Sunday, January 3, 2010
World's Third Largest Free-Trade Zone Takes Full Effect Between ASEAN and China
A free-trade agreement between China and 10 member states of the Association of Southeast Asian Nations (ASEAN) will come into force on 1 January 2010, liberalising trade and investment in an economic zone covering 1.9 billion people.
China and South-East Asian countries will tomorrow establish the world's third largest free-trade area, after the European Union (EU) and the North American Free Trade Area (NAFTA). Coming into effect, the ASEAN-China Free Trade Agreement (ACFTA) is set to cover 1.9 billion consumers and an estimated trade volume of US$1.2 trillion, with a combined GDP of US$6 trillion.
The FTA is a key milestone for Asian regional integration, heralding a more open market for goods and services in the region. While zero tariffs for 90% of the agreed products, and the removal of 6,682 import duties on Chinese goods, offer great business opportunities for some, not all are enthusiastic. The ACFTA raises economic and political concerns in South-East Asia over China's increasing dominance.
The ACFTA is likely to provide a major boost to regional trade and investment following a year of sharp economic slowdown. Given the similarity of ASEAN and China's industrial structures, competition in domestic markets will increase, however, provoking fears particularly in those less economically developed ASEAN countries. For China, the ACFTA offers great prospects of being able to sate its enormous hunger for natural resources.
New Year's Day 2010 marks the establishment of the world's third largest free-trade area between China and the ten member states of the Association of Southeast Asian Nations (ASEAN). Under the ASEAN-China Free Trade Agreement (ACFTA)—signed in 2002—China, Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand will eliminate barriers to investment and enforce zero tariffs for 90% of the agreed products, ranging from textiles to steel and vegetable oils. This will require the average tariff rates charged by ASEAN countries on Chinese products—currently at 12.8%—to be cut to 0.6%, while average tariffs imposed by China on ASEAN goods are set to fall from 9.8% to 0.1%. The late participants to ASEAN—namely, Cambodia, Laos, Myanmar, and Vietnam—will follow behind gradually reducing tariffs and totally eliminating them by 2015.
The new free-trade zone will have an estimated trade volume of US$1.2 trillion and a combined GDP of US$6 trillion. It will cover 1.9 billion consumers—more than any other regional economic block. Clearly, this marks a huge milestone for Asian regional integration, traditionally less advanced in comparison with Europe and the Americas, as the region has played "catch up" in recent years. Although the realisation of ACFTA brings huge opportunities for both China and ASEAN, it also raises concerns over China's increasing economic and political domination in South-East Asia.
China's Expanding Economy—Driving Force Behind Integration
The rise of China in economic and political terms has been the most important development in pushing Asian integration further. The ACFTA framework agreement was signed in 2002 and was the first stand-alone free-trade agreement signed by China. The agreement followed China's joining of the WTO and its decision to start pursuing a regional trade policy that led to the initiation of negotiations on free trade with the ASEAN bloc. Evidently, from China's point of view, the ACFTA will help in securing access to South-East Asia's abundant natural resources. Despite the economic downturn, China's economy is expanding and it needs resources to satisfy its hunger for energy. Closer trade relations with South-East Asian countries also provide China greater control over the crucial nexus between the Indian and Pacific Oceans. There is also the opportunity to strengthen political ties within a region that has traditionally been under strong Japanese influence.
ASEAN Opportunities and Fears
The ACFTA is set to determine regional co-operation and trade relations in 2010. What ASEAN seeks through the ACFTA is to gain greater market access for exports and the ability to attract more foreign direct investment (FDI). "In 2010 we are sending as a strong signal that ASEAN is open", Sundram Pushpanathan, of ASEAN, told Agence France-Presse yesterday, indicating that the pact is set to offer huge benefits for ASEAN economic growth, too. In particular, as U.S. and European demand for ASEAN exports plummets following the global economic crisis, China's growing economic interaction will generally be very welcome.
Given the huge economic and development disparities within ASEAN, the impact of the free-trade regime will, however, be felt differently across the region. Under the ACFTA Early Harvest programme, China granted ASEAN economies very beneficial terms to export more competitive agricultural products to China, bringing benefits to grassroots-level farmers in South-East Asia. However, as soon as the clock strikes midnight tonight, small- and medium-sized farmers and enterprises throughout ASEAN will face a harsh reality—they will need to compete with more price-competitive imports from China. Rising fears and subsequent social tensions have already been evident in some countries. Earlier this month, the Indonesian government came under mounting pressure from the country's domestic industries to delay full implementation of the ACFTA. A number of business associations proposed a temporary exemption of 11 additional industries from the FTA. The proposed exemption list included textiles, footwear, steel and iron, food and beverages, plastic, transportation, tools, electronics, forestry and plantations, the downstream chemical industry, the creative industries, and machinery. While the government opted not to take an eleventh hour appeal further, it has agreed to seek a delay in eliminating import tariffs on over 300 goods that are deemed too "fragile" to compete with cheaper Chinese imports. Indonesia is still "committed to the [agreement]… but we will ask for a tariff modification on 303 products whose competitiveness we consider has declined because of the global economic crisis", said Edy Putra Irawadi, Deputy Minister for Industry and Trade at the Co-ordinating Ministry for the Economy.
Outlook and Implications
Even though ACFTA's final realisation comes after years of gradual implementation, it is still a landmark event, promising great opportunities for traders and investors and raising the region's status in the international trade arena. No doubt there will be challenges too. What the ACFTA does not mean, however, is that China-ASEAN integration is complete. Instead, it will provide further impetus for deeper economic co-operation between the two entities. Further progress is expected to be made across the board, including laws and regulations on the free-trade area; construction of infrastructure facilities; agriculture and rural co-operation; sustainable development; and cultural and social exchanges.
Although bilateral trade between China and ASEAN has already exploded over the past decade, the most eagerly awaited advancements that the ACFTA is expected to bring are in the fields of greater trade and investment volumes. China and the ASEAN bloc are already each other's fourth largest trading partners, and trade volumes have been growing from US$105.88 billion in 2004, to US$202.5 billion in 2007. This is nevertheless likely to increase significantly now, with ASEAN's secretary expecting exports to China to grow by 48%, while China's exports to ASEAN will increase by 55.1%. Integrated markets and lower market risk and uncertainty are also expected to generate more foreign investment into ASEAN countries, not just from China, but also from U.S., European, and Japanese companies. In addition to this positive impetus, there will be increasing competition which will likely decrease the enthusiasm for integration among the general public in those involve countries, for example particularly in Indonesia. All in all, the realisation of ACFTA represents a turning point in the Asian economic and political sphere, and is another indication of China assuming a leading role in the South-East Asian region, where it looks set to stay.