Maximising the benefits of FTAs in AsiaPage 2
Agenda
► Recap on FTAs & key features► New Zealand’s FTA coverage + insight on CN & ASEAN► Progressive FTA benefits► Optimising value from FTAs
► Identifying benefits and “quick wins”► Progressive benefits - interaction with supply chain optimisation
► Supply chain impact: examples► Lessons learned
► Strategic sourcing, realignment of substance
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Focus of today’s session
► Key aims:► Evaluate how FTA benefits can be claimed► Explain the impact of FTAs through the supply chain► Evaluate opportunities to maximise FTA benefits► Examine opportunities to add incremental benefits
► Key learning:► How reviewing FTA claims in conjunction with supply chain
planning can drive optimal value
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Key features of FTAs in general
► General features of FTAs include:
Feature Summary considerations Impact
Rules of Origin
►ROO must be met to claim preferential duty rates – in general:►“Wholly obtained” (resources) or “substantial transformation” (manufactures) ►“Substantial transformation” if transformed into new good by manufacturer – ►(1) Value Added Rule (2) Change in Tariff Classification (3) Process Rule►Accumulation principle important in multi-stage value chain
High
Admin issues
►Significant – main requirement often is obtaining certificate of origin (COO)►COO is issued by authority of exporter but benefits borne by importer ►Generally, must prove compliance with ROO to obtain
High
Direct shipment
►Generally, delivery must be direct between member countries to obtain benefit►Transit allowed in some cases
Med
Third country invoicing
►Goods shipped between two Members, but invoiced through a third country►Most FTAs do not prohibit this, but “silence” risks prevention of FTA benefits
Med
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Summary of key New Zealand FTAsAnd a comparison between ASEAN-China
► Key features of New Zealand’s key FTAs are as follows:
ANZ-ASEAN NZ-China ASEAN-China
ROO (differs per product)
►Accumulation principle►Co-equal approach (tariff
change or value add w. 40% FOB threshold)
►Reduced red tape►Transit allowed
►Accumulation principle►Tariff change or value add
w. 40% FOB threshold►Reduced red tape►Transit allowed
►Accumulation principle►Tariff change or value add
w. 40% FOB threshold►Reduced red tape►Transit allowed
Admin ►COO, simplified procedure ►COO (but not on CN import)
►COO
Benefits ►Accumulation principle►Eliminates 90% of tariffs►Liberalised trade / access►Investor protection►Facilitate goods movement
►Eliminates 96% of tariffs to 2019, inc. key exports
►Increased cooperation►Investor protection►Liberalised trade/access
►“Normal” vs. “sensitive”►Normal duties almost
eliminated►Liberalised services trade►Greater investor protection
Overall ►High benefit ►Medium/High benefit ►Medium benefit
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Optimising FTA benefits through the supply chain – three tiers
Map FTA benefits with current flows
to claim FTA benefits
Map potential FTA benefit with
strategic sourcing opportunities
Restructure supply chain to optimise
FTA, tax and operational
benefits
1 2 3Claim FTA benefits Strategic sourcingSupply chain optimisation
Complexity and implementation challenges
Benefit
2/3. Supply chain restructuring1. Quick wins
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1. Quick wins - claiming existing benefitsMapping supply chain flows and claiming FTA benefits
► 5-point process to evaluate, apply and obtain strategic FTA benefits:1. Identify FTA coverage based on current supply chain product flows
2. Ascertain overlaps between FTAs for these flows
3. Evaluate the respective benefits of the FTAs, including overlaps (see table below)► Including duty, market access, relaxed ROO / qualification, reduced admin (may conflict)
4. Make application
5. Ongoing management/administration of the process
► AANZ: ASEAN: Australia & New Zealand FTA► TPP: Trans Pacific Partnership► BL / SP: Bilateral
SG TH MY Bru. ID PH VN CM LA MM AU US CN Peru Chile
AANZ AANZ AANZ AANZ AANZ AANZ AANZ AANZ AANZ AANZ AANZ
TPP TPP TPP TPP TPP TPP TPP TPP
BL BL BL BL BL
Bilateral only for CN
Multilateral and bilateral agreements with ASEAN
Maximising the benefits of FTAs in AsiaPage 8
1. Quick wins – other concerns
► Examples in evaluating the benefit include:
► But challenges remain:► Complexity of ROO requirements, admin process and duration for COO► Full awareness of benefits available
Question Summary considerations
If multiple FTAs, which to claim?
1. Differs based on type of product, service or investment flow
2. E.g. bilateral tariffs may be lower than ASEAN-ANZ for NZ exports to ASEAN
3. Not only the tariff is important: must evaluate whole package
Concerns outside of duty rates
1. Variance of ROO between parties, self-declaration
2. Special measures for certain products (e.g. textiles, clothing, agriculture)
3. The existence or removal under the FTA for non-tariff barriers
Services or investment flows
1. “Negative list” under the TPP – beneficial for services
2. …but no investment chapter in TPP
Other provisions?
• Competition policy, IP considerations – NZ FTAs affirm multilateral obligations in this area
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2. Opportunities through supply chain restructuring
► Assuming claims are both possible and feasible:1. Could the product flow or supply chain footprint be changed to maximise FTA
benefits?
2. How may FTA benefits be enhanced by operational and tax savings?
► Two major opportunities to enhance existing potential FTA benefits
1. Strategic sourcing 2. TESCM planning
Concept 1. Evaluate alternative raw material supplies to maximise FTA benefits
1. Full supply chain restructuring including FTA benefit optimisation
Applies 1. All NZ importers / exporters 1. All companies – discrete or full scale
Process 1. Spend and FTA analysis, full cost / benefit evaluation and implementation
1. 5-stage process: opportunity assessment, feasibility, design, implementation, sustain
Example 1. NZ importer of raw materials
2. Sources currently from Europe at 10%
3. Changes to MY, claims treaty benefits
4. Reduces duty to 0% for this product
1. NZ domestic value chain, goods exporter
2. Sets up MY manufacturing, procurement
3. FTA benefits claimable on purchase/sale
4. Tax/operational benefits added
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2. Strategic sourcing process
Project enablers
Analysis Definition Transition
Realise savings
Recommend ways toRealise savings
Strategicsourcing
Identify savings opportunities1.Undertake full spend analysis2.Identify quick wins3.Select priorities4.Benchmarking5.Blueprint
Full evaluation6.Supplier selection7.Final analysis
Realise savings8.Negotiate per blueprint9.Claim FTA benefits
Examples where strategic sourcing may apply:
A. Import of raw materials to NZ manufacturing siteB. NZ co with ASEAN or CN manufacturing presence, buy/sell from regionC. NZ co with ASEAN or CN manufacturing presence, buy/sell from NZ (NZ materials export)
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2. Option A – changing the source of imported materials
1. Goods for import currently sourced from EU
2. Evaluation of potential suppliers undertaken
1. Product characteristics / quality
2. Benchmark costs
3. FTA benefits mapped indicate overall cost advantages,
1. Net of quality and FTA benefits
2. Full costs included in review
New flow
Existing Flow
11. NZ co with domestic
manufacturing, source overseas & import to NZ
EU
Key Plants R&D Distribution Sales HQ
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2. Option B – changing the source of imported materials to overseas location
1. Goods for import currently sourced from EU
2. Similar to A, evaluation of potential suppliers undertaken
1. Product characteristics / quality
2. Benchmark costs
3. FTA benefits potential
3. Net cost benefits, as before1. Differing FTA arrangements
2. Origin rules on further manufacturing & supply key
Future flow
Existing flow Key Plants R&D Distribution Sales HQ
21. NZ co with ASEAN or CN
manufacturing presence, buy/sell from region
EU
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2. Option C – increased export opportunities for NZ companies
1. Goods for import currently sourced from EU
2. Opportunities for NZ exporters to maximise access to ASEAN
1. Importer can also benefit from reduced duty, accumulation rule
3. Net cost benefits, as before1. Note admin requirements for NZ
exporter, but benefit in importer
2. Main benefit to exporter is increased scale through access
Future flow
Existing flow Key Plants R&D Distribution Sales HQ
31. Independent co with
ASEAN manufacturing, buy/sell from NZ
EU
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3. Case study (1/3): incremental benefits through supply chain planning
► Supply chain planning can drive incremental benefits on FTAs► Operational benefits through more effective
operating model► Tax benefits through incentives, substance
► Fact pattern:► Procurement operations converted to
centralised model (in Singapore)► Manufacturing in MY converted to contract► Entails functional shift to SG site
► Demand aggregation► Supplier identification► Negotiation, potentially contracting► Supplier management► Supply chain planning, manufacturing strategy► Inventory ownership, management
1.NZ co with MY manufacturing presence, SG buy/sell procurement in a “Supply Chain Principal”
Sourcing
Sale to manufacturer
Sale to customers
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2. Case study (2/3): key features and benefits
1. FTA benefits claimable on import of raw materials to manufacturer – 0% duty
2. Accumulation benefit on sale of processed goods from MY
► Export still qualifies for ANZ-ASEAN FTA preference – 0% duty
3. Goods to not enter SG, but 3rd country invoicing allowed
4. Tax incentives on centralised procurement in SG and manufacturing functions in MY
5. Further operational benefits
►Must carefully review differences in ROO / accumulation of benefits
►Careful planning essential: switch sale/trade may be insufficient to claim ROO in other examples
Hig
hL
ow
Ben
efit
Low HighBusiness impact
Supply chain management
company
Service company
Full Principalwith intellectual
property
Sourcing company
Med
ium
Sales and marketingPrincipal
► Supplier identif ication► Demand aggregation► Negotiation► Contracting and
f ramework agreements► Supplier management
and development Plus► Logistics management► Import and export
processing► Freight forwarding
Plus► Supply chain planning► Inventory ownership
and management► Manufacturing strategy► Research and
development strategyPlus► Sales and
marketing strategy► Pricing policies
Plus► Brand management
Import and export
company
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Case study (3/3): tax incentives – further adding to the potential benefits
► Centralised procurement and manufacturing operations in ASEAN country (Singapore in this example)
► Incremental tax benefits, adding to FTA and operational benefits, through tax incentives
► Including Singapore, example incentives include:
Singapore Thailand Malaysia
Incentive type►IHQ or RHQ (DEI incentive)
►Global Trader Program
►Board of Investment (BOI) inc.
►International Procurement centre
►Pioneer status
►Investment tax allowance ITA
Typical benefits
►Tax rate potentially to below 5%
►Up to 10 years (5 + 5)
►Potential tax exemptions (BOI)
►15% tax rate (IPC)
►200% R&D deductions
►Partial or full tax exemption (Pioneer)
►Enhanced tax allowance (ITA)
►Up to 10 years
Conditions►Spend, headcount,
functions, product, industry, etc
►Location, spend, turnover, and other criteria
►Product, industry, spend, technology
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Key lessons learned
► FTA benefits can be extensive, if claimed
► These benefits can be enhanced by tax and operationally effective supply chain planning
► Strategic sourcing in a centralised procurement entity is one example of this:► There are several others
► Care should be taken to analyse ROO, admin requirements and other key factors:► Common experience is that admin burden is extensive and the rules are
complex
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