ASEAN-China FTA: A View from Jakarta Tubagus Feridhanusetyawan Centre for Strategic and International Studies, Jakarta Study Group on China Meeting, Policy Research Institute Ministry of Finance, Japan Tokyo, March 19, 2003

Background: Macroeconomic Contrast • Growth: • China: Continuing rapid growth • ASEAN: Weakening growth since the crisis

• Per capita GDP: • China: Tripled in the last decade • ASEAN: Declined after the crisis

• Trade: • China: Rapid export growth, becoming major exporter in the world • ASEAN: Weakening export growth, losing competitiveness

• Investment: • China: Massive FDI inflows • ASEAN: Declining FDI inflows • Indonesia: Massive outflow

Bilateral Trade • The size is increasing, China is more important for Indonesia than otherwise. • China: • Exports to Indonesia = 1 % of total export • Import from Indonesia = 1.6 % of import

• Indonesia: • Export to China = 7 % of export • Import from China = 9.2 % of import

Patterns of Trade • Indonesia exports natural resource based products – Mineral, woods, organic chemicals, pulp, etc.

• China exports light manufacturing products – Electrical machinery, Machinery

• Indonesia exports more to China, but: – Excluding smuggling (import to Indonesia) – Excluding trade through the third parties (Hong Kong and Singapore)

Bilateral Investment • Relatively small in size, but increasing – Indonesia to China: US$ 84 in 1998; US$ 171 million in 2000

• Indonesia invest more in China – Except that Indonesia approved large Chinese investment in energy sectors in 2001 – But the realization of China’s investment remains unclear

ASEAN-China Agreement • Agree to agree to start negotiation – We don’t know how real is the deal

• Comprehensive – Include sensitive sectors (such as agriculture); services sectors; non-tariff barriers; investment

• Rapid progress in coming up with the agreement: Announced in 2000, signed in 2002: Why? – Top down approach – China is ready (has prepared for the WTO entry) – ASEAN could not make any common position

Trade in Goods: Schedule of Tariff Reduction • Normal track: – ASEAN 6 + China: Jan 1, 2005 – 2010 – ASEAN4 : Jan 1, 2005

• Sensitive track: – Mutually agreed end rates and end dates

• Negotiation includes: – Detailed rules on reciprocity, out of quota treatment; non-tariff measures; safeguards; subsidies; countervailing measures; antidumping; TRIPs, etc.

• Issue: the devil is in the detail – How dirty is the tariff reduction – How much is in the sensitive track, etc.

Service and Investment • Trade in Services: – Agree to start the negotiation – Negotiations: elimination of discrimination and prohibition of new or more discriminatory measures; expansion beyond GATS; enhance cooperation

• Investment: – Agree to start the negotiation – Negotiations: Liberalize investment; strengthen cooperation in investment; facilitate investment and improve transparency in rule and regulation; protection of investments

• ASEAN’s proposal – more than just FTA • Sounds too good to be true – are they serious about it? • No specific schedules – have to wait and see

Early Harvest Program • Chapter 01-08 of HS: Live animals; meat and edible meat offal; fish; dairy products; other live animal products; live trees; edible vegetables; edible fruit and nuts. • Target dates – ASEAN 6 and China: 2006 – ASEAN 4: 2010 (but there are many exceptions)

• Attractive – politically attractive • Has some potentials - but the real benefit is unclear, major commodities like palm oil is not included

Early Harvest Program: Schedule of Tariff Reduction Product Category 1

2

3

Description Products with MFN tariff rates higher than 15% for China and ASEAN 6, and 30 % or higher for the newer ASEAN members Products with MFN tariff rates between 5% and 15% for China and ASEAN 6, and between 15 % and 30 % for the newer ASEAN members Products with MFN tariff rates lower than 5% for China and ASEAN 6, and lower than 15 % for the newer ASEAN members

Not later than 1/1/04

Not later than 1/1/05

Not later than 1/1/06

10%

5%

0%

5%

0%

0%

0%

0%

0%

Indonesia: Challenges and Opportunities • Preoccupied with the domestic problems – – – –

Macroeconomic stability Financial stability Fiscal sustainability Debt management

• Unclear trade policy – Trade policies are not on top priorities – No clear objective – ad-hoc approach – Responding to issues and vested interest

Indonesia: Early Harvest Program • Some potential gain from fisheries exports • Expected cheaper imports of Chinese fruit and vegetables • But other major resource based commodities: forestry related products, mining, gas, palm oil, rubber, etc – are not included

Indonesia: Competition with China • Without ASEAN-China agreement: The competition with China in the domestic market is already a serious challenge • Indonesia’s tariff is already low – the problem is coming domestic distortion – Poor tax and incentive systems

• Indonesia is facing tougher competition in the third market – Producing similar manufacturing commodities

• Indonesia is losing competitiveness – Lack on investment in the sector

Indonesia-China: Export Similarity Index Indonesia-China Export Similarity Index 90 80

percent

70 60 50 40 30 1996

1997

1998

All exp o rt

1999

2000

2001

M anufacturing Exp o rt

High similarity index in manufacturing products, and the index has been increasing after the crisis

Some opportunities • • • •

Natural resource based products Energy related products Investment opportunities Great psychological effect

The role of ASEAN • Can ASEAN be the hub? – ASEAN+3, ASEAN+1, ASEAN+4 – Problems with ASEAN • • • • •

Leadership issue Lack of supra-national institutions Problems with voluntary system Problems in making common position Two tiers ASEAN

• ASEAN+1 is more manageable

Challenge for Japan • ASEAN-Japan Economic Partnership – Potentially more benefit – the economies are more complementary – But the Japanese position is not very clear

• How comprehensive? – NTB? Services? Agriculture? Investment?

• Bilateral vs. Multilateral? • Early harvest program?

Thank you