Free Trade Area Still Faces a Rocky Road Ahead: Analysis

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Last updated at: (Beijing Time) Sunday, April 07, 2002

Free Trade Area Still Faces a Rocky Road Ahead: Analysis

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The establishment of the world's largest free trade area (FTA) - encompassing China and the Association of Southeast Asian Nations (ASEAN) - has the potential to produce a wealth of benefits, but faces a rocky road ahead.

Yet the mutual interests between the two sides will overcome the difficulties looming before the proposed ASEAN-China FTA, said Zhang Yunling, director of the Institute of Asia and Pacific Studies under the Chinese Academy of Social Sciences (CASS).

The comment by Zhang, chair of a China-ASEAN expert group to compile a FTA feasibility report for Chinese and ASEAN leaders, comes in the midst of the China- ASEAN Forum, a closed-door meeting starting in Kunming in Southwest China's Yunnan Province Monday, which is believed to be an important preliminary work for the formal negotiation.

The meeting took place only four months after Premier Zhu Rongji and the ASEAN leaders reached an agreement in Brunei last November to realize the ASEAN-China FTA before 2010.

Detailed contents of the talk are still unavailable, but Zhang said that the initial meeting should be aimed at discussing the approach for fulfilling the free trade area proposal and determining the timetable for formal negotiations.

Long Yongtu, vice-minister of foreign trade, said last week in Beijing that the formal negotiation would be launched after September when China-ASEAN economic ministers meeting was held.

"For such a significant and complicated issue, the negotiation process has been quick enough," said Zhang during an exclusive interview with Business Weekly.

The work to propel the FTA is speeded up by the tremendous mutual interests. In 2001, trade volume between China and ASEAN countries totalled US$41.6 billion, rising 5 per cent over the previous year despite the worldwide economic recession.

Highly reliant on exports, ASEAN countries view China's 1.3 billion population and its fast developing economy as one of the most important markets in the world.

Last year, ASEAN members exported commodities worth US$23.2 billion to China, representing a growth of 4.7 per cent over the previous year and resulting in a trade surplus of US$4.8 billion.

China, eager to ease its neighbours' worries on the country's strengthening economic power, is eyeing ASEAN countries for both their markets and supplies of raw materials, especially oil. Last week, during Indonesian President Megawati Sukarnoputri's visit to China, the two countries witnessed five deals signed, including one for a partnership between PetroChina and Indonesia's State oil firm Pertamina.

By 2010, average duty within the ASEAN-China FTA, if realized, will vary between zero and 5 per cent, and internal trade and investment barriers will be eliminated. The free trade area will then possess 40 per cent of the world's foreign exchange reserves and more than US$2 trillion in gross domestic product, 10 per cent of the world's total.

The political implications of the ASEAN-China FTA should not be overlooked, said Wang Shouye, a senior international relations researcher with the CASS. Closer economic ties with China could alleviate pressures some ASEAN countries are feeling from the United States to extend the anti-terrorism war into ASEAN, which is strongly opposed by ASEAN's Muslim population.

Despite the trade surplus and political advantages ASEAN members enjoy, however, many of them still complain that a rising China has attracted a large pool of foreign investment which previously would have poured into their countries.

"The free trade area between China and ASEAN is just an efficient way of solving the problem," said Zhang. With the establishment of the free trade area, the problem becomes how to rationally allot investments within one region, thus greatly easing the pressure of foreign investment outflow from ASEAN countries.

As China's economy strengthens, Chinese investors will also invest in ASEAN countries more freely.

Though still modest in absolute term, Chinese investment is growing at a rapid pace. In 2000, the Chinese Government approved US$108 million in new investment to the ASEAN region, a 50 per cent jump from 1999, and actual Chinese investment totals are certainly higher as many Chinese companies try to circumvent official foreign currency controls by investing through offshore entities.

While the free trade area will grant ASEAN a breather from foreign investment outflow, China will have to forgo some of the foreign investment it desires for its poorer inland regions.

"Within the free trade area, some ASEAN members, such as Viet Nam, Laos and Cambodia, have cheaper labour costs than China to lure foreign investment. Richer countries like Malaysia could also attract some foreign money away from China," said Zhang.

The free trade area would force China to further reform its regulation and goods circulation system so that it could compete with other members within the area, he added.

Besides foreign investment outflow, challenges of the ASEAN-China FTA for China still lie ahead. ASEAN members may request greater concessions on the Chinese side because they worry the huge economic power of China will threaten them, though this issue might not be raised in the ongoing forum, Zhang said.

Qin Haiqing, a senior economist with the State Information Centre, told Business Weekly in an earlier interview that the varying economic conditions of ASEAN members will also challenge China. If China gives those poorer ASEAN members, such as Cambodia and Laos, greater concessions, it will face a difficult decision of whether or not to extend such rights to richer countries like Singapore and Malaysia.

But Zhang said the mechanism of the ASEAN-China FTA has been designed to follow the free trade area model within ASEAN, to be finished by 2008.

"Because of the wide economic and political gap among ASEAN countries, they have set different processes and requirements on advancing the ASEAN FTA," Zhang said. "In this aspect, China could have an example from which to learn and take an adaptive and flexible method to reach the free trade goal."

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