Capitalising on China-ASEAN FTA Treatment to Explore Mainland Market

China is actively encouraging imports, hoping to bring in high-quality products from around the world to meet the fervent demand from consumers and various production activities. This is particularly pronounced at a time when Covid-19 continues to disrupt global markets while the Chinese economy is showing signs of steady recovery due to the sustained effectiveness of pandemic prevention and control measures. As industrial and production activities gradually resume and the consumer market stabilises, many enterprises want to redirect some of the products they manufacture or source from overseas back to China to meet the huge demand for imports.

It is worth noting that the Association of Southeast Asian Nations (ASEAN) is now China’s largest trading partner and biggest source of imported goods. In recent years, increasing numbers of enterprises in mainland China and Hong Kong have accelerated the establishment of overseas production networks – particularly in ASEAN countries – to help overcome trade barriers. In addition to expanding into international markets, they are also leveraging the preferential tariff treatment pursuant to the China-ASEAN Free Trade Area (CAFTA) to tap mainland China market opportunities by importing production materials and consumer goods from ASEAN countries.

To better promote sales of these products on the mainland, Hong Kong companies can further take advantage of the city’s transhipment-facilitation measures for free trade agreement (FTA) cargoes and its ability under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) to undertake the testing and certification of all products from ASEAN countries or other territories listed in the China Compulsory Certification (CCC) product catalogue.

Close Development of China-ASEAN Trade Relations

As industrial activities in other low-cost locations in Asia are increasing, China and ASEAN are gradually forging closer supply-chain relations. Furthermore, facing rising labour and production costs in mainland China in recent years, local and foreign-capital enterprises on the mainland are relocating some of their production activities to other low-cost areas. Hong Kong companies, in particular, are taking this opportunity to optimise their supply chains and production networks in the region as a way to raise competitiveness and diversify business risks.

The ASEAN region is a hot destination for mainland enterprises to “go out” and make production investments. The enterprises concerned usually produce or source products in ASEAN and sell them in mature markets like the western Europe and the US, while shipping back related industrial materials, parts and components to the mainland, including regions such as the Pearl River Delta to support higher-end production activities.

Meanwhile, the increasing regional division of labour in Asia and the ever-closer trade relations between upstream/downstream suppliers with producers in mainland China and various production locations in Asia are resulting in the rapid expansion of intra-Asia trade. Against this backdrop, trade has grown steadily in recent years between China and ASEAN, which has replaced the EU as China’s largest trading partner this year. Imports and exports between China and ASEAN from January to September 2020 rose 5% from a year earlier to US$481.8 billion, according to China’s Customs. Moreover, ASEAN ranks as mainland’s biggest source of imports, whose value climbed 5.1% year-on-year over the period to US$214.7 billion, almost 20% higher than that of the EU, the mainland’s second-largest source of imports.

China imports from ASEAN countries mostly production materials and raw materials, including various types of electronic and electrical parts and components, among which semiconductor products are particularly significant. Electronic and electrical goods under HS Code 85 accounted for 37% of all imports from ASEAN in 2019. Other imports from the region included mineral products and fuels (HS Code 25-27) and machinery (HS Code 84), which are mainly used for industrial production and processing in China, underscoring the close supply-chain ties between China and ASEAN.

China also imports from ASEAN end-products and consumer goods for domestic sale. Examples include mobile phones and consumer electronics (HS Code 85), food and beverages, apparel, footwear products, gems and jewellery. In contrast, among China’s exports to ASEAN markets, apart from industrial materials and semi-finished products for manufacturing purposes, there are a higher percentage and more varieties of consumer products, including various types of electronics and electrical goods, apparel, footwear, furniture and houseware, ceramic products and toys.

The above facts notwithstanding, the global economy is now ravaged by the Covid-19 pandemic and demand is anaemic in European and US markets. Yet effective pandemic prevention and control work in China has resulted in a gradual revival of various economic activities, so much so that industrial production is increasingly robust and demand from the consumer market is growing. Under such circumstances, many enterprises are switching focus to expansion in the China market and redirecting goods they produce or source from ASEAN and other overseas countries back to China to sell.

Furthermore, China is trying to give full play to the advantage of a huge domestic market, so that a new development pattern will gradually be created whereby domestic and foreign markets can boost each other – the so-called “dual circulation” strategy – with the domestic market as the mainstay. In particular during the 14^th Five-Year Plan period, efforts will be made to further promote the replenishment of consumption and release of potential by unleashing domestic consumption to strengthen connectivity between the domestic and international markets. In making better use of international and domestic markets and resources, it is hoped that stronger and more sustainable development can be achieved. [1] Consequently, many enterprises with production activities in ASEAN are switching their attention from overseas markets to the mainland China. They are now trying to use the high-quality products made or procured in the ASEAN region to tap earnestly into the country’s vast market.

Leveraging FTA Preferential Tariff Treatment

It is worth noting that enterprises can leverage the preferential tariff treatment under CAFTA when importing goods produced or sourced in ASEAN countries into China. Since CAFTA was established in 2010, trade between China and ASEAN grew rapidly because of the tariff reduction and related facilitation measures. The value of exports from China to ASEAN increased by about 160% to US$360.3 billion in 2019 from US$138.2 billion in 2010, while the value of imports from ASEAN rose about 83% to US$281.7 billion in 2019 from US$154.3 billion in 2010 [2]. Moreover, as the agreements concerned stipulated that all members of the Free Trade Area must implement all tariff reduction commitments (irrespective of whether the products are sensitive or non-sensitive) by 1 January 2020, these Free Trade Area measures are now further driving trade between China and ASEAN [3].

China’s imports from ASEAN come mainly from the six economies of Malaysia, Vietnam, Thailand, Singapore, Indonesia and the Philippines. These countries accounted for 25%, 23%, 16%, 13%, 12% and 7%, respectively, or a combined 96% of China’s imports by value from the ASEAN region in 2019. Together, the six economies took in 94% of China’s exports to ASEAN. Furthermore, with a gradual growth in trade, China has also been enhancing customs facilitation with the ASEAN countries. For example, a place-of-origin electronic data exchange system established by China and Singapore was implemented on 1 November 2019. Furthermore, a China-Indonesia place-of-origin electronic data exchange system has been operational since 15 October 2020 for the real-time transmission of electronic data on certificates of origin and mobile certificates under the Framework Agreement on Comprehensive Economic Cooperation between China and ASEAN. Since then, during customs declarations, traders do not have to enter electronic data of the document proving the place of origin and the commitments made under “direct consignment” rules, nor do they have to electronically upload the document proving the place of origin. Instead, all these data will be automatically transmitted by the systems, thereby providing further convenience in trade within the Free Trade Area [4].

There is no doubt that if traders want to enjoy the CAFTA preferential tariff treatment, they have to ensure the goods concerned comply with requirements for place of origin of the Free Trade Area and have obtained the Certificate of Origin (Form E) issued by the certifying authority of the exporting country. For goods to be exported to China in particular, the General Administration of Customs (GAC) of China has updated and issued place-of-origin rules applicable to ASEAN goods to be imported into China [5].

According to the Rules of Origin for the China-ASEAN Free Trade Area [6], the goods concerned must also meet the “direct consignment” requirement. If the goods whose transport involves transit through one or more non-CAFTA territories during shipment with or without transhipment or temporary storage, the traders concerned should verify the following when making import customs declarations for the cargoes:

(1) the transit entry of the goods is justified for geographical reasons or by consideration related exclusively to transport requirements;

(2) the goods have not entered the trade or consumption field in these territories; and

(3) the goods have not undergone any operation other than unloading and reloading or any operation required to keep them in good condition.

Only when the above conditions are met will the goods concerned comply with the relevant place-of-origin requirements and preferential tariff treatment of the Free Trade Area can be claimed. These requirements, however, may affect the routing of the goods through a third place by the traders.

Hong Kong Assists CAFTA Products to Enter the Mainland Chinese Market

Although Hong Kong is not a CAFTA member, it still plays a definite role in promoting trade between the mainland and ASEAN. For example, Hong Kong re-exported US$37.1 billion worth of ASEAN products to the mainland in 2019, which accounted for 13.2% of the value of the mainland’s imports from ASEAN. Hong Kong also re-exported about US$27.3 billion worth of mainland products to ASEAN, which accounted for 7.6% of the mainland’s exports to ASEAN last year. Furthermore, the “direct consignment” requirement of the Rules of Origin for the China-ASEAN Free Trade Area [7] notwithstanding, the mainland has already launched a corresponding policy to stipulate that, when specific conditions are met, ASEAN goods transiting through Hong Kong to the mainland can still be considered as “direct consignment” and are eligible for the CAFTA preferential tariff treatment.

• Transhipment Facilitation Scheme (FTA Scheme)

  
  An announcement from GAC [8] stipulates that, if consignees of the imported goods or their agents (importers) can provide mainland Customs with the following transportation documents when applying for conventional tariff or preferential rate, mainland Customs will not require the importers to provide a Certificate of Non-manipulation for FTA goods transited through Hong Kong (or Macao):

  • For transhipment cargo by air or sea, a “single bill of lading” issued by international liner transportation operators and their trusted agents, civil aviation transportation enterprises, international express enterprises. The departure point, which is within the boundary of the country of origin (region) and the destination point which is within the boundary of mainland China, should be displayed on the same page of the “single bill of lading”. For transhipment cargo by sea originating from an inland country (territory), the departure point can be the port of loading of the cargo.
  • For containerised cargo under a free trade agreement of which the electronic data of country of origin could be exchanged, a “through bill of lading” which can prove that the container number and seal number remain unchanged during their whole transportation journey.

  
  If the importers cannot present the above “single bill of lading” or “through bill of lading”, they can submit a Certificate of Non-manipulation to comply with “direct consignment” requirements in accordance with the following stipulations to prove that the goods have not undergone any operation other than unloading and reloading, or any operation required to keep them in good condition.

  • For both containerised and bulk goods transited via Hong Kong requiring pre-inspection and quarantine, a Certificate of Non-manipulation issued by China Inspection Co Ltd (CIC Ltd) should be submitted.
  • For containerised goods that are unsealed not owing to pre-inspection and quarantine during transhipment stay in Hong Kong, and for bulk goods requiring no inspection and quarantine, a Certificate of Non-manipulation issued by Customs and Excise Department of Hong Kong (C&ED) has to be submitted.
  • For containerised goods that have remained intact during their transhipment stay in Hong Kong, a Certificate of Non-manipulation issued by either C&ED or CIC Ltd has to be submitted.

  
  Premising on related free trade agreements and the policies and measures issued by mainland Customs, C&ED has launched the Free Trade Agreement Transhipment Facilitation Scheme (FTA Scheme). Through quick and efficient non-manipulation confirmation and convenient supervision measures, the FTA Scheme can issue a Certificate of Non-manipulation for goods from ASEAN countries and other FTAs transiting through Hong Kong into the mainland and helps the enterprises concerned enjoy mainland preferential tariff treatment. In this way, the transhipment of products from ASEAN countries and other FTAs via Hong Kong into the mainland will be effectively facilitated.

  [For further details, please see: Expanding Mainland Trade: Transhipping Free Trade Area Cargo Via Hong Kong]
  
  

• CCC Product Testing Services
   
  On the other hand, while the mainland authority has been actively enhancing its product quality and food safety management systems, the society at large is increasingly concerned with the health and safety risks associated with various consumer products. Consequently, a lot of companies are not content with merely complying with the mainland’s compulsory requirements on their products; they also want to achieve their marketing purposes through various voluntary product certifications.
  
  In the area of carrying out voluntary and compulsory testing, Hong Kong’s practitioners in the testing and certification industry are noted for their proficiency in testing technologies and regulations in advanced countries and on the mainland. With the facilitating measures of CEPA in place, the Hong Kong industry holds a definite advantage in helping ASEAN products meet mainland specifications and requirements. In particular, under CEPA, Hong Kong’s testing bodies can now undertake testing for products listed in the CCC catalogue imported from the ASEAN region and elsewhere. According to an announcement [9] issued by China National Certification and Accreditation Administration, beginning on 1 June 2020:
  
  
  • Hong Kong testing bodies accredited by the accreditation authority of the Hong Kong SAR Government to be competent to perform testing of the relevant products under the mainland CCC system are allowed to co-operate with designated mainland institutions in the testing of all products included in the CCC catalogue. The specific arrangements for co-operation will be implemented per the relevant provisions of the Regulations of the People’s Republic of China on Certification and Accreditation.
  • The above implementation product scope extends to all products in the CCC catalogue processed or produced in any territory.
    ​​​​​​​[Note: Testing bodies in Hong Kong engaged in CCC product testing services must be accredited by the accreditation body of the Hong Kong SAR Government (Hong Kong Accreditation Service) to be competent to perform testing of the relevant products under the mainland CCC system.]

Hong Kong is not only an international business and trading hub in Asia, but is also an important window through which mainland China imports foreign products. Hong Kong companies have extensive mainland business experience. In addition, with its highly effective and convenient transhipment measures and professional services such as product testing, Hong Kong is in a position to help high-quality products from ASEAN and other regions in entering the mainland market and in taking advantage of FTA preferential tariff treatment to tap the mainland’s huge industrial and consumer market opportunities.

[1] For further information of the 14^th Five-Year Plan, please refer to: CPC Unveils Proposals for 14th Five-Year Plan and 2035 Long-Range Objectives

[2] Source: Global Trade Atlas

[3] Members of the China-ASEAN Free Trade Area (CAFTA) comprise China and the 10 member countries of ASEAN, which together represent a population of some 1.85 billion and an area of 14 million km². The Framework Agreement on Comprehensive Economic Cooperation was signed between China and ASEAN in 2002, which led to the creation of CAFTA in 2010. Subsequently, the two parties signed a Trade in Goods Agreement in 2004 and agreed to implement mutual tariff reduction measures from July 2005 onwards. In 2007, the two parties also entered into a Trade in Services Agreement and started implementing free trade in services arrangements in July of the same year. The two parties signed an Agreement on Investment in 2009 to further promote the facilitation and gradual liberalisation of investment. By 2010, CAFTA was basically established. In particular, with regard to trade in goods, China and the original members of ASEAN (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) all committed to reducing the tariffs of most products, except sensitive ones, to zero by 1 January 2010. For new ASEAN members, tariffs were reduced every two years since 2011 and, by 2015, tariffs for all products except sensitive ones were reduced to zero. Tariffs for sensitive products were all reduced to 0-5% by 1 January 2018 for old ASEAN members and by 1 January 2020 for new members.

[4] For details, see China-Indonesia Electronic Certificate of Origin System Goes into Operation in October

[5] In 2015, China and ASEAN entered into the Protocol to Amend the Framework Agreement on Comprehensive Economic Cooperation Between China and ASEAN and Some of the Agreements Thereof, of which Appendix B to Annex I, Product Specific Rules of Origin, became effective as of 20 August 2019. The revised measures for the administration of the origin of imported and exported goods as mentioned in GAC Announcement No. 136 (2019) – Announcement on Issuing the Revised Measures of the Customs of the People’s Republic of China for the Administration of the Origin of Imported and Exported Goods under the Framework Agreement on Comprehensive Economic Cooperation between the People’s Republic of China and the Association of Southeast Asian Nations (ASEAN) have also been in force since 20 August 2019.

[6] And the requirements in Annex I – Rules of Origin of the Protocol to Amend the Framework Agreement on Comprehensive Economic Cooperation Between China and ASEAN and Some of the Agreements Thereof signed between China and ASEAN in 2015.

[7] Ditto.

[8] Announcement on matters concerning the submission of documentation on imported goods transited via Hong Kong or Macao under various preferential trade agreements (GAC Announcement No. 52 [2016]).

[9] Announcement No. 10 (2020) of the China National Certification and Accreditation Administration.