Business in East and South- East Asia C Course_2011

15.12.2011

China- ASEAN economic relations

Table of Contents

1. 2.

Introduction Theoretical basis

2.1 China as a global economic power 2.2 ASEAN 2.3 FTAs ( China- ASEAN FTA) 3. China- ASEAN economic relations 3.2 Trade Relations 3.3 China- ASEAN Free Trade Agreement 3.4 Foreign Direct Investment 4. Conclusions References

1. Introduction
Studies about business in East and South- East Asia give an insight into the very interesting market area. Asia is becoming probably the most important region of the world from the business perspective. European and North American markets are already almost full and oversaturated. Companies looking for big incomes must look for new opportunities. This opportunity is given by the East Asia. Fast growing economies of East Asian countries make a chance of huge incomes there. This is a market of more than 2 billion people, what is almost 1/3 of world population. This creates an opportunity of entering a still growing undiscovered market, with vast amount of potential consumers. The region of East and South- East Asia spreads from Mongolia and People's Republic of China in the North to Indonesia and Timor-Leste in the South. As countries of this region are developing very fast, we face also economic regionalization of East Asia. There are organized various pacts, with the goal of cooperation of neighboring nations. To them belong for example Association of South- East Asian Nations (ASEAN), Asia- Pacific Economic Cooperation (APEC), ASEAN+ 3 (China, Korea, Japan) forum and many Free Trade Agreements, like ASEAN Free Trade Agreement (AFTA) and related to this one free trade agreements of ASEAN with China, India, Korea, Japan and Australia with New Zealand. I decided to focus on ASEAN- China economic relations, which now, in the big part should be considered through the ASEAN- China Free Trade Area (ACFTA). This young agreement seems to be very interesting one, because of its huge economic potential. Mix of different countries- powerful China, Singapore business hub, but also authoritarian Burma and tiny Brunei gives it even bigger potential and importance in the world economy. Role of all the member countries is going to grow probably, world business centers will be moving there and knowledge about this area might have a significant value in 10 or 20 years, when countries like Indonesia and Malaysia will take the place of Spain and Italy in the world economy. Organising into ASEAN might also be meaningful and give an additional strength for these countries and let for common development and easier way of communication with European Union ( AsiaEurope Meetings- ASEM) and other global powers.

2. Theoretical Basis

To understand importance of China- ASEAN cooperation, it is worth to know basic theoretical fundaments of economies of included countries. Also power of ASEAN association cannot be underestimated. European Union and NAFTA cooperation shows how much it can give to all the sides. Opening the markets and lowering tariffs has always been in the history full of advantages and also the field of learning about international relations. Also idea of creating free trade agreements helps the participants and stimulates trade between members.

2.2 China as a global economic power

China, country located in the East Asia, with the capital in Beijing. The country with the biggest population of the world - 1,336,718,015 (estimation for July 2011)1 (CIA Factbook data) and the second biggest land area. After the year 1978, when Communist China decided to make many reforms, to make its economy a market-oriented, China began decades of successful growth. China is also one of BRICS countries. This is the group of five states, which economic rapid growth is going to make them the major global powers in the close future. China has a huge role in creating global economy nowadays. In the crisis time, it helps European countries and the USA to not bankrupt, provides various raw materials for many countries and has a meaningful share of the world trade. It is enough to look at data about Chinese GDP. Nominal rate of GDP stands for approximately 5,879 billion of US dollars2 (World Bank data) and it puts China on the second place in the world. They passed Germany in 2006 and Japan in 2010. Also the GDP Growth was extremely high for such a big country and the result of 10.3% (by World Bank) is the third highest in the world and the highest among major economies. China has also important role in stimulating international trade. The data show that China is the biggest exporter in the world, only European Union taken together might have higher export.

https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html http://data.worldbank.org/indicator/NY .GDP.MKTP.CD/countries/CN?display=default

Chinese export stands for 1,581 billion of US dollars3 (by CIA Factbook) and as an importer is second in the world, just after the United States with 1,327 billion of US dollars4 (CIA Factbook). Chinese main export goods are machinery, textiles and raw materials and imports machinery and oil (by CIA Factbook). Another data showing importance of China internationally is Foreign Direct Investment. China is the second biggest receiver of FDI in the world after the USA with $185 billion and its market is still undiscovered and most of other East Asian countries. This gives an opportunity for foreign companies to enter there and have huge incomes, but also brings a high risk of loss.

2.2 ASEAN
ASEAN is the Association of South- East Asian Nations, concentrating 10 Asian countries. Following ASEAN website5, the pact of cooperation was formed in 1967 with 5 forming states and it was enlarged in the next years to 10 countries. The members of the ASEAN are Indonesia, Malaysia, the Philippines, Singapore and Thailand (forming states) and Brunei, Burma (Myanmar), Cambodia, Laos and Vietnam. Nowadays also Timor-Leste is willing to join ASEAN, but member states are still concerned isnt it too underdeveloped for cooperation. The official aims of ASEAN are economic growth, peace promotion, active collaboration and assistance6. ASEAN population is an almost 9% of the world with 600 million inhabitants7 and its combined GDP is $ 1,865 billion what would put this organization at the 9th place in the world, between Italy and India. ASEAN also faces big growth of the GDP with 7.9% in year 2010. 8

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2078rank.html? countryName=China&countryCode=ch&regionCode=eas&rank=2#ch
4

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2087rank.html? countryName=China&countryCode=ch&regionCode=eas&rank=3#ch
5

http://www.aseansec.org/ http://www.asean.org/64.htm http://www.dfat.gov.au/geo/fs/asean.pdf http://www.dfat.gov.au/geo/fs/asean.pdf

Actually, at the beginning of my work with my essay, my idea was to write about ASEAN Internal Trade Relations, but this is not easy to find exact data about trade among all the member states and anyway, still, internal trade relations in ASEAN are not so meaningful. Of course, the goal of ASEAN is to stimulate the growth, but this is probably the matter of time and cannot happen so fast. There is a wish of members to do that; an example might be an occurrence of Indonesian president at the 18th ASEAN Summit in Jakarta where he said We have to further develop intra-ASEAN trade, investment and tourism9. But recently intra-ASEAN trade stands for only 25% of all trade of the ASEAN members and is meaningful for only two states- LAOS, where is around 84% of all trade and Myanmar (~52%)10.
2.3

FTAs (China- ASEAN Free Trade Agreement)

A good way to stimulate trade between nations is creating better conditions of the trade, by creating facilitations, like no barriers or tariffs. Following Reuvid & Sherlock, we distinguish four types of trade block. Free Trade Agreement is as stated Members accept to reduce or abolish trade barriers such as tariffs and quotas between themselves but retain their own individual tariffs and quotas against non-members (Reuvid & Sherlock, 2011)11. ASEAN has created it's own free trade agreement (AFTA) and there are very low tariffs nowadays, no higher than 5% and in a few years time, the aim is to have no tariffs at all on all products among AFTA12. In the beginning of year 2010, China- ASEAN Free Trade Agreement has began to work. It has a huge economic potential. Almost 2 billion inhabitants, fast economic growth and combined GDP of almost $8 trillion. GDP states CAFTA at the third place in the world, just after European Union and North American Free Trade Agreement. Creation of CAFTA is the most important aspect of trade relations between China and ASEAN in the last years and will have a great influence on cooperation in the region and on actions of the companies at each others markets, when the trade conditions will be more friendly and inviting.

http://english.peopledaily.com.cn/90001/90777/7372767.html http://www.asean.org/stat/Table18.pdf International Trade, Jonathan Reuvid & Jim Sherlock, pages 7-8, Kogan Page, 2011 Http://www.aseansec.org/10342.htm

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3. China- ASEAN economic relations

3.1 Trade relations

Creation of China- ASEAN Free Trade Agreement on 1 January 2010 is the most important element of the trade relations between China and ASEAN countries. Another important thing is Chinese entrance to WTO, what accepted at Doha Round in November 2001. As China entered World Trade Organisation, it accepted to maintain some decisions, which will make their international trade more open. Among them is promise no discrimination to any WTO members, elimination of dual price practices, avoiding price control, implementation of WTO Agreement into Chinese law, not maintaing agriculture subsides13. Creation of CAFTA is especially important, because of the financial crisis of years 20082009. In those years, most of the countries of the world faced much slower GDP growth and new strong ties help all of them in strenghtening their economies. In the first seven months after establishment of CAFTA, trade between ASEAN countries and China grew significantly. Chinese export to ASEAN rose by more than 40% and ASEAN's to China by almost 60% in the comparison with the year 200914. Of course, CAFTA creation cannot be recognised as a decisive moment. It is just an official outcome of movements which were made by both sides in last 10-20 years. Relations between both sides has been established in 1991. After the Asian Crisis in 1997 and big problems of South Asian countires, China decided to help by for example, not devaluating Chinese currency. Important was signing of the Framework Agreement on Comprehensive Economic Cooperation in 2002 about establishing CAFTA. After that moment, and Chinese WTO entrance, there were made decisions to facilitate trade between them. In next years China lowered tariffs on ASEAN goods to 0,1% and Chinese export to 6 major ASEAN members is with 0,6% tariffs and is going to be lowered with other members in the close future. Recently about 7,000 are

13

Http:/www.wto.org/english/news_e/pres01_e/pr243_e.htm Http://ics.um.edu.my/images/ics/IJCSV1N3/yandheng.pdf

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without tariffs in trade between them and by 2015 it is expected that most of the items will be included into the policy of zero-tariff rate15.

Country

Export to China Export to China Import from 1999 2010 China 1999 3,00% <3% <3% 10,00% 10,00% 13,00% 19,00% 11,00% 10,00% 13,00% 23,00% <3% 7,00% 5,00% <6% 4,00% <4% 5,00% 10,00% 5% (1997) -

Import from China 2010 11,00% 15,00% 13,00% 14,00% 13,00% 24,00% 39,00% 15,00% 15,00% 13,00%

Singapore Indonesia Malaysia

The Philippines <3% Thailand Vietnam Myanmar LAOS Cambodia Brunei <3% Main exporter 11,00% 5% (1997) <3%

Table 1.1 In table 1.1 there is compared tradee between ASEAN members with China in year 1999 and 2010. Remarkable growth in seen in almost all the cases. China, from one of the partners, become for many of ASEAN countries, the most important one. China is basically very important trade partner of ASEAN countries. It is the biggest ASEAN external trade partner with 12% share of the trade and $178,185 million in year 200917. In comparison with the past, in year 1993 share of trade with China was just 2,1% and in 2003 7,2%18.

15

Http://ics.um.edu.my/images/ics/IJCSV1N3/yangheng.pdf Http://www.asean.org/stat/Table19.pdf Http://www.asean.org/publications/AEC-Chartbook-2009.pdf

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By the commodities, in 2008 (Chartbook publication of ASEAN, 2009) most important goods exported to China from ASEAN were electronic integrated circuits and microassemblies (18%), automatic data processing machines, optical readers, etc (7%), petroleum oils, not crue (6%), natural rubber, galata, gutta-percha (6%), palm oil and its fractions, not chemically modified (5%) and others (58%). While goods imported to ASEAN from China were electric apps for line telephony, including currect line system (6%), parts & acces of computers and office machines (6%), electronic integrated circuits and microassemblies (5%), automatic data processing machines, optical readers, etc (5%), hot rolled, flat rolled products of iron or nonalloy steel (2%) and others (76%). This data shows that trade between ASEAN and China is wide ranged and based on many different fields.

3.2 CAFTA- New situation

Creation of CAFTA is the reason of the new situation in the East and South-East Asian region. There are new opportunities, but also risks to meet. Free Trade Agreement can stimulate a trade, but is not good for all companies within these countries. CAFTA is now the biggest Free Trade Agreement in case of population and third biggest in GDP. This means, it is very important to all foreign companies, which wants to do business there, but also countries within it. CAFTA is a great opportunity for the small countries of ASEAN, which economies are so much dependent on the foreign trade, because their domestic market is not big enough for many companies. Opening of this FTA is also important for external companies at East Asian market, because now, they can change way of treating this region, and without regional tariffs, take it as one, bigger, by changing supply chains for example. One component might be problematic on line China- ASEAN. There thing is that taking the thing from the wider perspective, China and most of ASEAN countries are natural competitors on the global market. They produce similar things, for example food, but are both very interesting for external companies to invest there by building new car or electronics factories. They compete to get production in their borders and goods which they produce are already in the other country, for example, Vietnamese rice is not needed in China. But of course,

this is just a part of the trade, and generally lowering the tariffs can be only good for all participants and they should benefit soon from that. Another important aspect is that ASEAN members are on the different stages of development this is problematic in trade. Nowadays, sometimes they can just copy their partners, and are still less attractive by lack of economies of scale. In needs some time to let them find their niches on Chinese market. Good things for ASEAN is that cooperation with China rises the role and the position of ASEAN on the international market. South-East Asian countries are found as more attractive, because it is easier to invest there. We have to remember that China is generally a cheap- production country and there is a risk for ASEAN states that their industires, competing with China can be pushed to the wall. Example might textiles and footwear industry. Indonesia and the Philippines are also strongly dependent on production of these goods, and there is a risk of an inflow of cheaper Chinese ones. Probably it will be the matter of time, until ASEAN companies will adjust to more competitive market, but when it happen, they can benefit, because of much bigger market. Thanks of cooperation with China, ASEAN states are more competitive on the global market, but it is still not easy to say what can happen in the future, because we don't know future effects of recent financial recession. There is still an existing problem, that despite CAFTA market is a huge one, it is still not so rich. People's incomes are comparably small and it needs some time, until they will get to the higher level. But until that times, foreign companies must hope for underdevelopment of markets of these countries and vast amount of potential customers. Information here included were based on two academic articles about CAFTA cooperation19 20.

19

Http://www.eai.nus.edu.sg/BB519.pdf Http://ics.um.edu.my/images/ics/IJCSV1N3/yangheng.pdf

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3.3 Foreign Direct Investment

Foreign Direct Investment is an important aspect of international trade, because it show how big inflow of money comes from abroad, it stimulates economy, make it more competitive and encourage new companies to enter to the given countries. East Asian countries, thanks of their fast economic growth, stabilized situation, big population and vast number of potential consumer are very attractive for international companies as a new markets, where they can have huge incomes. FDI states for around 4% of ASEAN GDP. In most of ASEAN members amount also fluctuates around 3-5%, but for Singapore it is much more important, because there it is more than 15% of the GDP. China and ASEAN are also receivers of each others FDI. It comes directly, but also through the third parties, like Hong Kong. From year 2002 to 2008 ASEAN's FDI rose from $3,3 million to $5,5 million what is not so much as states just for 6% of Chinese FDI income. Chinese FDI in ASEAN is only $ 4,9 million and it is only 2,6% of total ASEAN FDI inflow.21

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Http://www.eai.nus.edu.sg/BB519.pdf

4. Conclusions

China and ASEAN ar recently facing growth of role of the regional cooperation. Both are important powers in the world economy. China is huge by itself and ASEAN is strong thanks of it's internal cooperation. After they decided to sign a treaty to create a Free Trade Agreement their trade relations are expanding. Now share of trade with China for ASEAN states is higher than 10% and it grew a lot in last years. Economies of countries included into the cooperation are growing fast and their role in the world is raising. It's combined GDP states for more than 10% of the world GDP. They lay in one region and there is a risk of losing businesses of ASEAN companies because of their Chinese competitors, but wider market gives more perspective and chance to find a niche. Creation of China- ASEAN Free Trade Agreement is the most important step for rise of cooperation between these two sides. Thanks of lower tariffs, their combined market is more competitive and let foreigners to treat it as one bigger and because of that invest in all of it. Cooperation between China and ASEAN should become even more stronger in the future as all the countries from the region become more and more important economies.

References

CIA Factbook
https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html https://www.cia.gov/library/publications/the-world-factbook/rankorder/2078rank.html? countryName=China&countryCode=ch&regionCode=eas&rank=2#ch https://www.cia.gov/library/publications/the-world-factbook/rankorder/2087rank.html? countryName=China&countryCode=ch&regionCode=eas&rank=3#ch

ASEAN website
http://www.aseansec.org/ http://www.asean.org/64.htm http://www.asean.org/stat/Table18.pdf Http://www.aseansec.org/10342.htm Http://www.asean.org/stat/Table19.pdf Http://www.asean.org/publications/AEC-Chartbook-2009.pdf

http://data.worldbank.org/indicator/NY.GDP.MKTP.CD/countries/CN?display=default http://www.dfat.gov.au/geo/fs/asean.pdf http://english.peopledaily.com.cn/90001/90777/7372767.html International Trade, Jonathan Reuvid & Jim Sherlock, pages 7-8, Kogan Page, 2011 Http:/www.wto.org/english/news_e/pres01_e/pr243_e.htm Http://ics.um.edu.my/images/ics/IJCSV1N3/yandheng.pdf Http://www.eai.nus.edu.sg/BB519.pdf