China-ASEAN FTA Changes ASEAN s Perspective on China

China-ASEAN FTA Changes ASEAN s Perspective on China WANG Yuzhu and Sarah Y TONG* China s initiation of a free trade agreement with ASEAN was primarily politically driven to ease rising concerns of a China threat in Southeast Asia. Before China s WTO accession, concerns were rising among ASEAN members of strong competition from China in both export and attracting foreign investment. While it was a sensible move to allay such apprehension, the China-initiated FTA also gave China a political advantage to become a more important force in the region. THE CHINA-PROPOSED FREE Trade Agreement (FTA) with ASEAN (Association of Southeast Asian nations) countries 10 years ago was mainly a political decision. Responding to ASEAN countries concerns over the possible adverse impacts of China s World Trade Organization (WTO) access, Premier Zhu Rongji proposed a * WANG Yuzhu is Associate Professor of the Institute of Asia-Pacific Studies, Chinese Academy of Social Sciences. Sarah Y TONG is Research Fellow at East Asian Institute, National University of Singapore. east asian policy 47

China-ASEAN FTA, which was accepted readily by ASEAN leaders. Expert groups were subsequently set up to conduct feasibility studies, which mostly yielded supportive results. The FTA proposal involved two parallel considerations on the part of Premier Zhu. On the one hand, it was to dispel the growing concerns among ASEAN nations of a China threat. As a regional power, China s rapid rise naturally caused uneasiness among its neighbours, who were uncertain about China s intentions. Economically, such sentiment rose from the fear that, as a WTO member, China would become an even stronger competitor for ASEAN s export to third markets as well as for ASEAN s efforts to attract foreign direct investment (FDI). As the first FTA of its kind in Asia, the FTA initiative between China and ASEAN gave China a diplomatic advantage. Soon afterwards, Japan, worried that China might dominate the region, was compelled to follow suit. 48 east asian policy Such fear was especially rampant among Southeast Asian countries hard hit by the 1997 financial crisis which resulted in a drastic decline in FDI inflow. Indeed, most ASEAN nations and China are similar in their development levels and economic structures. Thus China presents significant challenges to countries like Indonesia that relies on exports of labour-intensive products. For Chinese leaders, economic integration with ASEAN through free trade arrangement seemed a favourable option to alleviating such anxieties. On the other hand, the China ASEAN Free Trade Agreement (CAFTA) initiation was also a useful tool to reinforce domestic support for China s WTO accession. In fact, China s bid to join the WTO was not totally free of domestic resistance. Some argued that some industries as well as the agriculture sector would suffer from intense import competition. Forming a bilateral trade arrangement with ASEAN offered a good alternative to reduce domestic concerns. For Premier Zhu, who strongly advocated China s WTO accession, CAFTA appeals to both domestic and external audiences. Even though the CAFTA initiation was based mainly on political calculations, economic interests were also important from the very beginning. Chinese leaders were fully aware that ASEAN, a large potential market with 500 million people and rich in various natural resources, could play a crucial role in China s long-run growth. Somewhat surprisingly, this reactive decision has proved to be quite successful, both diplomatically and economically. As the first FTA of its kind in Asia, the FTA initiative between China and ASEAN gave China a diplomatic advantage. Soon afterwards, Japan, worried that China might dominate the region, was compelled to follow suit. This was welcomed by ASEAN as it enhanced ASEAN s international eminence. Following the CAFTA initiation, bilateral trade picks up speed quickly (Table 1).

Between 2001 and 2008, bilateral trade between China and ASEAN grew by about 28% a year in nominal terms, from US$42 billion to US$231 billion, significantly faster than that of China s total trade. The rapid growth in China-ASEAN trade was partly attributed to the FTA and had far outpaced some estimates. It is interesting to note that bilateral trade between China and ASEAN was US$213 billion, a decline of eight percent in 2009 from 2008, considerably smaller than a decline of 14% in China s total trade. However, CAFTA has also drawn some concerns. For example, with the implementation of the Early Harvest Programme (EHP), certain sectors of some ASEAN countries were negatively impacted due to strong competition from Chinese products. Thailand, whose garlic planters in the northern part felt huge competition pressure from cheaper Chinese garlic, had expressed grave concerns. The Philippines, due to internal pressure, was hesitant to take part in the EHP, and had only joined in 2007 with a very short list of tariff lines. This reminded the Chinese leaders of the need to generate more concrete gains for ASEAN members. In the subsequent years after the signing of the FTA in 2002, China s import from ASEAN grew much faster than China s export to ASEAN; China s trade deficit with ASEAN climbed from US$4.8 billion in 2001 to more than US$20 billion in 2004. Since the mid-2000s, China s trade relations with ASEAN have remained robust and relatively stable. Currently, export to ASEAN constitutes about eight percent of China s total export, while around 10% of China s import comes from ASEAN. TABLE 1 CHINA- ASEAN TRADE, 2001-2008 China s Exports to ASEAN China s Imports from ASEAN Share in Share in Amount China s total Amount China s total export import China s trade with ASEAN China s trade balance with ASEAN 2001 18.4 6.9 23.2 9.5 41.6-4.8 2002 23.6 7.2 31.2 10.6 54.8-7.6 2003 30.9 7.1 47.3 11.5 78.3-16.4 2004 42.9 7.2 62.9 11.2 105.9-20.1 2005 55.4 7.3 75.1 11.4 130.4-19.6 2006 71.3 7.4 89.5 11.3 160.8-18.2 2007 94.2 7.7 108.4 11.3 202.6-14.2 2008 114.1 8.0 116.9 10.3 231.1-2.8 2009 106.3 8.8 106.7 10.6 213.0-0.4 Source: The Ministry of Commerce, P.R.C. east asian policy 49

From Economic Interdependence to a FTA Strategy The emphasis of China s external economic relations has gradually shifted from building economic interdependence to formulating FTAs. One sign of such a change is that China s leaders began setting targets for China-ASEAN trade. The successor of Premier Zhu, Wen Jiabao, is more focussed on the building of CAFTA. Encouraged by the favourable development and optimism of CAFTA s future, Premier Wen set US$100 billion and US$200 billion as the bilateral trade targets for 2005 and 2010, respectively. Both were achieved well in advance. In 2004, China s former vice-minister of foreign affairs, Wang Yi, also projected that China-ASEAN trade would eventually make up a quarter of China s total foreign trade. Chinese leaders believe that deeper bilateral Satisfied with the successful experience with ASEAN, China was encouraged to extend the approach to its engagement with other countries and regions, an approach which may be termed a FTA Strategy. 50 east asian policy economic relations will not only generate direct economic benefits to both, but more importantly have far-reaching positive impact on China- ASEAN relations. It is natural for China, a rising economic power, to build positive reputation and foster influence among its close neighbours through a mutually beneficial cooperation. By focussing on economic cooperation, especially bilateral trade, the Chinese government believes that useful economic interdependence can be developed. By encouraging more export from ASEAN to China under the FTA, bilateral trade and the trade imbalance that favours ASEAN will reach a point where ASEAN s heavy dependence on Chinese market might provide China with more leverage in the bilateral relationship. At the same time, the mutually beneficial cooperation would also encourage a friendly atmosphere for both sides to discuss certain sensitive issues, such as the South China Sea and bilateral territorial disputes. Inspired by such thinking, the China-ASEAN expo was launched to provide an additional forum to further deepen the bilateral relationship. However, good China-ASEAN relation is conditioned on stable China-US relations. Any changes in China-US relations and the subsequent attitude changes in ASEAN towards a rising China would induce a Chinese policy adjustment towards ASEAN. With deepening economic interdependence, bilateral trust between China and ASEAN has been built up steadily with CAFTA contributing significantly to such a positive change. Satisfied with the successful experience with ASEAN, China was encouraged to extend the approach to its engagement with other countries and regions, an approach which may be termed a FTA Strategy. The FTA Strategy was launched in 2007, according to a high ranking official from the Ministry of Commerce. Since then, or even before that, China has signed bilateral FTAs or made similar arrangements with nine countries or regions. Currently, another

five bilateral FTAs are under negotiation, while feasibility studies for FTAs with India and Korea are ongoing (Table 2). These efforts to formulate FTAs were aimed at promoting bilateral economic cooperation while cultivating a friendly international environment for a smooth and peaceful development of China. CAFTA to Promote Economic Integration The 2008 crisis diverted the leaders attention away from promoting further interdependence. In fact, global economic imbalances were highlighted as a cause of the crisis, where export-oriented economies were held responsible. In particular, China, TABLE 2 CHINA S FTA INITIATIVES WITH REGIONAL PARTNERS Initiative Year Signed Partners CEPA Signed in 2005 Hong Kong, China CEPA Signed in 2005 Macao, China ASEAN-China FTA Framework agreement, signed ASEAN (10 in 2002; Early harvest program, members 2005;Trade in goods, 2005; Trade in services, 2007; Investment, 2009 China-Pakistan FTA Signed in 2006 Pakistan China-Chile FTA Signed in 2005 Chile China New Zealand FTA Signed in 2008 New Zealand China-Singapore FTA Signed in 2008 Singapore China-Peru FTA Signed in 2008 Peru China-Costa Rica FTA Signed in 2010 Costa Rica China GCC Framework agreement in 2004, Gulf Cooperation under negotiation Council (five members) China Australia FTA Negotiation from 2005 Australia China Iceland FTA Negotiation from 2006 Iceland China-Norway FTA Negotiation from 2006 Norway China SACU FTA Study from 2005 South African Customs Union (five members) China ROK FTA Feasibility Study from 2006 Republic of Korea China Indian FTA Feasibility Study from 2005 India Source: Ministry of Commerce of the People s Republic of China, www.mofcom.gov.cn Note: China-Singapore FTA and China-Peru FTA were not included in this survey since the interviews were done before they were signed. east asian policy 51

due to its huge trade surplus with the United States, has been under mounting pressure to help rebalance the world economy. From China s viewpoint, the blame on China for the global imbalance was another way of expressing the China threat conviction of some in the West. In response, China called upon the US to rethink and rebalance its over-borrowing habits. At the same time, the sharp decline of the world economy and the resultant slowing down of China s economic growth is an alarming reminder to the leadership. They realised that China cannot sustain smooth growth if it continues to be overly dependent on export to TABLE 3 CHINA S TRADE WITH ITS MAJOR TRADING PARTNERS, 2009 (Billion US$ and %) Ranking 1 2 3 4 5 6 7 Trade partners EU USA Japan ASEAN Hong Kong Korea Taiwan Total Bilateral trade 364 298 229 213 175 156 106 2207 Growth over 2008-14.5-14.9-14.2-7.9-14.1-16 -17.8-13.9 Share in China s total trade 16.5 13.5 10.4 9.7 7.9 7.1 4.8 100.0 Source: The Ministry of Commerce, PRC. the Western markets. Table 3 shows that EU, US and Japan remain China s top trading partners. The economic crisis may also lead to a new wave of protectionism in advanced economies, such as the United States and European Union, where China would be the main target. Indeed, several measures have already been proposed or implemented in the US to curb import from China for products such as tyres and steel pipes. As a result, a shift in China s trade composition to diversify China s export markets has become even more pressing. The importance of CAFTA has thus become more prominent. The low utilisation rate of CAFTA s preferential arrangements has prompted the Chinese government to assign a research group to examine the reasons and make recommendations to how enterprises can benefit more from CAFTA. The objective is to further increase China-ASEAN trade. In a recent study on the effectiveness of CAFTA commissioned by China s Ministry of Commerce, it is found that only one fourth of China s enterprises involved in trade with ASEAN took advantage of CAFTA s preferential arrangement using Form-E under the CAFTA rule of origin. The main reasons include a lack of the basic knowledge about CAFTA, the high cost in the Form-E application and the low utilisation rates by their trading partners. In recent years, there has also been more emphasis on trade in services and crossborder bilateral direct investment, with the recent inclusion of both under CAFTA. With the opening of the service sectors, further economic integration may be expected. For direct investment, ASEAN s investment to China is likely to continue its 52 east asian policy

dominance, while China s direct investment in ASEAN in all likelihood will remain quite small. In the future, bilateral investment is expected to grow strongly. First, China s overall outward FDI has grown rapidly in recent years. As shown in Figure 1, China s total outward FDI in 2008 reached US$56 billion, nearly doubling its amount for 2007. China s direct investment in ASEAN also experienced rapid growth. According Chinese statistics, China s direct investment in ASEAN was about US$2.2 billion in 2008, more than twice the cumulated amount by 2000. The recently signed Agreement on Investment under CAFTA, which guarantees national treatment, is expected to propel further growth in bilateral FDI. Generally speaking, the global economic crisis has led China to view CAFTA in a more positive light, which is beneficial to China s interests as it is important to diversify China s trade relations and to counter its over-dependence on export to advanced economies. FIGURE 1 CHINA S FDI OUTFLOW, 2000-2009 Source: China Statistical Yearbook, various years, and Ministry of Commerce for 2009 website. Note: Figure for 2009 is non-financial FDI only. What Next? China and ASEAN have just celebrated the fulfilment of CAFTA. In contrast to the festive atmosphere in Nanning, there have been concerns and complaints about import competition from China by several ASEAN members since late 2009. For example, Indonesian Industry Minister Fahami Idris said that Indonesia is not ready for CAFTA because Indonesian products cannot compete with Chinese products according to Jakarta Global. This suggests that despite CAFTA s positive impact on the two regions economies, certain sectors will suffer in the short run. east asian policy 53

This is also true of some Chinese sectors. On the part of the Chinese leadership, there are several important considerations if CAFTA is to be successful. First, to rebalance the global economy means that China needs to diversify its trade relations so as to reduce its heavy dependency on the western market. According to China s Customs Statistics, export to the United States and European Union accounted for 38% of China s total export in 2009. As China s fourth largest trade partner, ASEAN naturally receives greater attention in this effort. Chinese leaders have appraised the China-ASEAN cooperation during the past 20 years highly and hoped that CAFTA can serve as a model for China s bilateral relations with other countries and regions. Second and perhaps more important, as a rising power, China wishes to maintain stable, harmonious and friendly relations with its neighbouring countries. To this end, China will continue to work with ASEAN. As a mutually beneficial arrangement, CAFTA could be a useful institutional framework for the two sides to deepen their overall relationship. Third, an emerging strategy of Shaping Neighbouring Relations also highlights the importance of CAFTA. To improve China s soft power among neighbouring countries, this strategy, like the Peaceful Rise pledge and Building a Harmonious World concept, will most probably be experimented first in Southeast Asia. In practice, China would focus on improving the mechanisms of the already signed agreements under the CAFTA. At present, there is still much work to be done to increase the utilisation of the various agreements, in trade in goods and services, and in cross border direct investment. Institutions may need to be adjusted and rules harmonised. Businesses also need time to learn about the new opportunities and to familiarise themselves with the new arrangements. The proposed Economic Community between China and ASEAN after the CAFTA seems a little farfetched from China s viewpoint as various CAFTA agreements are still in their infancy. New proposals will be considered but the focus is still on more urgent matters like improving the implementation of CAFTA. 54 east asian policy