What is the impact of the "zero tariff" free trade agreement

2015-06-23

On June 1st, the China South Korea Free Trade Agreement (FTA) was officially signed, and over 90% of the products from both sides will enter the era of zero tariffs. As one of the largest amount of goods imported by China from South Korea, the zero tariff policy for LCD panels will be gradually promoted according to the "8+2" strategy, which means there will be an 8-year buffer period after the China Korea FTA takes effect, until the tariff is reduced to 2.5% in the 9th year and then to zero in the 10th year.

Due to the fact that the panel industry in mainland China is still in its early stages of development, tariffs have always been sensitive to panel manufacturers, and there are occasional calls within the industry to raise tariffs to 8% to 10%. After the signing of the China Korea Free Trade Agreement, it will have a profound impact on the global LCD panel industry, and the market competition pattern will undergo subtle changes.

   Why adopt the "8+2" strategy?

   According to the relevant provisions of the China Korea Free Trade Agreement, the tariffs on the panel industry will adopt an "8+2" strategy. After the agreement comes into effect, there will be a "protection period" of up to 8 years, until the tariff is reduced to 2.5% in the 9th year and then to zero in the 10th year.

   Why set an 8-year 'protection period'? Dong Min, General Manager of AVC's Black Power Business Unit, believes that by 2016, there will be 19 8.5-generation lines put into operation worldwide, which is an astonishing number and highly competitive. Moreover, the 8.5-generation lines of Japanese and Korean brands have almost been depreciated, while the depreciation period in China takes about 7-8 years. Therefore, the setting of this time period is reasonable.

  Regarding this, Liu Tangzhi, the President of Skyworth Group's TV Business Division, has a similar view. He pointed out that the depreciation period of South Korean panel factories is 3-5 years, and their 8.5-generation line will gradually complete depreciation in the next one or two years; The depreciation period of Taiwan, China panel factory is 5-7 years; The depreciation period of panel plants in Chinese Mainland is longer, 8-10 years. If China suddenly lowers tariffs on imported panels from South Korea, it will be detrimental to the growth of China's panel industry.

   In the view of Liang Xinqing, Secretary General of the Liquid Crystal Branch of the China Optics and Optoelectronics Industry Association, the China Korea FTA adopts an "8+2" strategy, which takes into account the actual situation of both China and South Korea in terms of time arrangement: it considers the cooperation between South Korean panel factories and Chinese enterprises, demonstrating China's willingness to open up to South Korea to a greater extent; At the same time, the actual development status of China's panel industry has also been considered.

  "Chinese Mainland enterprises entered the LCD panel industry relatively late, and there is still a gap between them and South Korean enterprises in terms of core technology, industrial chain layout, production experience, industrial scale, etc., so the '8+2' strategy can give the panel industry a little more time, so that mainland panel manufacturers can catch up with South Korean enterprises." Liang Xinqing believes.

  Dong Min believes that panel manufacturers in Chinese Mainland have certain advantages in small and medium-sized screens, but there is still a gap between them and Korean manufacturers in terms of large size screens, both in terms of product size and quality, and in terms of the leadership of cutting-edge products.

   "For the panel industry in the early stage of development, I think policy protection is still needed in the short term. I believe that in 8 to 10 years, the 8.5 generation line in Chinese Mainland will be able to compete on the same level as the 8.5 generation line in South Korea." Dong Min said.

  The dispute over tariff increases and decreases

   In recent years, the flat panel display industry has received strong support from the Chinese government, especially in 2012 when panel import tariffs increased from 3% to 5%. At the same time, through preferential policies such as "home appliances going to rural areas", China's flat panel display industry has ushered in a good development opportunity, and domestic panel manufacturers such as BOE and Huaxing Optoelectronics have reached a turning point in profitability.

   However, raising tariffs has always been a controversial topic. For the panel industry, increasing tariffs has always been a demand point. Chen Yanshun, President of BOE Technology Group, has stated that the government should provide further support to the domestic flat panel display industry by raising import tariffs on panels to 8% to 12%. During last year's Two Sessions, Li Dongsheng, Chairman of Huaxing Optoelectronics, and Ouyang Zhongcan, academician of the Chinese Academy of Sciences, as representatives of the National People's Congress, also suggested that the country increase import tariffs on LCD panels.

 The import tax rate for panels in mainland China is significantly lower compared to other countries, with Brazil's tax rate being 12%, South Korea's tax rate being 8%, and the European Union's tax rate being 14%. It is reasonable for China to increase the tariff rate for LCD display panels from 5% to 10%. This can win development opportunities and time for panel factories, "said Ouyang Zhongcan.

   Dong Min also believes that the current 5% tariff on the panel industry in mainland China is not high enough. The panel industry is supported and protected by policies in any country, including Samsung, LG, etc. Moreover, the panel industries in South Korea, Japan, and other countries have already passed the policy support stage and are able to stand firm in terms of technology and scale. However, Chinese Mainland is still in a period of development and needs policy protection.

   However, raising tariffs is a double-edged sword. Lu Zhanbo, Deputy Secretary General of the China Electronics Chamber of Commerce, pointed out to reporters that domestic color TV companies mainly import upstream components such as panels and polarizers, which account for more than 70% of the total machine cost, from related companies such as LG and Samsung in South Korea. Therefore, increasing tariffs will undoubtedly raise the production costs of downstream color TV companies and squeeze the profits of color TV production.

    Liu Buchen, an analyst in the household appliance industry, calculated that the average net profit of the local color TV complete machine enterprises in Chinese Mainland was only 2%, and the panel generally accounted for 65%~70% of the complete machine cost. If calculated at 60%, a 2% increase in tariffs would push up the overall cost by 1.2%. That is to say, if the 2% profit of the entire machine is consumed by 1.2 percentage points, only 0.8% remains. "The profitability of Chinese Mainland color TV complete set enterprises was not strong, but now they have eaten up most of the profits, which undoubtedly hit the complete set enterprises," said Liu Buchen.

   In the view of Zhang Bing, the research director of Display Search China, although raising tariffs can protect the panel industry in the short term, the fact that whole machine companies often pass on the increased costs to consumers may actually lead to a slowdown in the sales growth of LCD TVs, thereby harming the entire LCD panel industry chain.

More importantly, balancing the competition between Chinese and Korean panel companies by increasing tariffs is not in line with the market economy. China's panel industry cannot be protected by increasing tariffs. China is a member of the WTO organization, and with the expansion of free trade, tariff liberalization is the future development trend. It is unrealistic to rely on tariffs to protect enterprises in the future. ”Zhang Bing stated.

    In Liang Xinqing's view, the demands of the panel industry have their rationality. In the short term, necessary tariff protection is necessary, but in the long run, zero tariffs will be the trend. Therefore, for the tariff dispute within the industry, the China Korea Free Trade Agreement is equivalent to a compromise choice.

   How much will it affect Taiwan, China?

    After the signing of the China South Korea Free Trade Agreement, the era of zero tariffs between China and South Korea is accelerating. For Taiwan, China, the second largest source of panel imports from Chinese Mainland, this is obviously a great touch.

    As the world's largest TV manufacturing center, Chinese Mainland has an annual output of more than 140 million sets. According to Ovi data, up to now, in the panel market in Chinese Mainland, Samsung and LG Korean manufacturers account for 35%, Youda, Qunzhuang and other Taiwanese manufacturers account for 32%, Chinese Mainland panel manufacturers account for 29%, and others account for 4%. Panel manufacturers in Taiwan, China, China, firmly occupy the position of the second largest panel supplier. At the end of May this year, Bai Weimin, Executive Vice President of the China Electronic Video Industry Association, once again led a delegation to Taiwan to purchase panels. It is expected that 27 million panels will be purchased this year, with a total amount of 4.5 billion US dollars.

    For China and South Korea to sign FTA, the Taiwan, China region of China has been greatly touched. The head of the economic department of the Taiwan, China authorities has said that the GDP growth rate of Taiwan will be reduced by 0.5%. According to their assessment, after the implementation of the China Korea FTA, Taiwan's total exports will decrease by 1.34%, with a total value of 3.75 billion US dollars and a total output value decrease of 0.98% to 8.9 billion US dollars. Among them, 24.7% (38.6 billion US dollars) of industrial products will be threatened or impacted more due to higher tariffs, especially in industries such as steel, machine tools, automobiles, panels, petrochemicals, textiles, and glass.

  Lu Zhanbo believes that the companies most affected by this agreement, such as AU Optronics and Innolux, whose products and technologies are closest to those of South Korean companies, have insufficient support from their downstream brand enterprises and are not as stable as LG and Samsung's downstream enterprises.

   However, Liang Xinqing does not see it that way. I don't think the impact of this agreement on panel companies such as Innolux and AU in Taiwan will be significant after its signing, at least for the next few years. There is an 8-year transition period during which Taiwanese companies should strive to make some adjustments, such as the accelerated negotiations on the Cross Strait Economic Cooperation Framework Agreement (ECFA)

  Liang Xinqing believes that the signing of the China South Korea Free Trade Agreement is a big touch for Taiwan, China, China, and will promote Taiwan, China to think about trade relations with Chinese Mainland. He predicted that ECFA would be more relaxed than the China South Korea Free Trade Agreement in terms of the policy of Taiwan, China's panel entering the Chinese Mainland.

  It is an inevitable trend for Taiwan and mainland China to achieve zero tariffs. As for when it can be achieved, it depends on whether Taiwan takes the initiative or not. If Taiwan accelerates the ECFA negotiation process, zero tariffs will be achieved faster. Although the Cross Strait Service Trade Agreement has caused a great stir in Taiwan, leading to a delay in the promotion of ECFA in processing trade, I think Taiwan should still seize this opportunity. ”Liang Xinqing told reporters.

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