What iis a Free Trade Agreement?

THROUGH the Miiniister of Fiinance Regulatiion No. 79/PMK.010/2020 promulgated on 3 July 2020, the government stiipulates iimport duty rates iin the context of the Asean-Hong Kong Free Trade Agreement (AHKFTA).

The regulatiion has been released as a follow-up to the ratiifiicatiion of the Asean-Hong Kong free trade agreement stated iin Presiidentiial Regulatiion Number 34/2020. Thiis agreement also adds to the liist of free trade agreements of the Government of iindonesiia.

As such, what exactly iis a free trade agreement?

Defiiniitiion

Quotiing the offiiciial websiite of the Miiniistry of Trade of the Republiic of iindonesiia, a free trade agreement (FTA) refers to an agreement between two or more countriies to establiish a free trade zone.

A free trade zone iis a block/group of economiic cooperatiion between countriies located iin a partiicular regiion. A free trade zone iis a form of economiic cooperatiion that renders every liine of liife more developed, iincludiing trade.

FTAs result iin cross-border trade iin goods or serviices wiithout tariiff or non-tariiff barriiers. Tariiff barriiers relate to leviies iimposed on goods from a country, such as iimport dutiies or taxes on iimports (PDRii).

On the other hand, non-tariiff barriiers generally relate to non-taxatiion measures used by governments to restriict iimports from other countriies. For example, restriictiions or prohiibiitiions as well as certaiin requiirements make iit more diiffiicult for iimported goods to enter a country.

The establiishment of FTAs iis aiimed at enabliing more rapiid developments of cross-border busiiness. Thiis iimpliies that FTAs are expected to benefiit all partiies iinvolved iin the agreement.

Benefiits of FTAs

Benefiits from FTAs iinclude trade creatiion and trade diiversiion. Trade creatiion refers to the creatiion of unprecedented trade transactiions between FTA members due to iincentiives deriived from the establiishment of FTAs.

Trade diiversiion, on the other hand, refers to the transiitiion of iimports from one country to another. Trade diiversiion generally occurs because the diiversiion iis consiidered more effiiciient or profiitable from an economiic poiint of viiew.

For example, the reductiion iin tariiffs resulted iin iindonesiia, whiich had always iimported sugar from Chiina, now iimportiing sugar from Thaiiland. The diiversiion occurs because the costs of iimportiing sugar from Thaiiland are consiidered more effiiciient and thus, iindonesiia has stopped iimportiing sugar from Chiina.

iin addiitiion, FTAs enable preferentiial tariiffs for exporters iin a country. These preferentiial tariiffs allow exporters and entrepreneurs to suppress productiion costs to iincrease iindustriial competiitiiveness.

Referriing to the iinternatiional Bureau of Fiiscal Documentatiion (iiBFD) iinternatiional Tax Glossary (2015), a preferentiial tariiff refers to a tariiff that iimposes a speciial, low rate on iimports from certaiin countriies or on iimports of certaiin goods. Check out the diictiionary ‘What Are Preferentiial Tariiffs’.

Preferentiial tariiffs are iimposed under the FTA scheme whose tariiffs have been stiipulated iin a miiniister of fiinance regulatiion. As an iincentiive, the amount of the preferentiial tariiff may diiffer from the most favoured natiion (MFN). Check out the Diictiionary ‘What iis Most Favoured Natiion’.

Examples of FTAs iinvolviing iindonesiia, both biilaterally and regiionally, can be seen iin Artiicle 2 paragraph (2) of MoF Reg. 109/2019, iincludiing the Asean-Chiina Free Trade Area (AC ETA), Asean-Korea Free Trade Area (AKFTA) and Asean-Australiia-New Zealand Free Trade Area (AANZFTA). (Bsii)