China-ASEAN Relations: Opportunities and Challenges

Zhang Yunling Director Institute of Asia-Pacific Studies, Chinese Academy of Social Sciences

1

I. Why China turns to regionalism As a strategy to deal with emerging regionalism in the world: most WTO members are in some kind of RTA. Enhanced confidence after joining WTO in RTA Expanding market opportunities for China’s business, “go abroad strategy” 2

Regional strategy East Asia is the major region to be emphasized China is a country of “regions” internally, different regions surrounding China: Northeast Asia, Southeast Asia, South Asia, Central Asia FTA is important, but not just FTA 3

II. Chinese Economy and East Asia Chinese economy has been on high growth track since early 1990s. It is reasonable to project that the high trend could sustain for another 2 decades(annual rate above 7%). WTO accession makes Chinese economic system more transparent accountable and also potential, thus more attractive to the investors. The experience of China’s WTO accession shows that China has high capacity to meet the challenge from liberalization of the market. 4

Economic Growth: China & East Asia (Excluding Japan) 10

9

9

8

8

7

7

6

6

5

5

4

4

3

3 2

2

1

1

0

0 1997

1998 1999

2000 2001

China East Asia

2002

5

FDI Flow to China (In billion US dollars)

60 1997 1998 1999 2000 2001 2002

50 40 30 20 10 0 FDI into China

6

Growth Dynamism The dynamics of Chinese economic comes from stable policy, restructuring and confidence. FDI and exports play important role to support the economy. Considering the process of Chinese economic restructuring and urbanization, the growth strengthen will gradually come from the internal, rather than the external.

7

The Potential According to the projection, until 2005, China will be the largest importer in Asia, ½ from East Asia; until 2020, China’s external trade will be equal to the US and larger than Japan. Due to the resource limitation, China will increase the imports to meet its demand for exports and also domestic consumption.

8

Good for the Region The Trade pattern reveals that even China’s export expansion offers significant growth leverage to its neighbors: import support export. Chinese absorption will emerge to dominate regional demand. Provided East Asian economies become more integrated, the net effect of China’s growth can be hugely positive. 9

A New Network FDI flow to China and economic growth create a new horizontal network in the region linked by MNCs and China’s economic growth, different from the old vertical “ flying geese model”. Intra- regional trade and other economic activities will further increase based on this new network of FDI flow. 10

A New Trend: export to China

25

20

Singapore

East Asia Taiwan

Korea Philippines

Malaysia

Thailand

10

5

Indonesia 0

1990 2000 15

11

20

10 Korea

Philippines

30

East Asia

Taiwan

Singapore

0 Thailand

40

Malaysia

50

Indonesia

A New Trend: export to Japan

1990 2000

12

China’s imports from major trade partners in 2002 40 35 30 25 Market shar Increase rate

20 15 10 5 0

Japan

EU

Taiwan

ASEAN

US

Korea

13

Long-term Trend:Real GDP Growth (Normalized to 100 in 2000, ADB modeling)

450 400 350 300 250

China Japan NIE ASEAN

200 150 100 50 0 2000

2005

2010

2015

2020 14

Long-Term Trend:Real Imports (billions of 1997 USD. ADB modeling)

1200 1100 1000 900 800

China Japan NIE ASEAN

700 600 500 400 300 2000

2005

2010

2015

2020

15

More Benefits from Regional FTA According to the simulation, the trade diversion of China’s imports from regional FTA is significant, import share from ASEAN or East Asia will be much larger than simple WTO scenario. East Asia will have fast growing internal market.The best strategy is to pursue globalism through more comprehensive regionalism 16

A Positive Recycle ‹ China will create a positive trade pattern for East Asia, where China develops a sustained trade deficit with East Asia and a surplus with Western OECD economies of nearly equal magnitude. ‹ Most of China’s trade surplus will ultimately accrue to its regional neighbors. This has profound implications for regional capital accumulation.

17

Bilateral Trade Balance scenario (year 2020 in Billion. Of 1997 US dollars, IADB modeling)

Exporter China Japan NIE ASEAN USA EU ROW Total

Importer China 0 5 135 41 -166 -66 -71 -122

Japan -5 0 -39 -20 -23 15 50 -21

NIE ASEAN -135 -41 39 20 0 19 -19 0 32 -18 32 -8 12 -12 -40 -41

USA 166 23 -32 18 0 -48 40 168

EU 66 -15 -32 8 48 0 -34 41

ROW 71 -50 -12 12 -40 34 0 16

Total 122 21 40 41 -168 -41 -16 0

18

III. China-ASEAN Relations China’s high economic growth and WTO accession have created challenge to ASEAN since China becomes more competitive and attractive. China’s economic growth will create more opportunities for ASEAN’s exports. Complimentary pattern is clear for many areas 19

China-ASEAN Trade ‹Trade started from a low level, but increased faster than the average. ‹ Import surge expected based on a new pattern of FDI flow. China’s imports from ASEAN increased more than 30% in 2002. ASEAN becomes the fourth largest partner for China’s import after Japan, Taiwan and EU. 20

China’s trade with ASEAN (19952001) 25 1995 1996 1997 1998 1999 2000 2001

20 15 10

Export

Import

5 0 Import

Export

21

Competition Effect Competition between China and ASEAN is a fact for the third market and FDI. But detailed analysis shows that the trade-off effect is limited both in the third market and FDI flow. China’s competition is there, but not a major cause of ASEAN’s problem. Be careful about the argument of similarity: quick changing market demand and supply pattern 22

Why China-ASEAN FTA? As a reflection of increasing economic interests. Exploring the economic potentials Under the framework of regionalism in East Asia, easier to start Beyond the economic consideration: as a general strategy to reliable relations 23

Road to Success Overcoming psychological barriers: not just a China’s forward strategy, not a zero sum Adopting a gradual approach: comprehensive, but easy first, Trade goods first, service and investment later, but need early conclusion of negotiation Not just FTA, but close partnership based on comprehensive cooperation

24

IV. What Does Framework Agreement Tell? The signed framework agreement set up important principles for China-ASEAN FTA process: mutual benefit, compromise, consolidation The coverage of liberalization through FTA is comprehensive, including goods, service and also investments. The timing of establishing the FTA is 10 years. However, considering the internal differences, liberalization will be done by different tracks and different timetables. 25

Early Harvest Program Early harvest program (EHP) is a fast track.The trade amount of it is not that big, but represents the good will EHP is based on mutual commitments, but it considers the differences of ASEAN members and makes difference arrangements for sensitive goods of exemption, and also different timeframes for different categories But not every ASEAN member well prepared 26

Broad Cooperation FTA is just one core part. It also listed up the other areas for broad cooperation: Five priority sectors for cooperation: agriculture; information and communications technology; human resources development; investment; and Mekong River basin development.  Also other areas: banking, finance, tourism, industrial co-operation, transport, IPR, SMEs, telecommunications, environment, bio-technology, fishery, forestry, mining, energy and sub-regional development. 27

Agricultural Cooperation Specific areas for cooperation were identified: such as training on hybrid rice, cultivation skills, fertilizer and water management, aquaculture specialists, biotechnology application, farm machinery, agricultural extension, livestock, as well as technology in agriculture, forestry, post-harvest technology, and food security. The memorandum of understanding on agricultural cooperation was signed separately.It will specially helpful to new members of ASEAN.

28

Political Foundation In order to strengthen the political foundation of the FTA and comprehensive economic cooperation, China and ASEAN singed other two documents: one is on cooperation in non-traditional security, another is on the code of conduct on South China Sea The gap between government strategic intension and grass root understanding in ASEAN still there, need more work 29

Implications to the Region Economic integration itself will help to build up political confidence. Both China and ASEAN realize the significance of political relations. East Asian cooperation is the main course and crucial important. Benefits from East Asian integration is much larger than any “10+1”. China-ASEAN initiative will facilitate East Asian integration and cooperation, need an early effort to push EAFTA and comprehensive cooperation.

30