As bilateral and regional free trade agreements (FTAs) continue to proliferate, observers of global trade have been asking the question: does the WTO really matter? This is clearly the case in Asia where some 40 intra-Asian FTAs are either in place or under negotiation. China alone has established or is negotiating no fewer than seven major agreements with regional neighbours and trading blocs.
The recent WTO meetings in Hong Kong revealed how profound this emerging dynamic has become. While trade ministers from opposing trade blocs clashed on fundamental ideology and exchanged brash rhetoric, it was business as usual for China and its growing number of trading partners. In what has become known in Asia as "feeding the dragon", China's appetite for both commodities and finished goods has stimulated a surge in trade with other countries in the Asia-Pacific region.
In China and elsewhere, there are two critical phases of an FTA. The first phase, known as the pre-ratification phase, involves the so-called "early harvest" opportunities and is focused on negotiations and lobbying. The term early harvest is so named because it relates to what commodities and products (defined by harmonized tariff code numbers) will be the first to receive duty reduction or duty elimination under the FTA.
Typically, these items are determined after governments analyze trade flows, market needs and then consider requests from multinationals and partner governments. Each government normally appoints a chief negotiator supported by a team of representatives. Submission for early harvest is generally channelled directly through to the negotiating team. The idea is to choose early harvest items that will build confidence in the negotiation process and lead to further rounds of discussions. When China was negotiating its FTA with Thailand, for example, its chief negotiators requested that all early harvest requests be submitted through recognised trade associations such as chambers of commerce, federations of industries and boards of trade. Many claimed, however, that this process lacked transparency and that it was administered informally.
The China experience was particularly noticeable when compared to that of Singapore, which has also been negotiating a robust number of its own bilateral FTAs, but received fewer complaints than its northern trading partner. The important thing to remember about ongoing China FTA negotiations is that they are not yet an exact science and that for some time to come, transparency issues will continue to be a conundrum.
The second critical phase of an FTA, known as the post-ratification phase, occurs after it is approved and becomes a functioning arrangement. Execution becomes vital – both for trading entities and governments. How will customs regimes enforce country of origin verification, tariff classification and documentation requirements?
Take, for example, the "regional value content" requirement in virtually all FTAs, that calls for an importer to clearly demonstrate, in a bill-of-material or other documentation, the percentages of value conferred in a particular country or customs territory. In China, there have been sizeable disparities in practice from one customs office to the next. Some customs officials request to see meticulous detail in documentation regarding many phases of an importer's manufacturing process, while others are far more lax.
Dealing with disparity
This same phenomenon applies to interpretations of the harmonized tariff code, the international document which assigns classification numbers and corresponding duty rates to imported goods. These numbers are important because they determine which goods receive duty-free treatment versus other goods which do not. Again, there can be considerable variances in interpretation. The same bottle of fruit juice imported through the port of Shanghai may be accepted under a different classification number than if it were imported through Shenzhen, or Qingdao.
Neither of the above examples is unique to China. What presents a challenge, however, is when international traders find that there are vague processes or no defined mechanisms for disputing a customs decision. In other cases, foreign companies may learn that a local customs office is approving specific activities by a competitor even when these activities appear to contradict existing regulations issued by the General Administration of Customs (GAC), the Ministry of Commerce for the People's Republic of China (MOFCOM) or other national agencies. Where does one go to address such matters?
China will continue to exert its influence on an increasing number of regional and bilateral FTAs within Asia Pacific and throughout the world. Many of the growing pains it is experiencing as a developing country will iron themselves out – both through external pressure and internal necessity. Clearly, the economic gains obtained through increased free trade will act as a catalyst for this process. China Customs is also climbing swiftly up a steep leaning curve as it grasps international practices in appraisement methodologies, electronic tracking and administration.
It is a wise executive that closely monitors the FTA opportunities with China, both in their pre-ratification and post-ratification phases. Those that pay attention can look forward to huge benefits further down the road; those that don't may find themselves perpetually lost in the highways and byways of China's trade bureaucracy.
Alex Capri is worldtrade management services director at PricewaterhouseCoopers