China-ASEAN FTA sets stage for broader economic integration

17:02, December 28, 2009      

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A free trade agreement (FTA) between China and the bloc of ten Southeast Asian countries, the first of its kind, will serve as a stepping stone for the diverse Asian community to further integrate and might give birth to a broader multilateralized trading pact across the region, said a senior economist of the Philippines-based Asian Development Bank.

"There is a lot of expectation of this FTA," Jayant Menon, principal economist of ADB's Office of Regional Economic Integration, told Xinhua in an interview on the eve of the establishment of the China-ASEAN (the Association of Southeast Asian Nations) free trade area on Jan. 1, 2010.

"Big bang" effects can't be expected because China and the ASEAN have come a long way in the past eight years and they are quite open economies already, Menon said.

"But this FTA can be seen as a stepping-stone towards a broader agreement, and eventually, hopefully, a multilateralized trading arrangement whereby the achievements are offered to non-members in a non-discriminate manner," he added.

Menon said other regional economic powers such as Japan, South Korea and the United States are expected to join once this FTA expands.

The China-ASEAN free trade area covered a population of 1.9 billion and a combined gross domestic product close to 6 trillion U.S. dollars. It is the world's largest trading bloc in terms of population covered and the third largest in terms of trading volume.

Trade between China and ASEAN countries have picked up rapidly in the past decade. Official statistics indicated that trade between China and the ASEAN bloc expanded to a total worth of 231.1 billion U.S. dollars in 2008, from 19.5 billion U.S. dollars in 1995. Trade has especially doubled in the past four years.

Agreements on the trade of goods and services and a pact to encourage inter-regional investment have been separately signed. The slash of duties has begun since 2005 and more than 7,000 trading items covered by the agreements will be tariff-free products by Jan. 1, 2010.

But Menon said more substantial changes would come from investment liberalization.

"The real benefits would come from investment more so than trade," he said. "If negotiators can complete the investment agreement rather quickly and make it clean, open agreements, there could be quite significant benefits. We could improve the investment inflow from outside as well as within the region."

Menon said China now is already a big investor in the region and there is a lot of room for allocation of investments in the region to facilitate the type of product fragmentation network trade that has already taken place.

PAINS, GAINS

Menon said people can't expect profits coming from this FTA too soon and actually in the short run, there might a little bit of pain of adjustment costs for some countries joining the FTA and there will also be some resistance.

The economist cited the recent example of Indonesian industries proposing the government to delay the implementation of the FTA, a move to protect the country's fragile textile, farming, steel sectors.

The Jakarta Post reported that Indonesian Textile Association has proposed a postponement for 94 textile and garment products being included in the zero-tariff products covered by the China-ASEAN FTA.

But Menon said gains will come in the long run and for instance a lot of farming communities could benefit by specializing in different commodities and doing two-way trade of commodities within agriculture. He said such gains have shown in the mutually beneficial farm trade between China and Thailand covered by the free trade agreement.

EU-STYLE BLOC STILL A LONG SHOT

Menon said it might take at least three generations before an integrated Asia moving close to a European Union style economic union.

"With the EU, we must always remind ourselves that it takes a long time for them to reach the point that they have arrived at today," Menon said. "In some senses, there are tendencies for them to eventually integrate because they have so much in common and there are so many economic forces pushing them together."

"But the situation in Asia is quite different and as there is too much diversity to easily form a sort of deep integration agreement like an economic union," he added.

Countries like Indonesia and Singapore and China are totally different economies in terms of population basis, economic structures, Menon said, adding that for example, labor mobility an important ingredient to any sort of economic union -- is a complicated issue in Asia and it is very hard to see it been addressed in any time soon.

He said moving towards the EU-style arrangement also has to do with the competitiveness of member countries. And unlike the EU where complementarities exist, Asian countries have similar capital and labor prices and it would take a long time for this to be changed.

Menon said that explains why the trade of intermediate goods, rather than final goods, dominates China-ASEAN trade despite the sharp increase in figures over the past few years.

An ADB study shows that 60 percent of the manufactured goods in the region eventually entered the Western market and China's role as an assembling hub for the region's goods has not changed.

Menon said as ASEAN countries developed and as China gets richer, there is still enough room for the increase of regional demand to sustain some of the growth, but substantive changes won't take place too soon. He said China can not move up the product value chain overnight to manufacturing hi-tech final goods that will meet the region's demands.

"We can't be too impatient about this type of integration process. It takes a very long time," Menon said.

Source: Xinhua
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