For firmer ASEAN-China ties

China and the Association of Southeast Asian Nations (ASEAN) are celebrating the 20th anniversary of their dialogue partnership. The relationship progressed from consultative dialogue partners in 1991 to full dialogue partners in 1996, then on to a strategic partner in 2003 and finally to an ASEAN-China Free Trade Area (ACFTA) last year.

ASEAN member states often view China both as a threat and source of hope. While the sense of hope comes from the size of the big market and China's ability to drive regional growth, the threat concept arises from China's skill to flood ASEAN as well as third country/region markets (the United States, the European Union and Japan) with low-priced products.

There are also concerns that China's growing competitiveness and the domestic market of more than 1.3 billion people will attract more overseas direct investment, leaving behind the ASEAN economies. But in the last 20 years, in many instances, China has assured that it needs ASEAN to grow and to become its partner in driving regional economic growth.

In the wake of the 1997-98 Asian financial crisis, China and ASEAN institutionalized the ASEAN+1 mechanism. China participated in the regional lending arrangements, namely the ASEAN Swap Arrangement and the Chiang Mai Initiative under the ASEAN+3 umbrella, involving Japan and South Korea as well. China is a member of the East Asia Summit and has an effective free trade area with ASEAN since 2010.

On the political and strategic front, China has joined the ASEAN Regional Forum and acceded to the ASEAN Treaty of Amity and Cooperation, reflecting its determination to maintain good-neighborly relations with the ASEAN members.

Following the initiatives of policymakers on both sides, ASEAN and China have enjoyed a thriving trade and investment relationship. From 1991 to 2000, ASEAN-China trade grew much faster, averaging 20.4 percent a year, compared to the growth in China's global trade (15 percent) and in ASEAN's global trade (10.9 percent). From 2001 to 2008, ASEAN-China trade increased an average of 20 percent a year, making them the fourth largest trading partners for each other. In 2008, ASEAN trade with China was more than $192 billion, excluding the significant border trade between China and Laos, Myanmar and Vietnam.

China is also a fast growing source of tourists visiting ASEAN member states, their numbers increasing from 2.4 million in 2001 to 4.4 million in 2008. Visitors from ASEAN member states to China comprise both tourists and business officials.

In terms of investment, the actual investment from ASEAN economies to China has reached $52 billion, and Chinese enterprises had invested $6.1 billion in ASEAN members until 2008. Traditionally, Chinese investors are attracted to ASEAN economies to secure energy and raw material supplies. In recent years, Chinese investments have gone into labor-intensive manufacturing, particularly electrical and electronic goods in Malaysia and Thailand. In Singapore, Chinese investments are mainly in services, reflecting Singapore's position as a regional services hub. Singapore is the leading ASEAN member to invest in China, concentrating on manufacturing, real estate and construction.

Despite the growing economic ties and warm political relations, the start of ACFTA on Jan 1, 2010 led to lot of anxieties among ASEAN economies and their business communities. Many believed that the Chinese authorities artificially raise the efficiency level of their production process by intervening in factor markets.

But ACFTA has its own benefits. ACFTA creates an economic region of 1.9 billion consumers, and combined trade of $4.5 trillion. This is of special significance when the world economy is facing growth uncertainty and the demand from the Western markets is likely to flatten. ACFTA is expected to promote intra-regional trade, especially given the proliferation of cross-border production networks in the region.

Moreover, since many ASEAN economies are looking to move to the next level of economic growth, ACFTA is likely to induce greater efficiency and productivity into the manufacturing sector of ASEAN, particularly where it has a comparative advantage.

Again, the "Early Harvest Program" extends to the ASEAN economies preferential treatment on agricultural products in terms of tariff reduction and market access, allaying the perceived "China threat" theory in terms of competition. ASEAN economies also get to benefit from collaboration projects with China with greater infusion of Chinese investment in projects such as the Singapore-Kunming Railway or the Bangkok-Kunming Highway.

Besides economics, ACFTA is also viewed as a means to reduce the chances of existing security problems erupting into conflicts. This is because any major feud between ASEAN member states and China could destroy peace in the region, which would be harmful for China's economic rise and subsequently for ASEAN's economic growth.

Therefore, in the years to come, ASEAN and China must discover ways to complement each other and increase investment in each other's economies. While ASEAN economies recognize the opportunities that a growing China offers, they are also worried about competition from China that may elbow out overseas direct investment from ASEAN, replacing ASEAN member states in labor-intensive manufacturing products.

To address this, China in particular needs to increase its investment in ASEAN economies substantially to further raise two-way trade volumes, as well as to generate a larger market as is supposed to be provided by ACFTA. This will contribute not only to a balance of power in East Asia, but also provide for a more effective voice at international forums.

The author is lead researcher for economic affairs at the ASEAN Studies Centre, Institute of Southeast Asian Studies, Singapore.

(China Daily 08/23/2011 page9)