A FreeTrade Agreement (FTA) between Australia and New Zealand would offer ASEANcountries some practical trade and investment benefits, as well as somesignificant strategic benefits. Tradebetween Australia and New Zealand is already substantially unencumberedespecially for most manufactured goods, but some restrictions constrain theability of Australian and New Zealand service exporters to take full advantageof opportunities in the growing Singapore market. Based on the analysis of theimpact of AANZFTA on Singapore companies, it is apparent that the substantiveand comprehensive FTA was successful in abolishing the effect of theserestrictions that would over time offer Australia and New Zealand some rewardingeconomic benefits.
The targetof this report is to comprehend the foundation, effects and advantages of FTAfrom Singapore’s point of view. The report will cover a concise background onthe subject: free trade agreement (FTA), a short review of the particular FTA(AANZFTA), the analysis of how the specific FTA has helped to make Singapore organizationsmore competitive and finally, the difficulties encountered by Singaporecompanies if they were to use the AANZFTA. TheAANZFTA is said to reduce tariff progressively and eventually reach a completeelimination of taxes for import and export goods. The AANZFTA also allows forback-to-back shipment of goods within member countries and third-partyinvoicing of goods. This leads to the many benefits in which Singaporecompanies can make use of, such as having cheaper exports, easier entry intoexport markets and trade facilitation which helps Singapore companies remaincompetitive. However,there are also challenges that come with the implementation of this FTA.
Someof which includes the overly complex rules and low standards of companies whichdoes not qualify them to use the specific FTA, or because companies are alsodisorganized that they are not aware of the FTAs available. Freetrade agreements (FTA) are trade agreements between two or more nationsagreeing on the terms of trade between them without government restrictions. FTAsare created to benefit consumers.
It stimulates competition, which brings abouta wider product selection and thus, making it cheap for consumers whichincreases their purchasing power. Along with lower prices, FTAs also bringabout lower production costs which increases the firms’ profitability. Both ofwhich can lead to an increase in domestic employment. FTAsare tailored to reduce the barriers to trade, which can come in the form oftariffs and trade quotas. Tariffs constitutes the first layer of market accessobstacle that companies face when exporting from one country to another.
Asduty levied on goods imported into a country, tariff increases the cost ofimported goods and decreases the attractiveness of these goods to buyers inthat country. In some countries, the duties imposed may be so high that thebuyers turn to cheaper domestic manufacturers. Trade quotas, also known asnon-tariff trade barriers are the less-obvious forms of trade barriers whichincludes regulatory measures, licensing requirements and administrativeprocedures. Trade quotas are imposed when a country imposes a limit on the amountof goods being imported or exported. Tradeagreements are one approach to decrease these hindrances, in this manneropening all parties to the advantages of expanded trade. Hence, two or morenations can come to an economic integration to partially or fully abolish thesebarriers.
FTAsare designed to foster strong trade and commercial ties and greater economicintegration among countries involved. This lowered trade barrier helps protectlocal markets and helps industries to expand to new markets, boosting theirreach and the number of people they can sell their products to (Grimson, 2014). Lastly,the FTA initiatives are likely to be beneficial for economies around the world.It brings about greater market access in goods and services due to reduction intrade barriers, increased investment opportunities in overseas markets, andreduction of business costs arising from the absence of tariffs and non-tariffbarriers.
The freedom to trade will allow exports to grow, as well as create jobswhich will help the economy to grow as most jobs depend on exports. Foreigninvestments will also create economic growth, and markets and investmentsopportunities will open up for trade partners. As such, industrycompetitiveness and expansion of exports will increase, which in turns forcesdomestic producers to remain prices low.
TheASEAN-Australia-New Zealand Free Trade Area (AANZFTA) entered into force inJanuary 2010. It is an exhaustive free trade agreement that provides chances forabout 663 million peoples of ASEAN, Australia and New Zealand. These are also regionswhich account up to a total Gross Domestic Product (GDP) of approximately USD 4trillion as of 2016 (ASEAN, 2017). TheAANZFTA targets for sustainable financial development in the locale by administeringa more liberal, facilitative and transparent market and investment system amongthe twelve signatories to the Agreement. The twelve AANZFTA Parties include:Australia, Myanmar, Brunei Darussalam, New Zealand, Cambodia, Philippines,Indonesia, Singapore, Lao PDR, Thailand, Malaysia and Viet Nam. TheAANZFTA is first in many regards, for example: It is the first plurilateralagreement for both ASEAN and Australia, first comprehensive free tradeagreement negotiated and signed by ASEAN with a Dialogue Partner, firstregion-to-region engagement for ASEAN, and the first Agreement that Australiaand New Zealand mutually consulted for (ASEAN, 2017).
TheAgreement has eighteen sections and four addendums, covering diverse parts oftrade in goods and services and investments. It also coversgoods, services, investment, intellectual property, e-commerce, temporarymovement of business people as well as economic integration (AustralianBusiness, 2014). TheAANZFTA has brought about many benefits and some of which will be listed in thefollowing.
Firstly, tariffs will be increasingly decreased from when it firstentered into force of the Agreement, and eliminated for at least 90% of alltariff lines within specified timelines. (ASEAN, 2017) Secondly, the movementof goods will also be carried out through a more flexible rule of origin (ROO),easier customs procedures and more transparent mechanisms. By the same token,the movement of individuals who are involved in trade and investment activitieswill be facilitated. In addition, covered investments are protected whichincludes the likelihood of dealing with conflicts through an investor-statedispute settlement mechanism. On a final note, barriers to trade in serviceswill successively be liberalized, which allows for superior market access toservice vendors in the locale. Competition betweenSingapore companies exists to encourage firms to produce more efficiently asthe pressure of keeping customers satisfied and loyal is so apparent. Whenfirms produce goods and services at the lowest cost possible, they are said tobe productively efficient. Thus, firms areresolute in reducing their costs to the minimum.
Since the implementation of the ASEAN Australia New Zealand Free TradeAgreement (AANZFTA), it has given a dynamic reduction and eventually, abolitionof taxes on ASEAN exports to Australia and New Zealand by2020, if the goods were to meet the rules of origin (ROO) benchmark establishedin the FTA. Over96% of Australia’s taxes were rid of when the FTA commenced in January 2010,and almost over 90% of New Zealand’s duty levy will be abolished by 2013 (SingaporeCustoms, 2010). These figures can also be seen in figure 1 attached in theappendix. NewZealand has a total of 85% exports to Singapore and imports a total of 94%goods based on the figures in 2005 alone. These figures are reflected in figures2 and 3 respectively.
Additionally, Australian imports to Singapore amounted upto US$5,606 and a total of US$4,036 imports. This means that Singapore holds asignificant amount of trade between these 2 economies. Therefore, with thereduction in costs, it has helped Singapore-based companies who require importsfrom Australia or New Zealand tremendously as goods and services will now besignificantly cheaper. Theagreement has brought about improvement in trade terms between all 11 countriesinvolved in the treaty, and promoted efficient and transparent operations. Thisleads to an increase in savings for the exporting company, as well as decreasedstorage costs. Therefore, tariff reductionsnot only diminish production costs but bring down the costs of technology upgradesand improve productivity.
For instance, Singapore companies that manufactures aparticular item could import raw materials at a lower cost or upgrade itsmanufacturing technology, which results in lower production costs, lower pricesand more competitiveness. Since the execution of the AANZFTA,Singapore’s exports of items, for example, paper materials, paints, plastic pitches,consumable oil and sauces have enjoyed competitive advantage upon importationinto Australia and New Zealand with the instantaneous omission of import taxeson these items, which extended from 5% to 7% (Singapore Customs, 2010). This improves competition in the supply of goods andservices offered by exporting companies. This would imply an increase ininternational sales, which generates more profit and stability for Singaporebased companies. By comparing it with companies which do not make use of theFTAs, companies who capitalize on the AANZFTA has made them more competitive. One of the goals in Singapore’s FTAstrategy is to enhance its market access in new, emerging market economies thathave been equally committed to trade and investment liberalization across bothgoods and service sectors.
Overall, Singapore’s moves towards bilateral FTAs thatare aimed at helping the Singapore economy to reduce its former dependence onother regional ASEAN economies for its growth in trade, as were the case priorto the crisis. The slow pace of economic recovery of some of the majoreconomies and increasing competition faced by the region from rapidly growinglarge emerging markets like China, have further prompted Singapore to look formarket access opportunities beyond the region in order to remain globallycompetitive. With the lower cost of exporting to theAustralian market, the AANZFTA provides a chance for Singapore companies whichare searching to expand production for export purposes in Australia.
Theagreement is dynamic and provides a platform for Singapore based companies toenter into new export markets. This increases the company’s customer reach andthus increase sales which in turn makes companies competitive. The AANZFTAyields financial engagement with ASEAN through a scope of implicit plans,economic collaboration jobs and business outreach exercises. Overall, being the first plurilateralagreement for both ASEAN and Australia, AANZFTA has been a comprehensiveagreement and is largely WTO-Plus in nature.
With the AANZFTA bringing tradehindrances down, it fosters trade and investment which has produced favorablecircumstances for the business community. With AANZFTA, paperless trading isintroduced. Second, risk management has been limited on high-hazard merchandiseand visitors, and low-hazard merchandise and visitors can be cleared at thecustoms checkpoints rapidly at present. Both Australia and New Zealand has likewiseconcluded a Mutual Recognition Agreement (MRA) with Singapore on electrical andelectronic goods inside the AANZFTA.
Under this arrangement, electrical andelectronic goods tested in Australia, New Zealand or Singapore will never needto undergo rounds of testing when exported to the countries within thearrangement, including ASEAN. They have likewise consented to follow through ona working scheme on common or stand-alone acknowledgement of standards, directivesand results, and the compatibility of standards. Sen, R. (2004) Free Trade Agreements in Southeast Asia. The AANZFTA provides a close economicallyintegrated platform for Singapore businesses to facilitate trade withineconomies and allow Singapore companies to remain competitive by trading easilyand at a cheaper cost. One of the challenges faces by Singaporecompanies is the complex rules of the AANZFTA. Most small medium enterprises (SMEs)are not even aware of the FTAs and how it benefits them. Not to mention thedifficult rules that come along with the agreements, it can confuse businesseson how it really works.
For companies to enjoy the myriad benefits of thetrade, there are many documents to be produced such as certificate of originand exporter declaration forms, just to list a few. Thus, the overly complex rules of origin for their exporters isone of the biggest challenges when it comes to businesses adopting the AANZFTA.These figures are reflected in figure 4, where Singapore achieved a total of 17.3%utilization of FTAs. It has the lowest percentage use of the AANZFTA, whichbrings attention to it.
Some of the other miscellaneous problems that come withthe agreement includes problems exporting goods to all, some, or specificAANZFTA countries including: continuance of high tariffs for particularproducts, import licensing or other requirements, customs-related problems,standards or technical Regulations and Conformity Assessment Procedures-relatedissues, just to list a few. All of which contributed to the complicatedprocedures and rules which led to a challenge that Singapore companies face andin turn, low utilization of the FTA. One of the potentialproblems Singapore companies may face implementing the AANZFTA is the level ofstandards. One of the requirements of AANZFTA is the standardising body in itsterritory to co-operate with the standardising body of other Parties. Suchco-operation should also include: exchange of information on standards, exchangeof information relating to standard setting procedures, and co-operation in thework of international standardising bodies in areas of mutual interest (ASEAN,2017) Singapore-based companies may be particularly affected by theserequirements, as they are less likely to have dedicated staff with expertise ininternational trade and therefore find it more challenging to ensure that theymeet these additional regulatory requirements currently imposed by AANZFTA. Inaddition, the professional qualifications of the staff/workers may also not berecognised by local authorities which brings about difficulties or regulatoryrestrictions when delivering an e-service/product in AANZFTA countries. Standards require a lotof preparation work.
If a company is not ready, there will be a great deal ofwork to do. For example, if a company’s operations are messy to begin with, ithas to work through the chaos and set up all the aspects that the standard requires.Sometimes a company must invest in research and development or productdevelopment in order to meet the standards. Such things can be expensive andtime-consuming, but they will be worth it because once the standard isachieved, it opens up the company’s market access. Essentially, all it takes isthe commitment and dedication along with efficient allocation of resources toachieve the goal. Inconclusion, the AANZFTA has provided a substantial amount of benefit toSingapore businesses.
First, with both counties eliminating all tariffs, mostof Singapore’s top exports to Australia and New Zealand will be duty-free andwould benefit Singapore businesses whose products are exported to both NewZealand or Australia, especially in the manufacturing industries within theelectric machinery, non-electric machinery, and manufactured article sectors. Second,the dedicated commitments to liberalize a range of services trade, includingprofessional services, financial services and environmental services from theAANZFTA opens up significant opportunities for Singapore service providers whowish to export these services to either Australia or New Zealand. Third,under AANZFTA, both countries have concluded easier trade procedures because ofthe platform that the AANZFTA provides. Lastly,the challenges that Singapore companies face which includes overly complexrules and standards that are not met, has caused businesses to reduce inutilization of FTAs in general and can cause a huge loss to the tradingindustry in terms of cost and amount of export and import goods and services.