Key Players for Global Economic Growth

The relationship between the Association of Southeast Asian Nations (ASEAN) and China’s Free Trade Agreement (FTA) has garnered international attention. Several agreements reached their dates of full implementation by early January of this year.

Among the most significant results, ASEAN FTA is now one of the lowest international trade tariff areas in the world. ASEAN-China is the largest FTA in population size and includes 1.9 billion total people. It is the third largest FTA in economic size, with a cumulative GDP of US $5.8 trillion. And after the EU and the North American Free Trade Agreement, it is the third largest FTA in terms of total trade transacted. In 2008, ASEAN-China accounted for a combined US $4.3 trillion, or 13 percent of global trade.

The international interest is not surprising. ASEAN’s overall economic growth and China’s own rapid expansion are contributing to economic dynamism on both a regional and global scale. Both are experiencing rapid integration into the global economy, and are quickly being absorbed into the evolving global supply chains and taking on the role as factories to the world. Therefore, there is a natural gravitation towards each other as production bases with geographical proximity, historical ties and shared cultural affinity.

A more open and liberal regime of trade between the two is benefiting ASEAN’s rapid trade growth (26.4 percent per annum between 2003 and 2008), as well as greater inflows of investment into manufacturing and resource and energy-rich sectors. It has also increased access to the large consumer base in China. In the last few years, the strong trade growth between the two has propelled China to become ASEAN’s third largest trading partner, while ASEAN is well on its way to becoming China’s third largest trading partner in 2010.

There is also an economic link between ASEAN and the inner provinces of China. The Chinese market in these areas is less developed than in the coastalregion. Sub-regional development cooperation is also part of China’s interest in engaging with ASEAN, which hopes to capitalize on the FTA by establishing early footholds in these markets with untapped potential. ASEAN can be on the supply chain for the various industries operating across China, in eastern, western and central provinces.

The FTA uniquely positions ASEAN countries to take advantage of China’s rapid growth. The rising middle class of China, with its high consumption pattern and future potential, provides ASEAN members with a market for its products and services. This market includes consumer electronics, food products, tourism, health and education services. China has already surpassed Japan as the largest consumer of luxury goods.

ASEAN should use the FTA to build a network that will capitalize on China’s next wave of expansion. The huge China market also forms a bulwark against a decline in demand from the traditional markets in the west.

Through the FTA, ASEAN and China have a more sustained approach for addressing tariff reduction, non-tariff barriers, services trade and investment. Both sides are also exploring closer cooperation in trade facilitation, including harmonization of standards and simplifying customs procedures. This process provides both sides with an avenue to take economic cooperation to higher levels.

At the same time, ASEAN-China economic cooperation has not merely existed on the trade front. It is also strengthening cooperation in tourism, infrastructure, human resource development, people-topeople interaction and the business sector partnership. In particular, ASEAN sees the benefit of developing transport and infrastructure services between the two production bases. A strong and integrated transport network between the two regions will facilitate regional connections, lower overall production costs, raise business efficiency and enhance overall competitiveness of the economies. It will also support tourism as the number of Chinese visiting ASEAN countries continues to increase.

Looking Ahead

ASEAN and China have concluded the ASEAN-China Maritime Transport Agreement and the ASEAN-China Aviation Cooperation Framework. Under it, they have agreed to work towards concluding an ASEANChina Regional Air Services Agreement by 2010, covering both air freight and air passenger services to support and facilitate the traffic and movement of passengers and cargo to increase their trade and economy.

In this connection, China has launched a US $10 billion infrastructure investment fund to improve road, railway, airlines and information telecommunications links between China and ASEAN to meet the demand of growing business ties. In addition, recognizing the potential of ASEAN’s own internal integration, China has provided a US $15 billion credit facility to promote integration of the two economies.

With focus shifting to Asia, the partnership between ASEAN and China is entering the world stage as a platform for global economic growth. East Asia itself is undergoing its own transformation, with China, the Republic of Korea, Japan and India altering the economic landscape. This shift of economic power towards East Asia fosters a deeper level of interaction between ASEAN and the region. Production networks and supply chain processes can further integrate China, ASEAN and others in the area. Doing so brings the myriad of origin rules and different tariff rates into alignment, which reduces procedural complexities, removes multiple rules of origin requirements and reduces transaction costs.

ASEAN-China economic relations are destined to grow even stronger in the years ahead. It will be a win-win partnership for the two, the region and the global economy.

S. Pushpanathan is the Deputy Secretary-General of ASEAN for the ASEAN Economic Community.