ASEAN FTA Seen as Political, Positional Play by Japan

There’s more than meets the eye to the new ASEAN-Japan Free Trade Agreement inked in late August.

At first blush, the question for Japanese auto makers might well be “Why bother?” After all, Japan already has FTAs with the six richest countries in the 10-member Association of Southeast Asian Nations – the four auto-making countries of Thailand, Malaysia, Indonesia and the Philippines, plus Singapore and Brunei.

The answer simply might be that the latest accord “has as much to do with politics as economics,” says Ferry Wong, head of research for BNP Paribus Securities Indonesia.

This is Japan’s first agreement with a regional bloc of nations and looms as a strategic move to bolster the country’s regional standing and help counter bids by China and India for more influence in that part of the world. China already has an FTA with ASEAN, and India is negotiating for one.

Japan is ASEAN’s third-largest trading partner after the U.S. and China, with 2-way trade of $153 billion in 2006, and this bloc is one of the fastest growing and most substantial markets in the world for a variety of Japanese manufacturers including auto makers.

The new accord, formally called the ASEAN-Japan Comprehensive Economic Partnership Agreement, is expected to be signed in November and go into effect in April, subject to the approval of the nations concerned.

Assuming all goes well, tariffs on 93% of Japanese imports from ASEAN are to be repealed over the next 10 years. The six affluent ASEAN countries have agreed to cut tariffs to zero on 90% or more of their imports from Japan, while the four poorer members – Cambodia, Laos, Myanmar and Vietnam – are making less aggressive commitments.

Thailand regional base for pickup production.

Industry experts in Indonesia calculate the net result in the first decade will be a gradual increase in beneficial 2-way trade of $40 billion per year.

Final details still are being hammered out for handling some of the more sensitive commodities, and how imports of completely built-up vehicles and automotive parts are treated probably will vary by country, while some may claim exemptions. Even so, the latest agreement appears to be somewhat of an anticlimax for Japanese auto makers. They were the pioneers in the region and now effectively account for about 95% of all vehicles sold.

The region’s economic meltdown of 1997-1998 is a faded memory for ASEAN’s 570 million people, with new-vehicle purchases reaching a record 2 million units in the top five countries in 2005. Demand in the top five markets declined last year to 1.73 million units, including 682,500 in Thailand, 490,700 in Malaysia, 317,300 in Indonesia, 149,000 in Singapore and 99,500 in the Philippines, yet some industry experts see the total rising to 3 million units within 10 years.

In a report issued this year, the Japan Automobile Manufacturers Assn. concludes the region will play “an increasingly critical role in the global market as a center of robust growth.”

A substantial automotive industry has been created in the ASEAN territory since Japanese producers began arriving more than 50 years ago.

For example, Thailand, billing itself as the “Detroit of Asia,” has become the regional pickup truck production base for major global producers such as Toyota Motor Corp., Isuzu Motors Ltd., Mazda Motor Corp., Ford Motor Co. and General Motors Corp., and is remarkably self-sufficient, with almost all parts made locally.

Nearly 550,000 vehicles, mostly pickups, were shipped overseas from Thailand in 2006 and forecasts call for 625,000 exports this year.

The new regional FTA, atop the four individual accords already in force with ASEAN’s auto making members, is not expected to make much, if any, difference in what is almost a private Japanese automotive preserve.

“Specialty vehicles may come in more easily. Lexus will improve its competitiveness with Mercedes and BMW. But major Japanese models are all produced in the region and the structure of the automotive industry won’t change,” says John Bonnell, an industry analyst and partner in Automotive Resources Asia in Bangkok.

The 10 ASEAN nations have ambitions of creating a European Union type economic community with neighbors by 2015, but progress has been slow.

“This will be one step toward furthering economic integration in the East Asian region,” says Japan’s Trade Minister Akira Amari.

Yet, auto industry analysts in the area stress how difficult it has been to eliminate trade barriers between member nations despite the ASEAN FTA. It took years to lower import duties on vehicles from exorbitant heights to the current 5%, and non-tariff barriers have been equally inhibiting.

For example, Malaysia has made many imaginative moves to protect its two national car companies. These included years of foot-dragging on intra-ASEAN tariff reductions; grants for domestic auto manufacturers, which excluded foreign assemblers; tax rebates to auto makers with research and development facilities in-country, for which only Proton Holdings Bhd and Perusahaan Otomobil Kedua Sdn Bhd (Perodua) qualified; and the exemption of both national car makers from automotive inspection centers.

An Approved Permit system that limited the number of vehicles imported from the other three ASEAN producers to 10% of all vehicles in the country – condemned as another non-tariff barrier – was not scrapped by Malaysia until this July.

“The general perception is that ASEAN is prone to agree fast, act slow,” ASEAN Secretary-General Ong Keng Yong admitted recently in a report.

The proposed new FTA with Japan calls for punitive penalties for member nations that choose to ignore or postpone their new obligations. But if past behavior is any guide, compliance will vary and there will be artful dodging.

“Not all countries will play by the new rules,” Wong says.

“Policies are not always implemented. Preferential rates are not always honored. There are all kinds of stalls,” adds Bonnell.

Industry experts believe a few more automotive parts and vehicles may be imported from Japan but expect the fundamental nature of the regional automotive industry to remain basically the same, with Japanese producers perhaps enjoying an added edge at the expense of U.S. and European competitors for which the slim pickings could become even slimmer.

Fears raised by European competitors that Lexus models will enjoy duty-free entry into Thailand some time in the future may be legitimate. Over the next 10 years, Wong foresees Thailand repealing tariffs on 97% of imports from Japan, including automotive parts and vehicles, and feels the market share of Japanese auto makers in ASEAN countries eventually could go beyond 95%.

“The bilateral Japan-Malaysia free-trade agreement has already been implemented, with duties being gradually eliminated for nearly 95% of goods including cars over 10 years,” a senior analyst in Kuala Lumpur says. Yet he points out that “the new multi-lateral free-trade agreement is not yet in force nor even been agreed to but is still in negotiation.”

While the precise shape of future ASEAN-Japan trade may not be clear, Japan’s dominant position in the automotive market appears secure. Less certain is what impact – political as well as economic – the new FTA will have on Japan’s standing in the unofficial three-way power struggle underway in the region.