Five members of the Association of Southeast Asian Nations (Asean) have implemented a free trade agreement (FTA) with Hong Kong to remove tariffs, improve access for intra-regional service providers and eliminate pervasive non-tariff barriers to trade.

The Asean-Hong Kong FTA (AHKFTA) came into force yesterday for Laos, Myanmar, Singapore, Thailand and Vietnam.

The AHKFTA is the result of three years of talks with 10 rounds of negotiations. The deal was agreed and signed in 2017. It builds upon the Asean-China free trade area (ACFTA) agreement by removing barriers to the free-flow of trade between China and Asean through Hong Kong, which is a major conduit for business to and from the mainland.

The ACFTA was first signed in 2002 as a comprehensive economic co-operation deal and was later expanded to encourage trade for goods and services.

The new FTA will see Asean members progressively reduce tariffs for a variety of Hong Kong commodities, including jewellery, apparel, clothing accessories, watches, clocks and toys, which are already some of Hong Kong’s biggest exports to Asean. This will be done over varying time periods.

Hong Kong in return will grant immediate tariff-free access to all products originating from an Asean member once the relevant FTA is in effect.

All parties have also pledged to strengthen co-operation in sanitary and phytosanitary measures and tackle technical barriers to trade and fix inconsistencies in customs matters.

Additionally, the AHKFTA includes a comprehensive set of rules for the equal treatment of foreign and domestic service providers and the easing of barriers to cross-border investment.

All parties will commit to removing or reducing various restrictions on foreign businesses, including on types of legal entity, foreign capital participation, number of service providers or operations, value of service transactions and number of persons employed.

“The AHKFTA will level the playing field for service providers from both sides and better market access means new business opportunities,” says Ajay Sharma, HSBC’s Asia head of global trade and receivables finance.

“Services in particular have become an increasingly important part of global trade, which FTAs further facilitate by opening the door to new opportunities for service providers.”

The remaining five Asean members – Indonesia, Malaysia, the Philippines, Cambodia and Brunei – are yet to confirm a date when the AHKFTA will take effect.

Asean trade in numbers

Asean was the second-largest market for Hong Kong’s goods after mainland China in 2017, according to Hong Kong’s trade and industry department. Hong Kong’s domestic exports to Asean amounted to over HK$7.9bn (US$1bn), accounting for 18.2% of Hong Kong’s total domestic exports. Within Asean, Hong Kong’s biggest export markets are Vietnam, Singapore and Thailand.

As a group, Asean was Hong Kong’s second-largest supplier of goods in 2017, worth 15% of Hong Kong’s total imports valued at HK$652.7bn (US$79.84bn).

“Hong Kong is the springboard for mainland Chinese companies to develop Asean business, and for Southeast Asian firms to explore opportunities in the mainland,” says Sharma. “By removing further trade barriers between Hong Kong and Asean, this FTA will inject new vitality to intra-Asia business flows while providing sound legal protection for both sides.

“With an FTA forged between Hong Kong and Asean, complementing the standing FTA between China and Asean, economic prosperity in Southeast Asia will present new business opportunities to firms in Hong Kong.”

Hong Kong’s trade and industry department says that around HK$258.4bn-worth (US$32.97bn) of the Chinese import of goods from Asean was routed through Hong Kong in 2017, while re-exports of Chinese origin goods to Asean through Hong Kong exceeded HK$200.3bn (US$25.56bn).

Removing NTBs

Meanwhile, Jayant Menon, lead economist, trade and regional cooperation at the Asian Development Bank, argues that the real value of the AHKFTA is in its attempts to address hard-to-remove non-tariff barriers (NTBs) that are on the rise in the region, and that more must be done in this vein. He says the tariff reductions are of limited value because 70% of Asean trade is already on a zero-tariff basis and non-Asean members are also offered these rates on a ‘most favoured nation’ basis, which refers to the requirement under World Trade Organisation rules to not discriminate against any nation by reducing tariffs to one party but not another.

Speaking to GTR, Menon, explains: “As tariffs have come down, NTBs have risen quite sharply. Although the FTA tries to deal with NTBs through trade facilitation measures and the like, there are two problems that still need to be addressed. First, NTBs are a moving target. As you try and address an existing barrier, a new one can morph in its place. Second is the perennial problem of ensuring implementation of agreed protocols in Asean.”

Menon adds that another challenge to removing NTBs is the fact that compliance with barrier-busting rules are often voluntary, with limited monitoring and sanctions.

“Unless there is clear mutual benefit many accords never get implemented and there is not much anyone can do about it. Asean is all about the carrot, as there is no stick,” he says.

The AHKFTA seeks to address NTBs through multiple chapters dedicated to mutual commitments on ensuring predictability, consistency and transparency in the application of the customs laws and the creation of a new dispute settlement process.

An Economic and Technical Cooperation (Ecotech) work programme will also be formed to support the implementation and utilisation of the AHKFTA while also taking into account the different levels of economic development of the parties.

Through this programme, parties will conduct activities in five priority areas: customs co-operation, professional services, small and medium enterprise co-operation, trade facilitation/logistics, and e-commerce co-operation.