Talking Point

Little fanfare, big promise

New trade bloc points to China’s growing regional ambitions

Little fanfare, big promise

APEC’s about the outfits. With ASEAN, China’s focusing on free trade

Batik shirts were worn in Indonesia and silky ao dai in Vietnam. They buttoned up barongs in Manila, posed in ponchos in Chile and even donned Drizabones in Sydney.

Granted: the meetings of the Asia-Pacific Economic Cooperation (APEC) forum may not have resulted in much in trade terms in recent years. But at least the sight of the 21 leaders, gritting their teeth through the annual humiliation of a closing photo in the host country’s national costume, has always been worth a few laughs.

However, the inauguration last week of a new free trade pact between China and the 10 countries of the Association of Southeast Asian Nations (ASEAN) is not about sartorial giggles.

Commentators are talking about a new challenger to APEC; and WiC is willing to bet that costumes and canapés aren’t high priorities on its immediate agenda.

A new free trade area – and the world’s largest?

Certainly in population terms, at 1.9 billion consumers.

The eleven markets still have some catching up to do on the EU or NAFTA in terms of aggregate GDP (which is around a third of their trade bloc peers on 2008 data).

But members of the new bloc – the ASEAN China Free Trade Area (ACFTA) – will be expecting to close some of that gap, and quickly. China, Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand all began to enforce tariff cuts for 90% of an agreed range of products, ranging from textiles to steel and vegetable oils. Average tariffs charged by ASEAN countries on Chinese products – recently as high as 12.8% – are reduced to 0.6%. Those imposed by China on ASEAN goods are set to fall from 9.8% to 0.1%.

The more recent members of ASEAN—namely, Cambodia, Laos, Myanmar and Vietnam— are being given longer to adjust tariffs downwards but are expected to have eliminated them entirely by 2015.

Why now?

ACFTA has been in the planning since 2001, when a free trade arrangement was proposed by then Chinese Premier Zhu Rongji. The initial framework agreement was signed a year later.

The formal launch of the full deal marks a logical extension of a surge in regional commerce. Trade volumes between China and ASEAN have grown from $78 billion in 2003 to $231 billion in 2009, at an average annual growth rate of 24%, according to China’s Ministry of Commerce.

Wider commercial contact has allowed for an overcoming of traditional suspicions. ASEAN came about in the late 1960s, at least in part as a response to the perceived threat of China-inspired communist insurgency. Many of its members were slow to offer Beijing full diplomatic recognition.

But the chance to sell commodities to China’s industrial machine – and to pitch products to its burgeoning consumer markets – has seen a softening of attitudes.

Some say it’s a ploy to sideline US influence…

Since 1989, APEC’s mission has been to bring countries with a coastline on the Pacific Ocean together, and the US initially played a prominent role.

But ACFTA has a more limited geographical scope, with a focus on Asia rather than the Pacific, and more specifically on Chinese economic integration with the southeast of the continent. That means some analysts see the new deal as a Chinese strategic move, designed to outflank American influence.

But the reality is that APEC has been losing steam since 1998. US pretensions to leadership have waned with it. After all, Washington’s foreign policy has focused more on the Middle East; and its previously gilt-edged reputation for economic leadership was left in tatters after the 2008 financial crisis. Asia took note.

Nonetheless, Andy Xie, writing in Caijing magazine, sees ACFTA as more of a reactive move than a strategic masterstroke. He says that whenever global trade gets into trouble, Asian countries talk about regional cooperation as an alternative growth driver.

But he thinks too that the talk might amount to something more concrete than normal, as global trade may not bounce back like it has done before. Something new is needed to kick-start the Asian export model.

So a lot is expected of the new grouping?

“In 2010 we are sending a strong signal that ASEAN is open,” Sundram Pushpanathan, ASEAN deputy secretary general, told AFP last week. He hopes for an annual boost to exports to China of 48%, with China’s exports to ASEAN increasing by 55.1%.

That looks optimistic. There will also be winners and losers under the deal. As a general rule, ASEAN commodity exporters are happier than their colleagues in manufacturing, who fear reinvigorated Chinese competition. So it’s better news for a country like Malaysia – which exports palm oil, rubber and natural gas to Chinese customers – than for Vietnam, which focuses more on production of cheap consumer goods.

Indonesian manufacturers are deeply concerned and have raised the spectre of 7.5 million job losses in pleading for exemption status for industries including textiles, footwear, steel and iron, plastics, tools, electronics and forestry. The Indonesian government has already submitted a request for tariff modifications on more than 200 goods regarded as “too fragile” to compete with Chinese imports

Some Chinese companies will be hit too, notes Song Hong at the Chinese Academy of Social Sciences in Beijing.

He says local farmers – like tropical fruit producers in the southern provinces of Guangxi and Yunnan – could be undercut by imports from Thailand, Malaysia and Vietnam.

Could it be a first step to a wider trade deal?

Interestingly, the deal has been a key factor in spurring Taiwan to negotiate its own trade pact with China. This should be ratified later this year.

The optimists have been whispering about an East Asian trading area – of an “ASEAN plus 6” bloc (with the six being Australia, Japan, South Korea, China, New Zealand and India). Japan’s prime minister, Yukio Hatoyama, has even broached the idea of an East Asian Community “to promote cooperation among Asian countries”.

But others question whether Beijing is ready to open up to deeper competition from more developed South Korea and Japan. In this context, its fondness for the ASEAN deal is shaped as much by the junior nature of many of its new partners.

Likewise there are many who believe that – despite frustrations with the US – many Asian countries remain keen on keeping America around, as a counterpoint to Chinese dominance.

And read the ACFTA small print…

As ever, the devil is in the detail. The Financial Times highlights that countries can register hundreds of sensitive goods on which tariffs will still apply, for products as varied as electronic equipment, toilet paper and popcorn. Back in China, the 21CN Business Herald reports that many of the concessions are bound up in complex ‘rules-of-origin’ requirements that will incur compliance costs. Many Chinese exporters have not grasped the benefits of zero tariff status and some are quibbling over spending a few extra renminbi on the certification process.

Razeen Sally, a director at the European Centre for International Political Economy in Brussels, is far more capable of seeing the bigger picture. He warns in the Wall Street Journal that there are greater obstacles to freer trade than tariffs alone. Policymakers will need to tackle restrictions like controls on foreign direct investment, discriminatory government procurement procedures, trade-restricting product standards and general red tape. Until then it is “cloud nine politics” to expect comprehensive trade deals in the foreseeable future.

Still, with many predicting that 2010 will see a flaring up of trade disputes with the EU and the US, China might have picked the right moment to cultivate more cordial commercial ties closer to home.

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