China's free trade agreements - Lowering landed costs and gaining competitive advantage 

Introduction
   
China is establishing a network of bilateral and regional free trade agreements (FTAs).  Companies can take advantage of these FTAs to reduce the customs duties that are assessed on goods when they are imported into a country.  This has the benefit of lowering the landed cost, which improves market access, competiveness and profitability.
   
However, it is estimated by some that the utilization ratio of China's FTAs in certain areas is as low as 20-30%.  This may be due to a lack of awareness about existing FTAs and the benefits, a lack of information on the requirements of the rules of origin and the application procedures, and confusion between labelling and origin requirements.
   
Key issues

• Navigating China's FTA map:
     
• China has established or is negotiating over a dozen bilateral and regional FTAs.
• Each respective FTA contains different rules of origin that should be studied individually in order to identify cost saving opportunities and confirm the qualification criteria.
• China's FTA map as of 2009 is summarised as follows:
  
  

  Implemented	Under negotiation	Under feasibility study
  China - Association of Southeast Asian Nations (ASEAN)	China - Australia	China - India
  Closer Economic Partnership Arrangement (CEPA) - Hong Kong	China - Costa Rica	China - Korea
  CEPA - Macao	China - Iceland	China - Switzerland
  China - Asia-Pacific Trade Agreement (APTA)	China - Gulf Cooperation Council (GCC)
  China - Chile	China - Norway
  China - New Zealand	China - Southern African Customs Union (SACU)
  China - Pakistan
  China - Singapore
  China - Peru

  
    
• Overcoming advanced qualifying criteria:
    
• Ensuring sufficient processing;
• Approving triangular invoicing;
• Obtaining back-to-back certificates of origin;
• Managing the impact of using a shared service centre;
• Analysing finance information for a value-add rule;
• Using an appropriate cost accounting methodology for a value-add rule;
• Using the cumulation rule; and
• Complying with the direct shipment rule.
     
• Complying as well as qualifying:
    
• Obtaining certificates of origin;
• Obtaining supporting documentation;
• Retaining documentation for verification;
• Managing a post exportation origin verification;
• Obtaining advance rulings; and
• Managing dispute resolution.
     
• Trouble-shooting ad hoc issues, such as:
    
• The exporter uses a different classification code to the importer; and
• The actual signature on a certificate of origin as received from overseas does not match the authorized signature.
     
• Considering FTAs "upfront" in conjunction with broader initiatives:
    
• Establishing a new sourcing strategy; and
• Establishing a new manufacturing entity.

Action items
   
A two-step approach can be taken for realising FTA benefits:
   
Step 1: Identify savings and validate qualification

1. Identify what FTAs cover the supply-chain in question;
2. Calculate the margin of preference on a product specific basis;
3. Quantify and forecast the annual customs duty savings; and
4. Evaluate whether the products qualify, per the rules of origin.

Step 2: Implementation

1. Obtain a certificate of origin (per shipment);
2. Consult with the authorities where advance qualifying criteria need to be overcome;
3. Retain documentation for verification; and
4. Obtain advance rulings, where applicable.

Benefits
   
FTAs have the benefit of lowering the landed cost, which improves market access, competiveness and profitability.  Per the example below, the graphs demonstrate some of the tariff concessions between China and ASEAN:



   
Summary
   
China's FTAs are under utilized as of now.  This means that cost savings opportunities are being missed.  Governments do not automatically grant companies FTA status.  Rather, companies, by proactively planning and putting in place new processes, can take advantage of these FTAs.
   
Companies have to make a claim for preferential treatment, using a certificate origin, which has been issued in the country of manufacture.  Whilst this does represent an additional administrative burden, this cost is typically negligible compared with the annual cost saving benefits that are gained.

Get your copy here
Download our China's free trade agreements - Lowering landed costs and gaining competitive advantage (pdf file, 251KB) for your reference.