The Impact of ASEAN-China Free Trade Area Agreement on ASEAN's Manufacturing Industry

AbstractIn November 2002 at the ministerial meeting, ASEAN and China signed an agreement to form a free trade area (FTA) by the year 2010. There was an estimation that both regions would gain from FTA deals. However, the rapid growth of China since the early 1990s does not warrant the estimation and positive expectation of the FTA deal. Prior to November 2002, substantial amount of trade and investment in the region had diverted to China. China's relatively lower cost of production compared to ASEAN members has decreased the export competitiveness of ASEAN. The strong competition between the regions in the international commodity market and productive foreign capital has produced great stress to ASEAN economies. The main reason for the economic stress is largely attributed to the structure of production and exports of ASEAN and China. Both regions engage in similar sectors of commodities production and exports. There is the factor of homogeneity in production and exports in the regions. In a group of countries or regions which have a similar structure of production of commodity and exports, theoretically only countries which have the lowest cost of production will gain in trading. The diversion of trade and investment of ASEAN to China is real. These diversions have explicitly affected the terms-of-trade of ASEAN's economies, and have eventually reduced exports income. This paper believes that the ASEAN-China FTA does not promise a total gain to members of ASEAN. This paper does not deny that there are members of ASEAN which may receive a positive economic impact from the FTA but the question is how much will they gain. This paper will explore the impact of the ASEAN-China FTA on ASEAN's trade and will provide some ideas as to how competitive members of ASEAN are relative to China.Keywords: economic integration, intra-industry trade, comparative advantage, China, ASEANJEL classification: F10, F13, F14, F19, O591. ASEAN-CHINA FTA: A Brief ReviewThe idea to establish a free trade area between ASEAN and China was mooted with the consensus of developing ASEAN+3 at Manila in 1998. Zhu Rongji, the Prime Minister of the People's Republic of China (henceforth China), had raised again the idea of an ASEAN-China Free Trade Area (ACFTA) during the ASEAN+3 meeting in Singapore in November 2000, and at the ASEANChina Economic Cooperation Meeting in August 2001 (Buszynski, 2001). The proposal was promoted by Singapore although the other ASEAN members were quite reluctant: they favoured a bigger FTA called the East Asian FTA (EAFTA) that would include China, Japan and South Korea. However, at that point, Japan and South Korea were not ready for this (the formation of the EAFTA). ASEAN and China in principle agreed to form a solid economic cooperation in the form of such an agreement. On 4th November 2002, 10 members of ASEAN and China reached an agreement to build the ACFTA (ASEAN-China Free Trade Area) in Phnom Penh, Cambodia. Both regions signed the Framework Agreement on Comprehensive Economic Co-operation. The formal agreement was based on a decision made by ASEAN members and China in 2001 at the Annual ASEAN Summit held in Bandar Seri Bagawan, Brunei. The agreement set the elements and basis for negotiations towards the realization of an ASEAN-China Free Trade Area by 2010 for the 6 main ASEAN members (Indonesia, Malaysia, Thailand, Singapore, the Philippines, and Brunei) and by 2015 for the 4 new ASEAN members (Cambodia, Laos, Myanmar, Vietnam).Under the Agreement Framework on Comprehensive Economic Cooperation (CEC), tariffreduction or elimination or liberalizing trade in goods falls under Article 3 of Trade in Goods. The reduction or elimination of tariffs on listed products was to be gradually implemented. Tariffreduction under the FTA agreement was based on applied MFN rates as of 1st July 2003. In the case of ASEAN members which were not members of WTO, tariffreduction was based on MFN rates applied by China. …