ASEAN-China Free Trade Area: Not a Zero-Sum Game
2010/01/12

1 January 2010 did not only usher in a brand new year but at the same time also rang in a new economic space that would have major ramifications for millions of people in Asia. The date marked the full implementation of the ASEAN-China Free Trade Area – the world’s third largest free-trade area.

China is a key trading partner of ASEAN – the third largest – and is responsible for 11.3% of total ASEAN trade in 2008 or US$ 192.6 billion. And the statistics clearly show the economic clout of the FTA: a combined GDP of US$ 6.6 trillion, 1.9 billion people and total trade of US$ 4.3 trillion.

Trade between the parties is an impressive 13.3% of global trade or half of the total trade of Asia in 2008. In addition, the two regions attracted a combined 10% global FDI or US$ 167.3 of foreign direct investment in 2008.

The FTA aims to bring the countries together in a mutually dependent and beneficial relationship in an increasingly borderless global environment. “It signifies the beginning of a deeper dimension in ASEAN-China trade relations,” said the Secretary-General of ASEAN. The establishment of the full ASEAN-China FTA also comes at an opportune time to boost regional recovery from the global economic crisis. China’s phenomenal growth has positive effects on ASEAN’s own expansion.

“China’s economic growth and strong investment expansion is energising the region and is providing ASEAN with an expanding diversified market in an environment of slowing growth in its traditional partners,” said Dr Surin, noting that the completed FTA also gives ASEAN a strong edge in terms of lower tariffs, more open services opportunities and investment expansion.

Dr Surin was responding to queries from the regional media on the apprehension raised by the private sector in Indonesia which fear that the entry of cheaper Chinese products would undermine domestic manufacturing. Indonesian industries had recently submitted a request to delay the implementation of tariff reductions on some 228 items including iron and steel, textiles, machinery, electronics, chemicals and furniture. The Indonesian Government has formed a team which also involves the private sector to examine these concerns.

Refuting claims that the FTA would be detrimental to ASEAN, Dr Surin said ASEAN has the capacity to be the supply chain for China’s booming economy which has been very much propelled by the gradual trade liberalisation under the ASEAN-China FTA. “The landscape of trade between ASEAN and China has changed in the last decade due also to fall in tariffs,” he said. Records show that trade between ASEAN and China grew by an average of 26% per annum between 2003 and 2008, mainly in electrical and electronic products, fuel and fuel products, plastics, rubber and vegetable oils. Electrical and electronic products accounted for more than one-third of ASEAN exports to China while machinery and equipment is close to one-fifth of the total.

In addition, the FTA positions ASEAN to take advantage of the next phase of China’s growth, as its expanding middle-class consumption trends are expected to predicate the next wave of economic expansion. “ASEAN needs to organise and prepare itself in terms of a stable and hospitable investment climate, a well-trained work-force and improved logistics to take advantage of the new investment prospects arising from this next wave of China’s expansion,’ said Dr Surin.

Although it is generally acknowledged that certain industries will face competitive pressures in the transition of the FTA, overall, the benefits from the growing trade between ASEAN and China would be translated into more jobs, more spending power and greater synergies between the two regions.

“Greater governmental efforts may need to be expended to strengthen the capacity of domestic firms to compete but this should be short-term and does not remove the incentive to innovate and cut costs,” Dr Surin cautioned. There are also built-in mechanisms in the FTA such as safeguard actions in the face of serious injury to domestic industries, he noted. The FTA has also been implemented gradually and products which are located in the sensitive lists are only slated for later liberalisation.

The FTA momentum will also provide greater encouragement for greater Chinese investment into ASEAN, particularly in transport and infrastructure. China recently launched a US$ 10 billion infrastructure investment fund to improve road, railway, airlines and information telecommunications links between China and ASEAN. China is providing a US$ 15 billion credit facility to promote regional integration and regional connectivity. With China’s global investment strategy just beginning to take off, and judging from the US$ 52.1 billion in FDI outflows from China in 2008, there would be more investments along the value chain in ASEAN.

There are adjustment pains but weighing in the gains, this FTA is necessary to ASEAN to learn to handle the competitive pressures so as to be able to survive in an increasingly more difficult global economic environment.

“If history is to judge this FTA, it is the capacity to add greater value to all parties’ economic development that will weigh in its favour,” Dr Surin said.

(Source: Website of the ASEAN Secretariat)

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