Is China Going to Be the Bigger Beneficiary from the Preferential Trade Agreement? ASEAN Competitiveness in a Free Trade Area with China

Is China Going to Be the Bigger Beneficiary from the Preferential Trade Agreement? ASEAN Competitiveness in a Free Trade Area with China
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    Is China Going to Be the Bigger Beneficiary from the Preferential Trade Agreement?  ASEAN Competitiveness in a Free Trade Area  with China by Dr. Roberto B. Raymundo     Yuchengco Center    2 Is China Going to Be the Bigger Beneficiary from the Preferential Trade Agreement?  ASEAN Competitiveness in a Free Trade Area with China by Dr. Roberto B. Raymundo  Associate Professor Economics Department De La Salle University Manila Introduction Promoting the growth of export-oriented industries, which have a distinct comparative advantage in either highly skilled, low-cost labor or technologically sophisticated, large-scale capital intensive manufacturing, has been a major strategy proven to be effective in terms of achieving sustained economic growth, reducing unemployment, raising per capita incomes, improving living standards, and reducing poverty. The highly industrialized economies of East Asia such as Japan, South Korea, Taiwan, Hong Kong, and Singapore have substantially increased their respective per capita incomes during the past three decades and achieved higher living standards through strong export growth in the production of high value-added goods  —  ranging from footwear and apparel to electronic devices and electrical equipment to automotive and industrial machinery manufacturing. China, for example, had accomplished so much with its export-oriented strategy, achieving an average economic growth rate of 9.9 percent, a projected per capita income of $6,000 by the end of 2013, and had removed 600 million people out of poverty (Lin, 2012). In 1980, the World Bank (WB) estimated China’s poverty incidence to be at 73.5 percent and after 28 years, had significantly reduced this to 7.4 percent (  ibid   ). China and the other emerging economies in the Association of Southeast  Asian Nations (ASEAN) have also generated robust economic growth using a combination of export-oriented strategies supported by foreign direct investments  which were responsible for improving their respective manufacturing capabilities. Foreign direct investment, which was designed to create global production networks, has facilitated technology transfers alongside the development of an international division of labor where emerging economies served as export platforms because of their lower cost skilled labor, cheaper land and less restrictive business regulations and tax laws. China, in particular, has attracted an enormous amount of foreign direct investments specifically from multinational corporations that are intent on earning huge profits by tapping the 1.3 billion Chinese domestic market, alongside the use of low-cost labor, cheaper land, and less restrictive business regulations to produce exports destined for the rest of the global market. The emerging economies   Is China Going to Be the Bigger Beneficiary from the Preferential Trade Agreement?  ASEAN Competitiveness in a Free Trade Area with China 3 in the ASEAN region have also attracted a substantial amount of foreign direct investment from the United States, the European Union, Japan and the other highly industrialized nations, and this involved countries like Thailand, Malaysia, the Philippines, and Indonesia as integral components of the global production network for electronics, electrical equipment, personal computers, automotives and industrial machinery, and equipment. However, export-led growth is not only supported by the appropriate foreign direct investment that will transfer technology and create the productive capacity for competitive goods, but just as importantly, by the ability to access foreign markets through the establishment of multilateral, bilateral, or regional preferential trade agreements. Exports from Japan, South Korea, Taiwan, Hong Kong, and Singapore  which were sold in the European Union, the United States, and the rest of the global market benefitted immensely from tariff reductions under the multilateral trade agreements covered by the World Trade Organization (WTO). China was accepted as a member of the WTO in December 2001 and since then has become the largest exporter in the global economy, taking ten percent of total world exports, overtaking Germany in 2009. Exporters from ASEAN have also benefitted from tariff reductions and increased market access as members of the WTO. However, during the past few years, additional trade concessions to further increase market access had been limited considering the weak bargaining position of individual ASEAN countries. In  view of the complex nature of WTO negotiations involving a large number of highly diverse countries with conflicting interests, the slow and tedious process of finalizing  WTO agreements to further reduce trade restrictions on various product lines and services, and the weak bargaining position of smaller economies, the Southeast  Asian countries found it necessary to establish the ASEAN Free Trade Area (AFTA) agreement in January, 1992. The agreement is designed to strengthen trade and consequently, attract more investments into the region as Southeast Asia becomes one large market with tariff rates reduced to zero to five percent by 2010 and finally to zero percent by 2015 under the Common Effective Preferential Tariff (CEPT) scheme. Although trade among ASEAN member countries is not as integrated as those of the member countries in the European Union, intra-ASEAN trade has continued to increase since the inception of AFTA in 1992. ASEAN member countries such as Singapore, Thailand, Malaysia, the Philippines, and Indonesia experienced moderate to rapid economic growth prior to the 1997 Asian financial crisis, and upon their recovery at that start of the new millennium, continued to show modest economic growth up to 2008  —  the United States financial crisis and the consequent global economic slowdown. Economic growth in the ASEAN region could have been slower after 2008. However, China’s rapid economic growth, its fiscal stimulus program, the increase in imports from ASEAN, and the refusal to   Yuchengco Center    4 devalue its currency mitigated the effects of the global economic slowdown. In 2011, ASEAN gross domestic product (GDP) was estimated at $1.8 trillion. The regional economy had an average annual growth rate of 5 percent and the 9 th  largest economy in the world. This regional bloc was the 5 th  largest trading partner of the United States, right behind Canada, Mexico, China, and Japan with over $203 billion worth of total trade (ASEAN Secretariat, 2012).  The ASEAN-China Free Trade Agreement  Attempts to further improve the competitiveness of the East Asian region and exploit the advantages of having a large consolidated market led to the formation of the ASEAN-China Free Trade Area (ACFTA) agreement which was established in January 1, 2010. The agreement is expected to enhance regional economic growth and greater cooperation and integration through more liberal trade and investment as well as infrastructure and institutional development among its member countries. The agreement stipulates the schedule for tariff reduction that  will promote trade, provide greater market access for member countries, encourage more intra regional and extra regional foreign direct investment, and facilitate the transfer of technology to improve the competitiveness of industries in ASEAN. As cross border trade and investment increase, the wealth gap between the developing member countries should be further reduced, living standards increased, and poverty gradually eradicated.  The first seven months of 2010 saw China’s exports to ASEAN increase by 43.2 percent while ASEAN’s exports to China grew by 56.1 percent compared to the same period in the previous year (Yang and Heng, 2010). The ACFTA is the 3 rd  largest trading bloc next to the European Union (EU) and the North American Free  Trade Area (NAFTA) in terms of regional gross domestic product (  ibid   ).  The process to finalize this agreement actually began in 2002 when both representatives from ASEAN and China signed the Framework Agreement on Comprehensive Economic Cooperation which effectively set the elements and basis for negotiations on tariff reductions that would be undertaken from January 2005 to 2010 (for the ASEAN 6 and China), and January 2005 to 2015 (for the newer  ASEAN member states: Cambodia, Lao PDR, Myanmar, and Vietnam). At present, close to 90 percent (or roughly 7,000 items) of the trade in goods are subject to tariff rates which are close to zero, in particular, with the ASEAN goods entering China enjoying tariff rates at 0.1 percent, from a previous high of 9.8 percent, with Chinese goods entering the ASEAN-6 members being subject to 0.6 percent tariff rates (from an average tariff rate of 9.4 percent in 2000). By 2015, the policy of zero tariff rates on 90 percent of traded goods is expected to apply between China and the remaining four ASEAN (CLMV) member countries (Ministry of Trade and Commerce in China, 2012, Yang and Heng, loc. cit). Total ASEAN and China trade   Is China Going to Be the Bigger Beneficiary from the Preferential Trade Agreement?  ASEAN Competitiveness in a Free Trade Area with China 5 has enjoyed robust growth after the signing of the Framework Agreement on Comprehensive Economic Cooperation increasing from $54.78 billion in 2002 to $292.8 billion in 2010 (UN Comtrade Database, 2012).  The consolidated market of ASEAN and China is enormous and will definitely serve as an incentive for exporters to mass produce goods and take advantage of economies of scale. The reduction of tariff rates and the implementation of more liberal investment policies will result in a larger integrated market, promote specialization and trade based on the member countries comparative advantage and allow the exploitation of economies of scale which will lower average costs and increase economic efficiency. These conditions will also attract more directly productive investment from member countries in the free trade area as well as those outside the region. The combined population of all the ASEAN member countries at roughly 600 million, alongside the 1.3 billion population of China, creates a consolidated market for the ACFTA made up of 1.9 billion people. China and ASEAN together cover a total land area of 14 million square kilometers and have a combined gross domestic product (GDP) at $6 trillion (Xu, 2010).  The promotion of more trade and investment between ASEAN and China through tariff reduction alongside liberal policies on foreign direct investment will reduce transaction costs and encourage more business ventures into exports and expansion of productive capacity through greater expenditures on plant, property, and equipment. This should allow firms to maximize the opportunities offered by the large consolidated market, generating growth, higher income, and more employment. Production is expected to be efficient, as firms mass produce for the larger combined market, and this will reduce average costs. An international division and specialization of labor will develop as member countries in the free trade area focus on the production of goods where comparative advantages exist. These may be in the form of highly-skilled lower-cost labor or some other factor endowment involving cheaper land, lower-cost capital, abundance of minerals, or technological superiority in manufacturing. In addition, the risk of experiencing a foreign currency crisis will be reduced  with more trade and investment concentrated in both ASEAN and China. Reducing dependence on the United States, the European Union, and Japan as export markets and focusing more on increasing demand coming from ASEAN and China will cushion the impact of the projected recession occurring in the European Union, and the difficult and slow recovery in both Japan and the United States. Reduced trade dependence on these three major economies also implies lesser demand for their imports, lesser need for their currencies and their credit facilities and lesser outstanding foreign debts which decreases the risk of default and substantially reduces the threat of a foreign currency crisis.
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