ASEAN -China Free Trade Area:

An opportunity to Move Forward

Dr. Mohd Fuad Mohd Salleh

Faculty of Business
UNISEL

Abstract

The ASEAN–China Free Trade Area (ACFTA) is believed to improve the economic
ties between China and ASEAN countries. With constant trade growth of 20%
between those regions over the past 15 years, it is expected to grow constantly,
helped by the large population of 580 million in ASEAN countries and over one
billion in China. Rapid economic growth in China will have greater impact on the
overall economic growth in the ASEAN countries. Eventually, besides all positive
impact on the China side, and all believes and projection of the ties, ASEAN
countries will be at the losing side when the liberalization of economy take effect.
Philippines will be the most effected country and has started to experience the
heat.

Introduction

The ASEAN –China Free Trade Area (ACFTA), also known as China–ASEAN 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 realized on 1 January 2010 (Jakarta
Globe. Bloomberg, 2010; Fiona, 2009). The ASEAN –China 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).

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 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.
The average tariff rate on Chinese goods sold in ASEAN countries decreased from 2.8
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 China Economy an Opportunity to ASEAN’s Trade Growth?

China’s 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 exporter in the world when it exports
have grown from US$62.1 billion in 1990 to US$969 billion in 2009. ASEAN -China trade has
grown at average of 15% annually with the total trade was US$237 billion in 2009. China’s
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. ASEAN -China’s 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 China’s extreme economic power raises great concern to members of
ASEAN.
Kalish (2005) and Cui’s (2006) statement certainly indicated that China’s 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 China’s and ASEAN’s
production sector and exports, the impressive expansion of China’s 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. ASEAN’s 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 China’s rapid economic growth and
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expansion is welcomed by most members of ASEAN , the growing Chinese economy (power)
has produced a positive impact on ASEAN 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 labor 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.
Furthermore, 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. China’s
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 agro-processing 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).
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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" between 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
producers 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’s 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.

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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.
China’s 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 labor-
intensive 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, agriculture, 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 ASEAN’s free trade scheme, AFTA-CEPT
(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 country’s negative agricultural trade balance with ASEAN
already reached US $ 410.15 million. In terms of total trade, imports from ASEAN in 2008,

5 | CHINA-AFTA 2013
valued at US $ 21.47 billion, far exceeded the country’s 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 country’s 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 ASEAN ’s 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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