ASEAN-China FTA: Boon for whom?
By Marwaan Macan-Markar

BANGKOK - Southeast Asian nations have little to fear from a free-trade agreement (FTA) they expect to ink with China early next month because of the potential profits to be made from such a deal, experts say.

While some of the initial fears held by Southeast Asian countries are valid - such as losing out on certain export sectors to China - what cannot be ignored are markets where the economies can complement each other. The 10 member countries of the Association of Southeast Asian Nations (ASEAN) have an advantage over China with respect to their services sector. China, according to experts, is woefully lacking in a skilled service sector as it opens up to free trade and embraces capitalism.

"The establishment of the ASEAN-China Free Trade Area will be beneficial to both parties, probably at the expense of those non-member third countries," said Li Wei, Deputy Director at the Chinese Academy of International Trade and Economic Cooperation. "ASEAN and China are important trade partners for each other."

Trade between the two has been growing at a steady pace despite the global economic slowdown, added Li, who spoke at a two-day seminar held here last week on ASEAN's future with China. "This means trade volume between ASEAN and China is likely to exceed US$50 billion for the first time, obviously reflecting the basis and potential for future cooperation," he said.

"People talk of China as the biggest factory in the world. This is true," said Edward Chen Kwan-yiu, president of the Hong Kong-based Lingnan University. But Chinese and ASEAN exports "are more complementary than perceived" and not all are "in direct competition". If you cannot beat China, the university president asked, then ASEAN needs to "work with [China] and grow with it", a fact made easier by China wanting to maintain "amicable relations with ASEAN".

But the experts who spoke at the seminar that ended on Friday drew attention to the challenges that ASEAN countries face in their efforts to forge a new economic relationship with China. ASEAN would have to be prepared to "deal with the 'exposure' to the influx of cheaper Chinese manufacturers," said Sarasin Virapol, executive vice president of Charoen Pokphand Group, one of Thailand's leading companies with business links in China.

Export sectors in ASEAN that will be affected range from the labor-intensive garment industry, and toys and sporting-goods manufacturers, to high-tech fields such as information-technology hardware, computers and electronic items. "The greatest potential for displacement will be in apparel after the phase out of the restrictive quotas of the multifiber agreement in 2005," said Nicholas Lardy, a senior fellow at the Brookings Institution, a Washington-based think-tank.

The FTA that the 10 ASEAN countries will sign at ASEAN's meeting on November 4-5 in Phnom Penh aims to create a free-trade area to supply its combined population of 1.7 billion people. The creation of this FTA, the world's largest, will also mean a combined gross domestic product (GDP) of $2 trillion and a two-way trade of $1.23 trillion annually. "The FTA will also increase ASEAN's GDP by 0.9 percent or by 5.4 billion dollars while China's real GDP expands by 0.3 percent or by 2.2 billion dollars in absolute terms," said Li.

This trade partnership will also make the countries involved less dependent on other markets, such as Japan, Europe and the United States, Li said. "Currently, ASEAN accounts for only 8.3 percent of China's export, while China accounts for a mere 3.9 percent of ASEAN's. But the three major markets accounted for 52 percent and 50 percent of China and ASEAN's export, respectively."

Even in regards to foreign direct investment (FDI), an area where ASEAN has taken a beating due to China's rise, the experts were optimistic. The FTA offers ASEAN "a unique opportunity to tap the China market particularly with the support of third-country FDI", said Sarasin.

Lardy said China is attracting FDI at a record pace, with the FDI total for this year expected to be over $450 billion, "making China the site of more foreign direct investment than any other country". Southeast Asia, by contrast, is expected to draw only $12 billion by the end of this year.

China's willingness to push ahead with these plans is a significant departure from its historical stance toward Southeast Asia, said Sheng Lijun, senior fellow at Singapore's Institute of Southeast Asian Studies. "This is the first time in the thousand years of Chinese history that China has ever found a point of common interest to engage all the Southeast Asian countries constructively and exclusively. This can be read as another form of political confidence-building for both."

Also not lost on some of the speakers was how the FTA with China has enabled ASEAN to regain relevance as a regional grouping after its confidence was shattered by the 1997 financial crisis. "China's offer of the FTA that takes ASEAN as one single identity, but not divide it, is exactly what ASEAN needs at this critical moment of its survival crisis," said Sheng.

If ASEAN does not opt for this FTA, it will "lag further behind and will soon find [itself] being marginalized, and ending up in a great disadvantage", Sheng said.

(Inter Press Service)