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ASEAN-China Free Trade Area: An opportunity to Move Foreward. Dr. Mohd Fuad Mohd Salleh1 Dr.

Norlaila Abdullah Chik2 Faculty of Business UNISEL Introduction The ASEANChina Free Trade Area (ACFTA), also known as ChinaASEAN Free Trade Area is a free trade area among the ten member states of the Association of Southeast Asian Nations (ASEAN) and the People's Republic of China. The Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China was signed by Leaders of ASEAN and China at the ASEAN-China Summit in Phnom Penh, Cambodia on 4th November 2002, with the intent to establish a free trade area among the eleven nations by 2010 (Isagani, 2002, ASEAN 2010). The full implementation of the agreement has been realised on 1 January 2010 (Jakarta Globe. Bloomberg, 2010; Fiona, 2009). The ASEANChina Free Trade Area is the largest free trade area in terms of population and third largest in terms of nominal GDP (Andrew, 2010; Liz, 2009). ASEAN members and the People's Republic of China had a combined nominal gross domestic product of approximately US$6 trillion in 2008 (Kevin, 2010). With the signing of the agreement, the free trade area had the third largest trade volume after the European Economic Area and the North American Free Trade Area (Liz, 2009) China first proposed the idea of a free trade area in November 2000 (Michael, 2000; Andry, 2009). It had overtaken the United States as the third largest trading partner of ASEAN, after Japan and the European Union, when the free trade area came into effect (Michael, 2009). Between 2003 and 2008, trade with ASEAN rose from US$59.6 billion to US$192.5 billion (Liz, 2009). China is also the world's largest exporter.Members of ASEAN have a combined population of more than 580 million. Amendments for the framework of the free trade area mostly concerned Vietnam. These amendments were designed to assist Vietnam lower tariffs and put forth dates as guidelines (ASEAN, 2003). The free trade agreement reduced tariffs on 7,881 product categories, or 90 percent of imported goods, to zero (The Jakarta Post, 2010) and this import duties were eliminated on 1 January 2010. Furthermore the remaining 150 tariff lines (NT2) will be gradually eliminated by 2012. This reduction took effect in China and the six original members of ASEAN: Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. The remaining four countries such as Cambodia, Laos, Myanmar and Viet Nam will follow suit in 2015 (China Daily, 2009; Qiaoyi, 2009) and their full tariff elimination for products in the NT will only be realized in 2015, with flexibility on 250 tariff lines under NT2 which will be eliminated in 2018.

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Associate Prof. Dr. Mohd Fuad Mohd Salleh, Dean, Faculty of Business, Unisel Dr. Norlaila Abdullah Chik, Lecturer at Faculty of Business, Unisel


The average tariff rate on Chinese goods sold in ASEAN countries decreased from 12.8 to 0.6 percent on 1 January 2010 pending implementation of the free trade area by the remaining ASEAN members. Meanwhile, the average tariff rate on ASEAN goods sold in China decreased from 9.8 to 0.1 percent (Stephen, 2009).The six original ASEAN members also reduced tariffs on 99.11 percent of goods traded among them to zero (Ellie & May , 2009; The China Post, 2009). Indonesia accounts for more than 40 percent of the region's population, and its people have voiced the greatest amount of opposition to the agreement (Daniel, 2010; Stephen, 2009). Several days following the implementation of the free trade area, it announced plans to renegotiate tariffs on 228 product categories.In exchange, Indonesia would accelerate implementation of the agreement on 153 categories (Yessar & Dian, 2010) Is Economy of China a Opportunity to ASEANs Trade Growth? Chinas economy has rapidly increased since the 1990s with averaged about 10% of real GDP growth, the fastest rate of real GDP growth in the world. The total trade of China has increased from 1.7% in 1990 to 4.2% in 2009. Since 1990s, both ASEAN and China has achieved high growth rate in foreign trade. China became the third largest exportter in the world when it exports have grown from US$62.1 billion in 1990 to US$969 biliion in 2009. ASEAN-China trade has grown ata average of 15% annually with the total trade was US$237 billion in 2009. Chinas exports to ASEAN grew from US4.1 billion in 1999 to US$175 billion in 2009. Foreign trade is an important driving force for the economic development of China and ASEAN. China seems to have more advantage in trading with ASEAN. ASEANChinas economy is moving up the ladder, expanding at a rapid speed and is in a position to become a major economic house in the world. The rise of Chinas extreme economic power raises great concern to members of ASEAN. Kalish (2005) and Cuis (2006) statement certainly indicated that Chinas economy is growing very very fast compared to others developing country particularly on low and high technology industires and products. Since there are similarities between Chinas and ASEANs production sector and exports, the impressive expansion of Chinas manufacturing sector seems to adversely affect industries in ASEAN. Trade relationship between ASEAN and China was rapidly grown more than 20 per cent on average from 1995 to 2010. ASEANs total trade to China has increased from 2.2 per cent in 1995 to 12.3 per cent in 2010 (Table 3). China has become one of the major trade partners not only to ASEAN as a group but also to individual members of ASEAN. For instance, China is the fourth largest trade partner for Malaysia and Singapore and the third for Thailand. Based on Table 3, it is anticipated that the ACFTA would make China the biggest market for ASEAN. Since the structure of trade for ASEAN and China is similar, China and ASEAN are competing in the same category of goods. Although Chinas rapid economic growth and expansion is welcomed by most members of ASEAN, the growing Chinese economy (power) has produced a positive impact on ASEA since China also produces most of the manufactured goods that are exported by members of ASEAN (Shen, 2003).


Trade between ASEAN and China increases with the size of the economy as a large domestic market promotes division of labour and provides opportunities for trade in a wide variety of goods. Strengthening such an integrated supply chain from ASEAN region to fit in as a supplement to China can also empower the ASEAN economies to compete more effectively with other producers in major markets worldwide. Futhernore, China has been trading with ASEAN for more than three decades; however, since 1995 the trade between these regions has grown by leaps and bounds. Chinas imports from ASEAN have increased significantly and ASEAN has become one of the major sources of imports to China. ASEAN has also benefited by expanding exports of agricultural and agroprocessing goods to China (Greenaway, Mahabir and Milner, 2008). China has increasingly been a central player in production networks, including electronics and machinery, and has sourced its supply of capital goods and components from these countries. Although China provides benefits to ASEAN, the loss of trade suffered by ASEAN due to diversion is not fully compensated (Greenaway, Mahabir and Milner, 2008). At first glance, it seems like the China-Asean relationship has been positive. After all, demand from a Chinese economy growing at a breakneck pace was a key factor in Southeast Asian growth beginning around 2003, after a period of low growth following the Asian financial crisis of 1997 and 1998. For Asia as a whole, in 2003 and the beginning of 2004, noted an Unctad report, "China was a major engine of growth for most of the economies in the region. The country's imports accelerated even more than its exports, with a large proportion of them coming from the rest of Asia." During the current international recession, Asean governments are counting on China which is expected to register growth of 7-8 per cent when the figures for 2009 are final to pull them out of the doldrums. The reality, however, is that most of the advantages will probably flow to China. A More Complex Picture Yet the picture is more complex than that of a Chinese locomotive pulling the rest of East Asia along with it on a fast track to economic nirvana. There have been widespread fears that China's growth is, in fact taking place at Southeast Asia's expense. Low wages, many in Southeast Asia fear, have encouraged local and foreign manufacturers to phase out their operations in relatively high wage Southeast Asia and moving them to China. There appears to be some support for this. China's devaluation of the yuan in 1994 had the effect of diverting some foreign direct investment away from Southeast Asia. The trend of Asean losing ground to China accelerated after the financial crisis of 1997. In 2000, foreign direct investment in Asean shrank to 10 per cent of all foreign direct investment in developing Asia, down from 30 per cent in the mid-nineties. The decline continued in the rest of the decade, with the United Nations World Investment Report attributing the trend partly to "increased competition from China." Since the Japanese have been the most dynamic foreign investors in the region, much apprehension in the Asean capitals greeted a Japanese government survey that revealed that 57 per cent of Japanese manufacturing TNCs found China to be more attractive than the Asean-4 (Thailand, Malaysia, Indonesia, and the Philippines).


Snags in a Trade Relationship Trade has been another, perhaps greater, area of concern. Massive smuggling of goods from China has disrupted practically all Asean economies. For instance, with some 70-80 per cent of shoe shops in Vietnam selling smuggled Chinese shoes, the Vietnamese shoe industry has suffered badly. In the case of the Philippines, a recent paper by Joseph Francia and Errol Ramos of the Free Trade Alliance claims that the local shoe industry, along with the vegetable industry, has also been hit badly by smuggling of Chinese goods. Indeed the range of goods negatively affected is broad, including steel, paper, cement, petrochemicals, plastics, and ceramic tiles.Many Philippine companies, even those that are competitive globally, had to close shop or reduce production and employment, due to smuggling, they write. It is owing to massive smuggling that few analysts take seriously official trade figures with China released by the Chinese Embassy in Manila that show the Philippines enjoying a positive trade balance in non-agricultural goods. As for agriculture, they say that the $373 million deficit with China is actually much worse once smuggling is taken into account. Now there are fears that Cafta will simply legalize smuggling and worsen the already negative effects of Chinese imports on Asean industry and agriculture. The Thai Early Harvest Debacle Many analysts point to the results of CAFTA's "early harvest agreement" betwen China and Asean as indicative of what awaits Asean producers. Under the agreement, Thailand and China agreed that tariffs on more than 200 items of vegetables and fruits would be immediately eliminated. Thailand would export tropical fruits to China while winter fruits from China would be eligible for the zero-tariff deal. The expectations of mutual benefit evaporated after a few months, however, with most Thai commentaries admitting that Thailand got a bad deal. As one assessment put it, "despite the limited scope of the Thailand-China early harvest agreement, it has had an appreciable impact in the sectors covered. The "appreciable impact" has been to wipe out northern Thai roducers of garlic and red onions and to cripple the sale of temperate fruit and vegetables from the Royal projects." Thai newspapers pointed to officials in Southern China refusing to bring down tariffs as stipulated in the agreement while the Thai government brought down the barriers to Chinese products. Resentment at the results of the China-Thai "early harvest" agreement among Thai fruit and vegetable growers was, in fact, one of the factors that contributed to widespread disillusionment with the broader free trade agenda of the Thaksin government; and opposition to free trade was a prominent feature of the popular mobilizations that culminated in the ouster of that regime in September 2006 by a military coup. The Thai early harvest experience, in fact, created consternation not just in Thailand but throughout Southeast Asia. It stoked fears of Asean becoming a dumping ground for China's extremely competitive industrial and agricultural sectors, which could drive down prices owing to cheap urban labor that was continually replenished by dirt cheap labor streaming from the countryside. These fears at the grassroots have, however, fallen on deaf ears as Asean governments have been extremely reluctant to displease Beijing.


The Chinese View For Chinese officials, the benefits to China of an FTA with Asean are clear. The aim of the strategy, according to Chinese economist Angang Hu, is to more fully integrate China into the global economy as the "center of the world's manufacturing industry." A central part of the plan was to open up Asean markets to Chinese manufactured products. In light of growing popularity of protectionist sentiments in the US and European Union, Southeast Asia, which absorbs only around 8 percent of China's exports, is seen as an important market with tremendous potential to absorb more Chinese goods. Chinas trade strategy is described by Hu as a "half open model," that is, "open or free trade on the export side and protectionism on the import side." Asean: A Net Beneficiary? Despite brave words from President Arroyo and other Asean leaders, it is much less clear how Asean will benefit from the Asean-China relationship. Certainly, the benefits will not come in labor-intensive manufacturing, where China enjoys an unbeatable edge by the constant downward pressure on wages exerted by migrants from a seemingly inexhaustible rural work force that makes an average of $285 a year. Certainly not in high tech, since even the US and Japan are scared of China's remarkable ability to move very quickly into high tech industries even as it consolidates its edge in laborintensive production. Will agriculture in Asean be a net beneficiary? But, as the early harvest experience with the Philippines and Thailand has shown, China is clearly super-competitive in a vast array of agricultural products from temperate crops to semi-tropical produce, and in agricultural processing. Vietnam and Thailand might be able to hold their own in rice production, Indonesia and Vietnam in coffee, and the Philippines in coconut and coconut products, but there may not be many more products to add to the list. Moreover, even if under Cafta, Asean were to gain or retain competitiveness in some areas of manufacturing, agricultture, and services, it is highly doubtful that China will depart from what Hu calls its half open model of international trade. The Thai early harvest experience underlines the effectiveness of administrative obstacles that can act as non-tariff barriers in China. What about raw materials? Yes, of course, Indonesia and Malaysia have oil that is in scarce supply in China, and Malaysia does have rubber and tin and the Philippines has palm oil and metals. But a second look makes one wonder if the relationship with China is not reproducing the old colonial division of labor, whereby low-value-added natural resources and agricultural products were shipped to the center while the Southeast Asian economies absorbed high-value added manufactures from Europe and the United States. The Cafta-Afta Double Blow For the Philippines, in particular, Cafta will add to the erosion of manufacturing and agriculture triggered by its hasty incorporation into the ASEANs free trade scheme, AFTACEPT (ASEAN Free Trade Area Common Effective Preferential Tariffs Arrangement). The country has consistently charted agricultural trade deficits with ASEAN, and as early as the first quarter of 2009, the countrys negative agricultural trade balance with Asean already reached US $ 410.15 million. In terms of total trade, imports from Asean in 2008, valued at US $ 21.47 billion, far exceeded the countrys total value of exports in the same year of US $ 7.09 billion.

These trends are likely to accelerate under Cafta, but with a difference: China will beat out the countrys Asean neighbors in achieving control of the domestic market. Conclusion To sum up, despite the official propaganda, the China-Asean trade agreement that came into effect on Jan. 1, 2010, is likely to disadvantage Asean. Even with the temporary exemptions of certain from full trade liberalization, Asean would be locked into a process where the only direction that barriers to super-competitive Chinese industrial and agricultural goods will be downwards. Being one of Aseans weaker economies, the Philippines has already seen itself driven into a massive deficit in its relations with other Asean countries under the Asean-Cept free trade scheme. Cafta is likely to accelerate this negative trend, but with China, instead of the Philippines Asean neighbors, being the eventual winner.


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