppliers, offering a wide array of products and materials that may not be readily available or as diverse within the USMCA region.
  • Technological expertise: Asian markets often exhibit advanced technological capabilities, allowing businesses to access cutting-edge innovations and specialized production techniques.
  • Scale of production: The substantial scale of manufacturing in Asia enables businesses to benefit from economies of scale, leading to enhanced production efficiencies and competitive pricing.
  • Supply chain optimization: Supply Chain Optimization: American businesses in Asia can capitalize on the extensive trade agreements in the region to optimize their supply chains. They can tap into the diverse and dynamic markets of Asia, utilizing the specialized expertise, resources, and production capabilities available in different countries –, as long as the goods produced within these supply chains meet the specific criteria outlined in the USMCA agreement.

Mock case study: streamlining sourcing operations in the electronics industry

In this case study, we examine the sourcing strategies of Company X, a multinational electronics corporation based in the United States. The company specializes in producing smart wearable devices, sourcing raw materials from China, processing them in Vietnam, and completing the assembly in Mexico for global distribution. As Company X navigates the complexities of various trade agreements and rules of origin, it encounters challenges and opportunities that significantly impact its sourcing and manufacturing operations.

Let’s delve into the intricacies of these trade agreements and their implications for Company X’s global supply chain dynamics, as exemplified in the table below.

Case Study: Streamlining Sourcing Operations

Product

Smart wearable devices

Scenario

Company X, a multinational electronics company based in the United States, sources raw materials from China, processes them in Vietnam, and assembles the final product in Mexico for global distribution. The company faces intricate challenges related to the rules of origin and trade agreement limitations, impacting its sourcing and manufacturing strategies.

 

Impact of trade agreements

  1. USMCA limitations: Despite sourcing raw materials from China and utilizing the USMCA benefits for Mexican assembly, Company X encounters limitations in qualifying for full USMCA benefits due to the use of non-qualifying materials.

 

  1. RCEP and CPTPP synergy: While facing USMCA limitations, the company capitalizes on the RCEP benefits for distribution in the Southeast Asian (SEA) markets, leveraging the CPTPP agreement for the Mexico-SEA trade route.

 

  1. EVFTA considerations: With some processing taking place in Vietnam, Company X also explores potential opportunities through the European-Vietnam Trade Agreement (EVFTA), aiming to access the European Union market more effectively, in light of the absence of an EU-US FTA.

 

Key takeaways

By strategically diversifying market presence and adeptly leveraging various sourcing tactics, businesses can not only overcome intricate trade landscapes but also solidify a competitive edge in the global market. This can lead to a potential increase in supply chain efficiency, cost reduction, and broader market access, ultimately fostering sustainable growth and resilience within the electronics industry.

 

About Us

ASEAN Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia and maintains offices throughout ASEAN, including in Singapore, Hanoi, Ho Chi Minh City, and Da Nang in Vietnam, in addition to Jakarta, in Indonesia. We also have partner firms in Malaysia, the Philippines, and Thailand as well as our practices in China and India. Please contact us at [email protected] or visit our website at www.dezshira.com.

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