A new ASEAN-Japan Comprehensive Economic Partnership Agreement (AJCEP) will be taking effect on the 1st of December 2008. This FTA covers not only goods but services and investments. It will enable Japanese companies that want to expand into the ASEAN region to reduce trade costs, which is especially beneficial for electronics and automobile manufacturers.

Tariffs on 93% of imports from ASEAN into Japan will be removed within 10 years, while 90% imports from Japan into ASEAN will be reduced by six ASEAN members (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) within 10 years.

For Malaysia in particular, CKD kits for motor vehicles regardless of engine displacement are classified under the B4 range, which means tariffs have to be gradually reduced in 4 annual installments starting from 35%. This probably means a step by step reduction every year until the 4th year which will see a maximum 5% CEPT tax.

For CBU vehicles, the rate begins at 50% for vehicles with engine displacements under 2,500cc (B7 category) and will slowly be reduced in 7 annual installments down to a maximum CEPT rate of 5%. CBU vehicles above 2,500cc is classified under the R category, which means reduction to a maximum of 10% tariff (not a CEPT 5% tariff) in 11 equal annual installments.

Malaysia is part of ASEAN but Malaysia already has an FTA with Japan called the Japan-Malaysia Economic Partnership Agreement (JMEPA). This agreement also provides tariff reductions for cars coming in from Japan. Under the JMEPA, CBU vehicles with engine displacements are covered with a 0 to 5% tax in 2008 and eliminated by 2010. All other CBU tacxes are to be eliminated by 2015.

These reductions in taxes will allow more companies to be like DRB-HICOM companies Suzuki Malaysia Automobile and Mitsubishi Motors Malaysia, offering CBU Japan vehicles at surprisingly good prices. Its either that or they maintain prices and fatten up their account books anyway, which hopefully will be reinvested locally into better 3S centers and other support facilities.

The bad news is with this new AJCEP there is one less reason for Volkswagen to pick Malaysia over Indonesia or Thailand for its ASEAN assembly plant if it also wants to use the plant to penetrate the Japanese market.

Interestingly, industry people are of the opinion that this new FTA will probably not change much. John Bonnell of Automotive Resources Asia in Bangkok says policies are not always implemented, preferential rates are not always honored and there will be all kinds of stalls. Head of research for BNP Paribus Securities Indonesia Ferry Wong is of the opinion that not all countries will play by the new rules.

Of course, Malaysia has always and probably for a long time more been criticized as being one of these FTA-dodging countries, especially when it comes to the automobile sector, thanks to the dark shadow cast by the controversial Approved Permit system.