Goh Sui Noi
The Straits Times
The China-Asean Free Trade Area (Cafta), which kicked in at the start of this year, has been greeted with little enthusiasm in the region.
A Philippine Daily Inquirer story, headlined 'The China-Asean Free Trade Area: Propaganda and reality', contended that contrary to the positive spin by the country's leaders, 'most of the advantages will probably flow to China'.
A Jakarta Post analysis urged Indonesian companies to 'face the music' and take on the challenge of competition from China. The most telling headline was in Beijing's China Daily: 'China allays fears of Asean nations over Cafta'.
A little bit of history will help to explain why there is some angst in Asean regarding the trade pact, which at first glance should be welcomed by the grouping for it opens up the huge Chinese market to Asean.
The FTA was first mooted in 2000 by then Chinese premier Zhu Rongji, mostly to assuage anxiety in Asean about China, particularly after its accession to the World Trade Organisation in 2001. Thus, the pact was borne out of the fear of one side being overwhelmed by the other, rather than great expectations of what the 'union' would bring.
A framework agreement was signed in 2002 and some 'early harvests' were agreed to, essentially to provide some products from Asean with early access to the Chinese market. But the experience was not altogether positive.
Thailand, in particular, had a bitter experience. In 2005, tariffs for 200 items of vegetables and fruits were abolished. Thailand expected to export tropical fruit to China and import winter fruit from it at zero tariff. But what happened was that Thai farmers of garlic, longan and other fruit and vegetables were decimated by cheap Chinese imports. Worse, Chinese officials reportedly either refused to lower tariffs on Thai imports or left the Thai produce to rot in warehouses.
The Thai experience fanned fears that Asean would become the dumping ground for cheap Chinese agricultural and manufactured products. And that fear is not unfounded.
Already, smuggling of cheap Chinese shoes into Viet Nam has done damage to the shoe industry there. In Indonesia, cheap imports of clothes, toys and electronic goods, often through smuggling, have hurt local manufacturers of such products. What would happen when the floodgates to cheap Chinese products are thrown wide open? It is no wonder that Indonesia has asked for a two-year delay in tariff reductions for 228 items.
The trade and foreign direct investment (FDI) figures are not encouraging either. Since 2004, tariffs between the two sides have been coming down, and Asean's trade deficit with China has widened. From 2000 to 2008, China-Asean trade grew sixfold to US$198 billion (S$280 billion). But Asean's trade deficit also widened five times to US$21.6 billion. Asean's cumulative FDI in China was US$52 billion in 2008. By comparison, China's FDI in Asean was just US$2.8 billion.
Beijing won a great deal of goodwill during the 1997-98 Asian financial crisis when it did not devalue the yuan, a move that would have deepened the crisis. But its refusal to revalue the yuan in the current global financial crisis, thus causing currencies in the region to appreciate against the yuan, has cast doubt as to whether China is sincere about its desire to develop a balanced trading relationship with its Asean neighbours.
It is not surprising thus that some Asean countries view Cafta with trepidation. But the situation is not altogether dire. Though Cafta does pose some short-term disadvantages to Asean, it can address some of the imbalances in the China-Asean economic relationship.
The FTA will not only lower tariffs but also simplify administrative procedures, such as Customs and investment licensing, and help facilitate the regional supply chain production network. Cheaper raw and intermediate goods from China will help some manufacturing sectors in the Philippines, Thailand and Indonesia. And despite the earlier Thailand debacle, Asean countries, including Thailand, are hoping to sell more agricultural products to China.
The pact should attract Chinese and other foreign investors to the region, with an eye on not only the Asean market but also the Chinese market. For example, Haier is planning to export two models of refrigerators from its Thai factory to China. Cambodia could see an inflow of investments from Chinese garment makers.
For Asean manufacturers whose products overlap those made in China, competition from the Asian giant is not necessarily a bad thing. While some factories will close, the more dynamic manufacturers should be spurred by the competition to improve their efficiency.
Still, if the Chinese hope to allay the fears of Asean, they should do more to assure that bilateral trade and investment flows are not skewed in their favour. If Beijing cannot reassure Asean that the grouping has little to fear from it economically, how can it begin to address fears over its intentions in issues such as the territorial disputes it has with various countries in the region?
A Philippine Daily Inquirer story, headlined 'The China-Asean Free Trade Area: Propaganda and reality', contended that contrary to the positive spin by the country's leaders, 'most of the advantages will probably flow to China'.
A Jakarta Post analysis urged Indonesian companies to 'face the music' and take on the challenge of competition from China. The most telling headline was in Beijing's China Daily: 'China allays fears of Asean nations over Cafta'.
A little bit of history will help to explain why there is some angst in Asean regarding the trade pact, which at first glance should be welcomed by the grouping for it opens up the huge Chinese market to Asean.
The FTA was first mooted in 2000 by then Chinese premier Zhu Rongji, mostly to assuage anxiety in Asean about China, particularly after its accession to the World Trade Organisation in 2001. Thus, the pact was borne out of the fear of one side being overwhelmed by the other, rather than great expectations of what the 'union' would bring.
A framework agreement was signed in 2002 and some 'early harvests' were agreed to, essentially to provide some products from Asean with early access to the Chinese market. But the experience was not altogether positive.
Thailand, in particular, had a bitter experience. In 2005, tariffs for 200 items of vegetables and fruits were abolished. Thailand expected to export tropical fruit to China and import winter fruit from it at zero tariff. But what happened was that Thai farmers of garlic, longan and other fruit and vegetables were decimated by cheap Chinese imports. Worse, Chinese officials reportedly either refused to lower tariffs on Thai imports or left the Thai produce to rot in warehouses.
The Thai experience fanned fears that Asean would become the dumping ground for cheap Chinese agricultural and manufactured products. And that fear is not unfounded.
Already, smuggling of cheap Chinese shoes into Viet Nam has done damage to the shoe industry there. In Indonesia, cheap imports of clothes, toys and electronic goods, often through smuggling, have hurt local manufacturers of such products. What would happen when the floodgates to cheap Chinese products are thrown wide open? It is no wonder that Indonesia has asked for a two-year delay in tariff reductions for 228 items.
The trade and foreign direct investment (FDI) figures are not encouraging either. Since 2004, tariffs between the two sides have been coming down, and Asean's trade deficit with China has widened. From 2000 to 2008, China-Asean trade grew sixfold to US$198 billion (S$280 billion). But Asean's trade deficit also widened five times to US$21.6 billion. Asean's cumulative FDI in China was US$52 billion in 2008. By comparison, China's FDI in Asean was just US$2.8 billion.
Beijing won a great deal of goodwill during the 1997-98 Asian financial crisis when it did not devalue the yuan, a move that would have deepened the crisis. But its refusal to revalue the yuan in the current global financial crisis, thus causing currencies in the region to appreciate against the yuan, has cast doubt as to whether China is sincere about its desire to develop a balanced trading relationship with its Asean neighbours.
It is not surprising thus that some Asean countries view Cafta with trepidation. But the situation is not altogether dire. Though Cafta does pose some short-term disadvantages to Asean, it can address some of the imbalances in the China-Asean economic relationship.
The FTA will not only lower tariffs but also simplify administrative procedures, such as Customs and investment licensing, and help facilitate the regional supply chain production network. Cheaper raw and intermediate goods from China will help some manufacturing sectors in the Philippines, Thailand and Indonesia. And despite the earlier Thailand debacle, Asean countries, including Thailand, are hoping to sell more agricultural products to China.
The pact should attract Chinese and other foreign investors to the region, with an eye on not only the Asean market but also the Chinese market. For example, Haier is planning to export two models of refrigerators from its Thai factory to China. Cambodia could see an inflow of investments from Chinese garment makers.
For Asean manufacturers whose products overlap those made in China, competition from the Asian giant is not necessarily a bad thing. While some factories will close, the more dynamic manufacturers should be spurred by the competition to improve their efficiency.
Still, if the Chinese hope to allay the fears of Asean, they should do more to assure that bilateral trade and investment flows are not skewed in their favour. If Beijing cannot reassure Asean that the grouping has little to fear from it economically, how can it begin to address fears over its intentions in issues such as the territorial disputes it has with various countries in the region?
