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Will the FTA between China and ASEAN region benefit China more?

Will the FTA between China and ASEAN region benefit China more?

14-Sep-10
Under the China-Asean Free Trade Area (CAFTA) that came into effect on the first day of 2010, trade between China and six ASEAN countries including Brunei, Indonesia, Malaysia, the Philippines, Thailand and Singapore has become duty-free for more than 7,000 products. A zero-tariff rate is applied to 91.5% of goods from 10 Asean member countries and the average tariff was reduced by China from 9.8% to 0.1%. The six original ASEAN members have also imposed a zero tariff on 90% of Chinese products. The four newer ASEAN members (Cambodia, Laos, Burma and Vietnam) will not have to cut tariffs on Chinese goods to the same levels until 2015 given their current stage of economic development, though they can still enjoy the benefits of a zero-tariff policy with China for the five years before that. This is publicized as the world�s largest Free Trade Area as it covers 1.7 million consumers with a combined gross domestic product of US$2 trillion and total trade of US$1.3 trillion. By 2015, the newer ASEAN countries- Vietnam, Laos, Cambodia and Myanmar, will join the zero-tariff arrangement.
China undoubtedly has been a major driving force in Asia. The other Asian countries enjoyed the benefit of China�s growth so far because China provided an opportunity for the export of raw materials from these countries. In 2003-2004, demand from the fast growing Chinese economy was a key factor in the growth witnessed in Southeast Asia. This robust growth followed a period of low growth post-Asian financial crisis of 1997-1998, and was a major driver of growth in most economies in the region. China�s imports exceeded its exports that was supplied by its� Asian counterparts. The ASEAN economies are banking on a repeat in history in the ongoing economic crisis as China continues to march ahead with GDP growth rate of 8-9%. However, this seems unlikely as the economic scenario has seen a drastic change in this decade. The prevalent low wages in China have encouraged a relocation of manufacturing from SE Asian countries to China. The supply of cheap labour in China seems unending because of an inexhaustible stream of migrants from the rural areas. The low labour cost of China makes export of end products more competitive and economical compared to cost of production almost anywhere in the world. Devaluation of the Chinese yuan in 1994 has diverted some foreign direct investment (FDI) away from Southeast Asian countries. FDI in ASEAN shrank from 30% to 10% in 2000 of all FDI in developing Asia, and continues to decline. China has benefited after the devaluation due to lower cost as compared to the US dollar. China refuses to make the Yuan freely traded. Rampant smuggling of goods from China has disrupted practically all ASEAN economies. The CAFTA may end up legalizing smuggling and lead to deterioration of the damage already caused by Chinese imports on ASEAN industry and agriculture. The aim of CAFTA, 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% 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." China is highly competitive in a spectrum of agricultural products from temperate crops to semi-tropical produce, agricultural processing. Though China is dependent on the ASEAN countries for its raw materials, it in turn will be in a position to dump the cheaply produced high-value added products on the ASEAN countries.
The first noticed effect has been a substantial increase in bilateral trade between China and ASEAN countries, as per BangkokPost. In H1-2010, bilateral trade reached US$136.5 bln, a year-on-year increase of 55%. Chinese imports from ASEAN touched US$71.9 bln, a 64% increase from the same period last year, while exports to ASEAN were at US$64.6 bln, a 45% increase compared with last year. Import growth exceeded export growth substantially, with a Chinese deficit of US$7.3 bln. CAFTA has helped reduce companies' tariff payments by lowering mutual tariff levels. China eliminated US$900 mln worth of tariffs on imported goods from ASEAN in 2009, and cut US$770 mln further for H1-2010, a year-on-year increase of tariff reductions of 98%. China has seen a sharp increase in imports of plastic goods, electronics, rubber products and fruits and vegetables from ASEAN. Bilateral investment increased: ASEAN investments in China rose from US$2.93 bln in 2003 to US$4.68 bln in 2009, while China's investments in ASEAN expanded from US$230 mln to US$3 bln. By the end of June 2010, accumulative mutual investment stood at $69.4 billion, with $59.8 billion invested from ASEAN and US$9.6 billion invested from China. Overall, the CAFTA has been successful in enhancing bilateral trade and economic relations. However, given the short period of time the CAFTA has been in effect and the lack of public promotion, many enterprises in the region are still unfamiliar with the preferential policies under the CAFTA and unable to make better use of it. Additionally, the benefits of the CAFTA are also limited by insufficient connectivity and inefficient transport and logistics systems between China and ASEAN nations. A concerted effort is needed for the governments and enterprises from both China and ASEAN countries to ensure the CAFTA plays a bigger role in strengthening bilateral trade and economic co-operation.
 
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