Introduction

 

In November 2004, at the 10th ASEAN Summit in Vientiane, Lao PDR, the Economic Ministers of ASEAN and China signed the Agreement on Trade in Goods (TIG) of the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China. This occasion is a major step towards the realisation of an ACFTA for goods, which is set to be established by 2010 for ASEAN 6[2] and China, and by 2015 for the newer ASEAN Member States.[3]

 

This ACFTA in goods would soon be augmented by services and investments with negotiations on agreements on these relevant areas being aggressively pursued in 2005.

 

In order to understand the economic relevance of the ACFTA, this brief will highlight its net benefits to the ASEAN region.

 

 

Enlarged Market Size and Enhanced Trade

Outright, this ACFTA will create an economic region with 1.7 billion consumers, a regional Gross Domestic Product (GDP) of about US$2 trillion and total trade estimated at US$1.23 trillion. This makes it the biggest FTA in the world in terms of population size.

 

And as any in other FTA, the ACFTA will bolster ASEAN-China trade, which has risen at a dramatic pace, indicating the growing economic interdependence of ASEAN and China, as illustrated in Table 1 below.

 

Table 1. ASEAN-China Total Trade

2000-2003

(in US $ billions)

Year

2000

2001

2002

2003

Total Trade

39.5

41.6

42.8

55.2

                                     Source: ASEAN Trade Statistics Database


Moreover, the share of China in ASEAN’s total trade has grown from 2.1 per cent in 1994 to 7% in 2003, making China the 4th largest trading partner of ASEAN after the European Union (11.5%), Japan (13.7%) and the United States of America (14%).

 

This trade volume is expected to grow further with the implementation of the Early Harvest Programme of the ACFTA in January 2004, as well as the implementation of the tariff reduction programme under the normal track of the TIG Agreement by the mid-2005. Already by July 2004, the value of the Early Harvest Programme products[4] traded between ASEAN and China reached US$1.11 billion representing an increase of 42.3% over the same period of 2003, amongst which ASEAN exports to China were US$ 0.68 billion, an increase of 49.8% over that same period.

 

            Amongst ASEAN’s top exports to China include electrical equipment, computer/machinery, lubricants/fuels/oil, organic chemicals, plastics, fats & oils and rubber. Notably these products are mostly intermediate goods to China’s exports to Third Countries. Thus, it can be expected that in the process of China’s economic expansion and with the ACFTA in place, it will import more from ASEAN countries for its required inputs in its production processes and for its needs as its income and standard of living improves.

 

 

Removal of Trade Barriers, Specialisation and Enhanced Economic Efficiency

 

 

A key feature of the TIG Agreement is the non-maintenance of quantitative restrictions and the elimination of non-tariff barriers.[5] The removal of these trade impediments will lower the costs of trade transactions, further increase ASEAN-China trade and enhance economic efficiency. As low-cost imports under the FTA flow from one member to another, specialisation in production ensues, thereby boosting real income in both ASEAN and China as resources flow to sectors where they can more efficiently and productively utilised.      

 

Simulations[6] conducted by the ASEAN Secretariat suggest that an ACFTA will increase ASEAN’s exports to China by 48 per cent and China’s exports to ASEAN by 55.1 percent. The FTA increases ASEAN’s GDP by 0.9 percent or by US$5.4 billion while China’s real GDP expands by 0.3 percent or by US 2.2 billion in absolute terms.

 

However, it must be noted that the ensuing intensified competition in each region’s domestic market given the similarity in industrial structures of ASEAN and China may entail short-run costs in the form of displacement of workers and rationalisation of some industries and firms. And as such, there would be the need for adjustments amongst workers and enterprises, particularly the small and medium enterprises.

 

This is particularly poignant in the case of Thailand, which undertook a bilateral FTA with China and in turn, experienced a surge of 117 percent for apple imports, 346 percent for Chinese pear imports and 4,300 percent for grape shipments. However, they also experienced an increase of 986 percent for fresh longan exports, 21,850 percent for durian exports, 1,911 for mangosteen and 150 percent for mango. Thus clearly illustrating that with fierce competition, specialisation would occur as enterprises from FTA members are inclined to produce those products, where they have comparative advantage. Ultimately, the surviving enterprises would become globally competitive with their own niches in the world market.

 

 

Improved Investments Prospects

 

 

The formation of an ASEAN-China Investment Area should also aid in generating more investments for ASEAN. Not only will more ASEAN and Chinese companies be willing to investment within the integrated market, since market risk and uncertainty are lowered, but US, European and Japanese companies, which are interested in making inroads into the Asian market, will also be attracted to invest in the integrated market.

 

On its own, China has been successful in luring investors into its growing economy for it has the essential investment determinants in place. China’s market potential is already well established and its performance in relation to some indicators of institutional quality and macroeconomic and political stability is better than other members of ASEAN. And despite the perceived inadequate legal framework, high inflation and the pervasiveness of bureaucratic red tape and corruption, foreign investors are looking at the long-term benefits of investing in China more than its short problems.

As such, the integration of ASEAN with China can entice more foreign corporations, which each market alone cannot otherwise attract. With a larger market, more intense competition, increased investment and economies of scale, investors will be more inclined to locate in the integrated region.

 

 

 

 

 

References:

 

ASEAN-China Expert Group on Economic Cooperation. “Forging Closer ASEAN-

China Economic Relations in the Twenty-First Century.” October 2001.

 

Ofreneo, Rene E. “Free Trade with China: What’s in store for small farmer.” The

Manila Times. 17 November 2004.

 

Pongvutitham, Achara. “China FTAs ‘need careful thought.’” The Nation. 9

November 2004.

 

Tongson, Jose Lelis. “A Comparative Analysis of Trade and Investment Regimes

of China and ASEAN.” October 2002.

 

Vatikiotis, Michael. “China-ASEAN FTA: Who wins?” The Jakarta Post. 2

December 2004.


[1] Prepared by Raul L. Cordenillo, Senior Officer, Studies Unit, Bureau for Economic Integration, ASEAN Secretariat

[2] Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore and Thailand

[3] Cambodia, Lao PDR, Myanmar and Viet Nam

[4] Early Harvest Programme products are agricultural products identified by FTA members for early liberalisation. All countries, except the Philippines, which has yet to come out with its list, are part of this Programme.

[5] This is stipulated in Article 8 Quantitative Restrictions and Non-Tariff Barriers of the Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China.

[6] Simulations were carried out using the Global Trade Analysis Project