How Asean can fully benefit from trade pact with China

Shandre Mugan Thangavelu
The Straits Times/ANN

THE China-Asean Free Trade Area (Cafta) is one of the world’s largest FTAs, with a combined gross domestic product of US$6.6 trillion (S$9.3 trillion), 1.9 billion people and a total trade of US$4.3 trillion.

Its Framework Agreement was signed in November 2002. The Trade in Goods Agreement was concluded in November 2004 and entered into force in July 2005. And the Trade in Services Agreement was signed in January 2007 and entered into force in July 2007. This year, the full implementation of zero tariffs for most goods in the FTA is expected for China and the Asean 6 - Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. Cambodia, Laos, Myanmar and Vietnam will do the same in 2015.

Cafta’s key benefit for Asean is the access it provides to China’s market. In 2008, China accounted for nearly 12 per cent of Asean’s total exports and 10 per cent of its total imports. Some see Cafta as a potential platform for the creation of a larger free trade area, consisting of Asean+3 (China, Japan and South Korea) or Asean+6 (China, India, Japan, South Korea, Australia and New Zealand).

However, the potential benefits of Cafta for Asean are still not very clear. The Chinese economy is a low-cost production base, endowed with a large pool of unskilled workers. It has also recently emerged as an important source of foreign direct investments overseas.

There could be short-term displacements in labour-intensive industries such as textile, garment, footwear and toy manufacturing in Asean, as well as in large capital-intensive industries such as steel and machinery serving domestic markets in Asean. The short-term impact might be more significant for small and medium-sized enterprises (SMEs) in the region. In particular, the competitive impact of Chinese exports of machinery and equipment is expected to affect SMEs in more advanced Asean countries, such as Singapore, Malaysia and Thailand. Overall, the impact of Chinese exports will probably be more significant in Cambodia, Laos, Myanmar and Vietnam, as well as in emerging countries like Indonesia and the Philippines, which are still dominated by labour-intensive industries.

Furthermore, Cafta could diminish the importance of the Asean Free Trade Area and perhaps delay the formation of the Asean Economic Community (AEC). The dominance of the Chinese market might shift the focus away from Asean, even within the region. But despite the short- term adjustment costs of Cafta, the potential gains for Asean and China in the medium and long term are significant. To fully benefit from Cafta, however, Asean needs to address several key issues.

First, Asean needs to maintain the momentum for the formation of the AEC. The integration of Asean into an economic community consisting of a ‘single market and production base’ will be crucial if Cafta is to evolve into a larger free trade grouping encompassing more countries.

Second, there are large disparities among Asean countries and greater focus should be directed towards reducing income disparities within the region. In particular, Asean could focus on capacity building in Cambodia, Laos, Myanmar and Vietnam, and develop stronger infrastructure to facilitate trade.