Why ASEAN Matters For Your China Business

May 22, 2012 Posted by ASEAN Briefing Reading Time: 7 minutes

The 2015 Free Trade Agreement will soon kick in. Is your China business ready?

Op-Ed Commentary: Chris Devonshire-Ellis

May 22 – The term “ASEAN” is cropping up more often these days, yet still many businesses in China are unaware of what it is and why it is gaining in importance. The basic answer is fairly simple – free trade across Asia. That means reduced or zero customs duties across a space that includes the 10 ASEAN nations in Southeast Asia, and includes China, India, Australia, New Zealand, Japan and South Korea.

But let’s step back a bit from that weighty statement and examine exactly what ASEAN is and how it will impact upon all businesses in China, Asia and beyond. ASEAN – the Association of Southeast Asian Nations – was formed in 1967 and comprises 10 Asian countries as an economic trade bloc. It includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

Collectively, ASEAN represents a market of some 600 million people, with a combined GDP of about US$1.8 trillion. If it were a country, in economic terms it would be the ninth largest in the world. Effectively a trade bloc situated between China and India, ASEAN is the third Asian dragon in terms of its development as an emerging economy. The OECD has projected growth within ASEAN to be about 6 percent per year for the period 2011-15.

Because of that, and its developing wealth, China has specifically targeted ASEAN as a bloc for Chinese companies to be doing business with. It makes sense; Chinese companies need to expand overseas, ASEAN is right next door, and it represents a fast growing opportunity for growth in sales and trade. Indeed, ASEAN overtook Japan last year to become the third-largest trade partner with China with trade figures reaching US$362.3 billion, only behind the European Union (US$567.2 billion) and the United States (US$446.6 billion).

Even so, aware that not everyone has fully recognized the significance of ASEAN, the Chinese government has been going to some lengths to encourage Chinese trade with the bloc, going so far as to set up a China-ASEAN trade office just recently to raise ASEAN’s profile within China. That’s important, as China has double tax and free trade agreements with ASEAN, only recently inking a deal that permits zero tariffs on over 7,000 products.

That was done as part of the ASEAN-China Free Trade Area (ACFTA), being an agreement between China and the 10 member states of ASEAN. The ACFTA is the largest free trade area in terms of population and third largest in terms of nominal GDP. The free trade agreement reduced tariffs on 7,881 product categories, or 90 percent of imported goods, to zero. This reduction has already taken effect in China and the six original ASEAN members: Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. The remaining four countries – Cambodia, Laos, Myanmar and Vietnam – will follow suit in 2015. We discussed the Indochina countries in some detail here and Myanmar late last week here.

However, ASEAN has also signed other significant agreements. The ASEAN-India Free Trade Area (AIFTA) is a similar agreement and came into effect on January 1, 2010. The AIFTA will see tariff liberalization on over 90 percent of products traded between the two dynamic regions, including so-called “special products,” such as palm oil (crude and refined), coffee, black tea and pepper. Tariffs on over 4,000 product lines will be completely eliminated between ASEAN and India by 2016.

Additional agreements are also in place with Australia and New Zealand in the form of the ASEAN–Australia–New Zealand Free Trade Area; with Japan in the form of the ASEAN–Japan Comprehensive Economic Partnership; and in South Korea with the ASEAN–Korea Free Trade Area. All of these came into effect in 2010 and have already begun to lift trade figures between ASEAN and their respective countries.

What this means is that from now until 2015 and then 2016, the flow of trade, the shape of the global supply chain, and the opportunities for selling goods and services right across Asia are changing and, in doing so, the customs duties will be increasingly attractive. Taking advantage of this means getting prepared now. The impact of the ASEAN bloc upon the region, and upon global trade dynamics will be immense. It also opens up huge potential for global businesses to enter the ASEAN market, establish a presence, and use that to reach out to China, India, and beyond.

It makes sense – China’s manufacturing capacity is slowing, and becoming more expensive just at the time when its population is moving to a more consumer-based society. The role of ASEAN, to some extent, is to provide a lower cost manufacturing base and to use that as a springboard to export to China. This is why manufacturing in Vietnam is starting to take off as an alternative to China – not purely because Vietnam is cheaper in terms of labor costs, but also because as part of ASEAN, that 90 percent of manufactured goods will be traded with zero duties by 2015.

The same applies to Cambodia, Laos and Myanmar, which is one reason the latter suddenly appears to be in such a hurry to get its reforms in place. But for Vietnam, with a border directly with China and that long coastline with increasing TEU capacity through its ports, multinationals being based there in order to target the China and India markets is beginning to make a lot of sense. We wrote about Vietnam as a manufacturing play for both China and India here and about hedging China manufacturing and selling to India and ASEAN here.

When it comes to the Asia-Pacific region, including the west coast of the United States, the UN Economic and Social Survey of Asia and the Pacific released a report earlier this month showing that Asia is the world’s fastest growing region and an anchor for global economic stability. That report is available on our emerging Asia website here. With those sorts of sustainable growth rates, it is no wonder that investment gurus such as Mark Mobius are so bullish on Asia. We also wrote about the China ripple effect and the 2012 growth projections for emerging Asia here.

ASEAN then is developing as an excellent starting point for reaching out to the region’s developing markets, but the benefits of that extend beyond setting up a physical presence in the bloc. An ASEAN-based company enjoys not just the automatic tax and free trade benefits of intra-ASEAN trade, but also those sexy free trade and double tax agreements ASEAN has with China, India, Australiasia, Japan and South Korea. The ASEAN agreements are the primary reason why international media expects Asia to help the world economy get out of the current financial crisis. Taking advantage of ASEAN then is a relatively simple matter – just as many Hong Kong companies have been used as springboards and advantageous tax structures for getting into China, Singapore as a financial and services hub fulfills the same role for ASEAN.

We covered the use of Singapore holding companies in the current issue of China Briefing – it’s available as a complimentary download until the end of May on the Asia Briefing Bookstore. Singapore is the de facto financial capital of ASEAN, and enjoys a low corporate income tax rate of 17 percent, has no tax payable on dividends earned externally from its borders, and even offers tax incentives for SMEs wishing to establish operations in the country. It is also possible to operate a Singapore company as a “shelf” entity to take advantage of these benefits without the need to fully go to the expense of setting up a full service office. As such, it is an excellent base from which to direct operations from ASEAN, thus qualifying for the intra-ASEAN free trade agreements and for those with China and India.

Businesses based in China should be looking at Singapore-based ASEAN subsidiaries to take advantage of what is going to be a huge free trade area with a significant impact on global trade and supply chains. For businesses looking at investing in ASEAN countries, the place to start is Singapore, and the time to begin planning your business to ride the free trade train is now.

A legal presence via a Singaporean entity gives access to the ASEAN free trade agreements that the bloc has between its own members, and with China, India, Australasia, Japan and South Korea. Using a Singaporean company to hold subsidiary operations in any of these then allows foreign businesses the ability to enjoy Singapore’s low tax rates while also taking full advantage of the free trade and double tax agreements of ASEAN and each of it’s trade partners, including China, India and the Japan-Korea-Australiasia triumvirate. This is a total free trade area that is already the fastest growing in terms of returns and will become the largest free trade area in the world. Is your company prepared for ASEAN?

Chris Devonshire-Ellis is the principal of Dezan Shira & Associates and is based in the firm’s Singapore office. The firm has 20 offices throughout Asia, including Hong Kong, China, India and Vietnam and is operational throughout other ASEAN countries via associated firms. The practice provides corporate establishment, tax planning, due diligence and on-going accounting, bookkeeping and tax filing services to foreign investors throughout Asia. Please contact the firm at asia@dezshira.com or visit www.dezshira.com for advice and assistance.

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