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Trade Relationship Between Thailand and China

Term Paper Title Page for Postgraduate Program ???? 2010~2011????????????? Spring Term, Academic Year 2010-2011, Shanghai University ???? /Course Name: International Trade Theory and Policy ???? /Paper Title: Trade Relationship between Thailand and China ????? /Name: Ms. Thip Koo-akarakul ?? /Student ID: 10760002 ????? /Class: 2010 ???? /Reviewer’s Remark: ? ? /Score: ???? /Reviewer: ???? /Review Date: Abstract The objective of this paper is to study the relationship of the trade between Thailand and China and its impact after open China ASEAN free trade area.

Thailand and China have a limited agreement which eliminated tariffs on some 116 agricultural items (in HS 01–08 categories) by October 2003. This is an ‘earlier-harvest’ than the early-harvest package in the ASEAN-China FTA, which eliminated tariffs in the same categories for all ASEAN countries. In particular, the paper analyzes the trade structure, its current situation and problems, the effects of the trade, and the implication to the policy. The results of the paper highlight that this agreement has little aggregate impact, but within the sectors concerned the effects have been noticeable.

This trade policy is to create the business partners and alliances among the region and reductions in the non-tariff barriers tend have significant positive impact on the trade performance of ASEAN countries. JEL classification: F13 Key words Thailand trade, China trade, Free trade, ASEAN, ACFTA Table of Contents Abstract 2 Table of Contents3 I. Introduction4 II. Literature review5 III. Overview the trade relationship between Thailand and China5 IV. ASEAN – China Free Trade Agreement’s Background9 V. Current Situations 12 VI.

Thailand’s Trade Policy toward China 13 VII. Problems of Bilateral Trade Negotiation 16 VIII. Implications to the policy 17 IX. Conclusion 18 References 19 Trade Relationship between Thailand and China I. Introduction The relationship between Thailand and China has been positive and constructive since diplomatic ties between our two countries were established 30 years ago. It has entered into a whole new era in 2003, when the China-ASEAN FTA was signed. This agreement has enormous implications for Thailand’s economic future.

Under this Agreement, China and Thailand agreed to rapidly eliminate tariffs on fruit, vegetables and other agricultural products over a two-year period. This process had begun in January 2004 and by January of this year; tariffs on these products had been totally eliminated. Now its impact has been for almost 8 years, it is timely to consider the influence that FTA has had on trade between our two countries. II. Literature review Thailand and China official established the diplomatic relations since 1 July 1975. Later on, in 1976, Thailand and China began their official economics relations.

All along China is one of the most important trading partners, by the last year, China is Thailand’s second most trading partner after Japan. China is Thailand’s the top export market and is the second large import source. Meanwhile, Thailand is the 15th of China’s trading partners by being the 21st of export market and the 10th of import source. The economics relationship of Thailand – China has been intensively developed since 2003. According to statistics from Department of Trade Negotiations, Ministry of Commerce of Thailand revealed China is the third large of import source and the forth large of export market.

Association of Southeast Asian Nations established the ASEAN free trade area – AFTA in 1992 as well as always promotes china to attend the ASEAN – China free trade Area. Presently, AFTA consists of 10 countries; Singapore, Malaysia, The Philippines, Indonesia, Laos, Vietnam, Cambodia, Myanmar, Brunei, and Thailand. Under the agreement, to open free trade area became fully operational in 2003 and aimed to finalize the negotiation in 2004. After that, it was expected to reduce the tariff in the region from 2005.

Based on its schedules, the 6 original ASEAN countries must complete their tariff reduction in 2010 while the remaining four countries; Cambodia, Laos, Myanmar, and Vietnam will follow suit in 2015. Moreover, under the framework of ASEAN – China Free Trade Area, two sides are able to reduce the tariff in some items before the due date which was called “Early Harvest” or pre – free trade. The agreed items were the agricultural products code 01-08, i. e. live animals, meats, fishes, milk products, other animal products, trees, vegetables and fruits, by effective on 1 January 2004 and will be reduced to 0% within 2006.

Until October 1, 2003, ASEAN and China signed a new agreement to reduce the tariff to 0% for products code 07 and 08 which is vegetables and fruits. It shortened the official free trading enforcement for 3 months and also affected the customs duty of vegetables and fruits between Thailand and China became 0% since that time. This article is aimed to reveal the impact of an executed part of ASEAN – China Free Trade Area to Thailand, by analyzing the problems, obstacles of exporting and the tilization of this free trading, throughout evaluate the impact in the present as well as offer suggestions, strategy and solutions, in order to assist Thailand earns the most advantage from this free trading. III. Overview the trade relationship between Thailand and China 1. Trade between Thailand and China 2. 1 Total Value Trade: In the last five years (2006-2010), the average value of total trade is 34,322. 27 millions $US, increasing 18. 68 percents per year in average. In 2010, total trade value rose to 45,712. 56 millions $US. Compare with 2009, it was raised up 37. percents, China was also Thailand’s second partner trade. 2. 2 Export: During the last five years (2006-2010), an average export value is 18,250. 69 millions $US. Compare with 2009, it was raised up 42. 34 percents 2. 3 Trade Balance: Thailand has a trade deficit with China for a long time; although in 2009, the trade deficit with China is decreased 338 percents from 2008, which its deficit value is 3,965. 7 millions $US. In contrast, it has been increased to 2,766. 17 in 2010. 2. Export and import goods between Thailand and China 3. Export goods to China: such as computer accessories and parts, Para rubber, chemical supplies, plastic beads, rubber products, Cassava products, refined oil, electronic integrated circuits, wood and wood products, and household electrical goods. In 2010, most of export goods from Thailand to China are industrial products and agricultural products which accounted for 20 percents. 3. 5 Import goods from China: such as computers and parts, electronic machines and parts, household electrical goods, chemical supplies, iron, steel, steel products, appliances, textile, electronic integrated circuits, metal products, etc.

In 2010, most of import goods from China to Thailand are capital goods, raw material products and semi-finished products, and consumer products, accounting for 42, 35, 20 percents respectively. IV. ASEAN – China Free Trade Agreement’s Background The ‘Framework Agreement on ASEAN-China Comprehensive Economic Cooperation’ was signed by ASEAN and China on 4 November 2002 to serve as the structure and mechanism for negotiations to establish a free trade area covering trade n goods, services, and investment, as well as to effect various measures for economic cooperation between China and ASEAN. In this framework has opened the free trade in some products that early harvest. All products at 8/9 digit level in HS Chapters 1-8 (live animals, meat and edible meat offal, fish, dairy produce, other animal products, live trees, edible vegetables and edible fruits and nuts) shall be covered. And those goods were deducted tariff since 1 January 2004, and decreased to 0 in 1 January 2006.

Apart from early harvest products, ASEAN and China signed ‘Trade in Goods Agreement’ on 29 November 2004, in order to open the free trade in the other products, excluding from products at 8/9 digit, those tariff reduction have commenced since 1 July 2005. Reduction of tariff on general goods, is conducted by Two tracks, has been established for trade in goods, a ‘normal track’ under which tariffs will finally be completely eliminated, and a ‘sensitive track’, which sets a more detailed and long-term schedule of tariff reduction and elimination for goods to be safeguarded. . The Normal Track: Products in the Normal Track, other products other than Early Harvest Program (EHP), are divided into Normal Track 1 (NT1) and Normal Track 2 (NT2). 2. 1 Tariff liberalization on NT1, covered about 90 percents of all product, has been implemented to begin on 1 July 2005 and to be conducted in four trenches in 2005, 2007, 2009 and 2010. ASEAN-6 and China are required to reduce tariffs to 0-5% on 40% of their products by 2005 and 60% of their products by 2007. 2. NT2, no more than 150 goods, will be realized by 2010 for China and ASEAN-6, and they can be decreased to 0 within January 1st, 2012 and 2015 for CMLV. 2. The Sensitive Track: Products in the Sensitive Track are divided into Sensitive List and Highly Sensitive List. 3. 3 Sensitive List (ST) [Final tax rate must be between 0-5%] No more than 400 items comprising not more than 10% of the value of all goods imported from China by respective ASEAN countries are to be included in the sensitive list, with a reduction of duties on these goods to 20 % by 2012, and final rates of 0%-5% by 2018. . 4 Highly Sensitive List (HSL)[ Final tax rate must not exceed 50%] It was also agreed that goods in the highly sensitive list should comprise no more than 100 items or 40% of goods in the sensitive list, whichever is less, with the reduction of tariffs on these items to 50% by 2015 for ASEAN-6 and China, and 2018 for CMLV. There will be no further tariff cuts. Tariff lists 1. Tariff reduction in early harvest goods between Thai and China has covered 384 products in HS Chapters 1-8 (products at 6 digits) since 1 January 2004.

Product in 7, 8 digit have been eliminated to 0 percent tariff since 1 October 2003. 2. There are 5,121 products going to impose tariff reduction policy in the framework of AC-FTA, 897 products have already been reduced tariff since 1 July 2005. The rest of them are in the waiting list. 3. The goods, 4,225 products, which have not been reduced tariff are consisting of: 4. 1 Products which have tax base lower than 5 percents and equal to 10, 15, 20 percents. This category is going to reduce tariff in 2007 and products that impose tariff lower than 5 percents has been reduced to 0 in 2009. . 2 There are 359 Sensitive Track Lists that still have not used tariff reduction. 4. 3 The 30 Normal Track goods of Thailand which China has categorized to Sensitive Track goods still have not used tariff reduction, because of principle of reciprocity. 4. 4 Some goods, which have been reduced tariff in general by The Ministry of Commerce since 1 July 2003 in the Agreements of AC-FTA, have been made the real tariff rate, that have been imposed in the present, lower than the regulations. 4. From the information above, products that have been reduced the real tariff rate since 1 July 2005.

After deducted 30 Sensitive Track products, there are only 866 products or 16. 9 percents of 5,121 products which are within the tax reduction. Also, if we consider only the products that are imposed tariff more than 20 percents; there are only 699 products, which accounted for 13. 6 percents of 5,121 products or 80. 7 percents of 866 products. V. Current Situations Products in Normal Track lists of ASEAN-6, which covered more than 90 percents of all products, have been reduced to zero since 1 January 2010.

Trade between Thailand and China after open free trade area in 2010 According to Thailand’s trade information the first 6 months of year 2010, China has overtaken the United State with the total value trade more than 21,500 million $US (or 12 percents of total value trade of Thailand), and has been the second trade partner of Thailand. Export: China has become the biggest export market of Thailand, with the export value in the first 6 months of year 2010 around 10,100 millions $US or 10. percents of the total export value of Thailand more than the old major export market like the United States and Japan. Import: China is the second biggest import market of Thailand, with the import value 11,420 million $US or 13 percents of the total import value of Thailand. Export goods from Thailand to China are: computers, Para rubber, chemical supplies, Cassava products, tire product, plastic beads, electronic integrated circuits, refined oil, wood and wood products, electronic machine and parts, rice, chilled and frozen fresh fruit, etc.

Import goods from China to Thailand are: computers, electronic machines, household electrical goods, chemical supplies, iron, steel products, electronic integrated circuits, fertilizer and pesticides, plastic product, jewelry, printed circuit board, vegetables and fruit, etc. VI. Thailand’s Trade Policy toward China Thailand significantly emphasizes on the economic relationships with China. Especially, because China’s economic growth is one of the most progressive in the Asia region and the world.

A promotion of being economic partner between Thailand and China is very essential in order to enlarge the competition ability, throughout support the economics of both countries. Thailand aims at the development of economic relationships with China, by after initiating the free trade in 2003, Thai and Chinese Government have signed the performance agreement in stimulating the import customs tariff reduction to be zero percent of vegetables and fruit between Thailand and China (as code HS 07-08, in total of 116 items (6 digits tariff)).

It was the beginning of fastening the opening of free trading between two countries and ASEAN until accomplishing in the negotiation of trade agreement in 2004. Nowadays, almost 90 percents of the import customs tariff have been reduced to zero since 1 January 2010. The establishment of ACFTA will give the competitive advantage to members under the agreement of free import customs tariff, at the same time, the entrepreneurs will have more various choices of goods and materials and will gain an advantage of lower cost when comparing with the external countries.

The tendency of trading between Thailand and China after the completion of opening the free trade area, the quantity of trading of both countries tends to increase more than in the present, calculated that it may increase not less than 20% a year. Summery the Status of the Major Trade Partners of Thailand (January – June 2010) Unit: million $US Country| Export| Percentage of Export| Import| Percentage of Import| Total Trade| Percentage of Total trade|  Trade Balance| China| 10,102. 11| 10. 85| 11,421. 90| 13. 18| 21,524. 01| 11. 97| -1,319. 79| Japan| 9,398. 16| 10. 10| 17,706. 00| 20. 42| 27,104. 16| 15. 08| -8,307. 4| US| 9,163. 26| 9. 85| 5,079. 00| 5. 86| 14,242. 26| 7. 92| 4,084. 26| International Organizations| | | | | | ASEAN| 21,680. 00| 23. 30| 14,752. 70| 17. 02| 36,432. 70| 20. 27| 6,927. 30| EU| 10,384. 00| 11. 16| 6,828. 90| 7. 88| 17,212. 90| 9. 58| 3,555. 10| Source: Office of Permanent Secretary Ministry of Commerce Summery the Status of Trade between Thailand and China in 2007 – 2010 (January – June) | 2007| Percent| 2008| Percent| 2009| Percent| 2010(Jan-Jun)| Export| 14. 8| 26. 59| 16. 2| 9. 25| 16. 1| -0. 41| 10. 1| Import| 16. 2| 19. 27| 20. 2| 24. 23| 17. 1| -15. 52| 11. 5| Trade Balance| -1. | | -4. 1| | -1. 1| | -1. 4| Source: Thai Customs Department In addition, the progressive development of transportation routes and networks i. e. land transport (R3 route), water transport (Mekong river), and air transport will be a vital factor to enlarge the quantity of trading between Thailand and China. Not only the opening of free trade area, but also in the future, under the ASEAN-China FTA agreement, ASEAN and China are planning to enlarge the cooperation of the free service sector and investment which are considered as the important sectors. So they will offer a new opportunity to the economic development.

For the investment sector, it will include both direct and indirect investment as well as stock investment, by the way, it is must based on equality and fairness. The agreement in investment between ASEAN and China, besides offering the direct benefit from trade and investment enlargement, it also builds up the confidence for investors among member countries throughout outside investors. Meanwhile it will attract and promote the investment between ASEAN and China, finally, the capital current and investments among member countries will generate their sustainable economic growth.

Besides above, the establishment of ACFTA is a crucial fundament for the next economic cooperation framework in a wider scope, for example ASEAN + 3 (China Japan and Korea) or ASEAN + 6 (China Japan Korea Australia New Zealand and India), which is a golden opportunity and challenge in the economic world. VII. Problems of Bilateral Trade Negotiation AC-FTA in agricultural products, Thailand has gotten advantage from free trade in early harvest products in the agreement ASEAN-China. In industrial sector, Industries that import raw material from China has gotten advantage, because of the imported raw material capital is reduced.

Industries that exported goods to China market, for example accessories, spa products, furniture, have more chances to expand market. At the same time, the industries that must compete with products imported from China need to adjust for decreasing the negative impact of AC-FTA, such as Petro – Chemical, building materials, plastic products, etc. However, there are a lot of industries that affect from AC-FTA, that is Small and Medium Enterprises (SMEs). The most of SMEs are feeble in management and marketing.

Also, they lack of regardless and awareness to get benefits of AC-FTA, lack of capability to adapt themselves for decreasing the negative impact of AC-FTA. This agreement let many enterprises protesting the government to slowdown the opening of this free trade, because it still causes lots of problems: 1. For many years, Thailand has a trade deficit with China the whole time, and largely increased the value of trade deficit, because Thailand imports a high number and value of China’s industrial and semi-industrial. 2. Agricultural goods exported to China, now China tries to produce by itself and it is enough for the domestic consuming.

So, chances to expand export market to China in agricultural products are not much. Also, it resulted in value of export in agricultural sector, major exported goods, which lacked of a straighten tendency and stability because of the changeable in production and demand and supply in China market. 3. In the last five years, China has improved in agricultural sector, and now is the agricultural product exporter. It causes some Thai products as they must compete with Chinese product in the third country, for example, rice in Hong Kong and Korean market, corn in Japanese and Korean market, green bean in Indian market, etc. . Purchasing goods in China is still at risk, especially the payment, such as open L/C. 5. Products that Thailand export to China have less ability to compete because product prices are higher than other countries, cost of labor is higher, also products of China have lower prices than the price of that product in the country for 10 percent. That is because China can determine the prices without cost of capital; the reason is that investment comes from the government. 6. Import goods from China must pass the third country such as Singapore and Hong Kong, which make the cost getting higher.

Moreover, there are a lot of customs processing, imports’ costs are certainly getting higher. 7. China imposed non-tariff barriers to trade (NTBs) 8. 1 Tariff Quota: exporters are required the Imported Licensing and quotas in rice, Para rubber product from the central government. 8. 2 Product Standard: industrial products are required CCC Mark , but it is very hard to get through the information and it is written in Chinese. 8. 3 In order to import fruits to China, it is required to have plant diseases and insects certification and must be verified by the phytosanitary officer at quarantine station both at the airport and the port.

For instance, to import longan, if it is detected because of disease and should be smoked with Methyl bromide, that causes more expense. Besides, it is required to have Certificate of inspection residue from Department of Agriculture, determined that there is no more than 300 ppm of sulfur dioxide in longan and it must have no Methamidophos residue. Mango and durian must come from the farm that is checked and registered in Department of Agriculture. 8. 4 Import – export fruit regulations of Ministry of Foreign Trade and Economic Cooperation (MOFTEC) were determined that importer and exporter must get the license.

For the companies that are located in coastal-area city must have capital not less than 5 million Chinese Yuan to ask for the allowance to run import-export business. In other city, capital must be not less than 3 million Chinese Yuan. China imposed 13 percents value added tax in vegetables and fruit and 17 percents value added tax in processed fruit which makes the price of import goods from Thailand to China’s market much higher than product which is produced in domestic. 8. Logistic: transportation by land, by air, and by boat is used in order to expand in the China’s market, collection and distribution the goods.

The major problem occurred is the delay transport, causes the quality of Thai goods when they are delivered. 9. China determined to used ‘Rules of Origins’ criteria from which one of these two ways 10. 5 Substantial Transformation which can be determined by the origin of good from the change of tariff classification on at 4-digit level. 10. 6 The production of the goods must consist of local content at least 40% of their value. If any good cannot reach the determined value, it must be paid in a higher tax rate. In contrast, Thailand does not use the rule, but imposed tariff rate in general much more than the regulations of WTO.

In some cases, it imposed tariff rate lower than the AFTA. VIII. Implications to the policy To improve Thailand’s FTA policy, the government should revise the overview of FTA policy, adjust the process to determine the policy by listen to others’ opinion and cooperate with experienced negotiators, for example, asking an advice from experts, consulting with the Parliament, being open-minded to listen the different opinion from NGO, furthermore, studying more issues about the public in order to reform the trade policy to be a better one.

Thai government should decrease the discussion about FTA and extend time to be longer in order to have enough time for considering about the real benefits of the country, and should consider the Rules of Origin by researching, especially in the issue of how to let the Rules of Origin making more benefits and reducing distortion of trade. The FTA policy should be conducted along with the other policies, for instance, the government should determine the adjustment assistance policy for farmers who get the effects from free trade. Shortly, Thailand’s FTA Policy has much weakness.

Improving FTA is the most important key to challenge Thai government. Moreover, Thailand should build a stable basis of the economy and reform regulations in the country as well. IX. Conclusion The forming of Free Trade Area (FTA) has played an important role for international business of Thailand at the present. The main objectives of this trade policy are to create the business partners and alliances among the region and reduce the trade barriers of commerce and investment in term of tariff and non-tariff restriction among each member nation.

The advantages of FTA are to influence each member nation to produce the product that has high competitive advantage and uniqueness in order to compete in the global market. On the other hand, the product with low competitive advantage will be reducing and not be pushed into the global market. However, even up to now that the FTA does not reach to its full accomplished stage. Some problems to Thailand market has seemed to be occurred. The relationship between China and Thailand in term of economic development has can be called as both business partner and rival at the same time.

For Thailand, the statistic of the nation has proved that the import-export volume between Thailand and China has been increasing during these 2 recent years. Furthermore, China also is the attractive location for many Thai investors. The main product that manufacturing in China are the garment and electronic devices. However, China herself also can be the major rival of Thailand in the global market. The main aspect that allowed China to compete in global market is the lower wages standard which attracts many investors around the world to step into China market.

The cost of manufacturing in China has made it become more competitive than Thai product in of pricing especially, the cheap price products which mainly produce in the very large amount. In addition, the low-price electronic equipments, clothes, artificial jewelry and footwear from China have created the great effect to Thai Market. Therefore, it also created the usurping of market among each other. For example, the low price products from China are also entered to the Thai market which can effect to the Thailand domestic market.

Some of small companies such as SMEs also have to force out from the market because it cannot compete with the large foreigners’ companies. However, in the optimistic point of view, this kind of situation will be the good chance for Thai market to improve itself standard and try to increase the ability to compete in world market. The current government of Thailand has presented the FTA policy to public and private sectors which not even ready to deal with this enormous change.

But the result is the FTA has created rapid economic growth and the complementary of business between two nations. Thailand still have some advantages on free trade of agricultural products due to the large amount import of agricultural products and fruits such as apple and sweet corn and more non-tariff barrier in China still make it business flow still have some limitations. However, the agricultural product export is only take small part of benefit when compare with the major problem in other industry that Thailand can earn only few benefits.

It is because Chinese government has support the mass product manufacturing business which can produce the cheap product with vast quantity that can fulfill the global demand. The low quality product also can return into Domestic market which likely to seek for low price good. Nevertheless, regard to the FTA many Thai businesses also have chances to import the low price manufacturing material from China in term of substituted. However, the situation in the global market and trend of consumers’ behaviors and preferences has changing over time.

Therefore, the issue of FTA also need to be update and adaptable to the global demands. The investigation and insight of FTA are necessary in order to create the long-run benefit among all partners. References Chia, S. Yue. 2004. ASEAN-China Free Trade Area. Hong Kong: the AEP Conference. Department of Trade Negotiations. 2005. China – Thailand FTA: How do Thai SMEs get benefits. http://www. dtn. go. th (accessed June 5, 2011). Department of Trade Negotiations. 2010. Framework Agreement on Comprehensive Economic Co-operation between ASEAN and China. ttp://www. thaifta. com/ThaiFTA/ (accessed June 5, 2011). Faculty of Economics Chulalongkorn University. 2005. The Impact of China – Asean Free Trade Area. Bangkok: Chulalongkorn University Press. Fiscal Policy Research Institute Foundation. 2004. Framework Agreement on Comprehensive Economic Co-operation between ASEAN and China. http://www. fpri. or. th/ (accessed June 5, 2011). Pongjityingyong, Nattinan. 2007. Study of the effect of China – Thailand Fruits and Vegetables Sectors. Taiwan: Graduate school of International Affairs. Pothiyaraj, Supawadee. 010. Impact of Trade Liberalization Policy on Thai Economy: A Case of Imported Vegetables and Fruits from People’s Republic of China. Bangkok: National Research Counsil of Thailand. Sally, Razeen. 2007. Thai Trade Policy: From Non-discriminatory Liberalisation to FTAs. Oxford: Blackwell Publishing. Tantiwasadakorn, Chayan. 2006. Thailand International Trade Policy in 2000 – 2006. Bangkok: Thammasat University Press. Thangavelu, Shandre M. 2010. Non-Tariff Barriers, Integration and Export Growth in ASEAN. Malaysia: University of Nottingham.

Thanonline. 2010. 7 years of Thailand – China FTA Let the Exporters Cry. http://www. thanonline. com (accessed June 5, 2011). Uthaisangchai, Prasong. 2005. Free trade between Thailand and China – reaping the harvest. Bangkok: Bangkok Bank. ——————————————– [ 2 ]. Harmonized System [ 3 ]. Thailand’s NT2: textile product and garments; China’s NT2: jewelry and accessories [ 4 ]. ASEAN-6 = Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore and Thailand [ 5 ]. CMLV = Cambodia, Myanmar, Laos and Vietnam [ 6 ].

The first trade partner of Thailand is Japan, with the total value trade 27,104 million $US [ 7 ]. The first biggest import market of Thailand is Japan. [ 8 ]. China Compulsory Certificate (CCC) mark on industrial products: requiring that the mark be attached to 155 products, with expansion of the product coverage to be expected. The product must be certified by Accredited Certification Bodies in order to ensure consumer health and safety. [ 9 ]. It is for fumigating cut ? owers and many other commodities. [ 10 ]. ‘Local content’ here includes the value of materials obtained from all ASEAN member countries.