CAFTA Trade Prospects Analysis
Abstracts: Amongst the expedited global regional economic integration, China-ASEAN Free Trade Area has entered a phase of overall construction. Such will bring about active and significant changes to this region and emerge a pattern of brand new, active and all-round cooperation. At the time of mutual-market opening between China and ASEAN, there exist some problems to be solved or prevented by Chinese enterprises with investment in ASEAN countries. In order to facilitate the timely establishment of CAFTA, this essay suggests that: (i) Both China and ASEAN parties should enforce the implementation of Agreement on Trade in Goods of CAFTA; and (ii) Both parties should increase the strength, enrich the contents, broaden the fields and innovate the means of cooperation. China and ASEAN should jointly promote the economic integration of the East Asia during the course of building the CAFTA.
The concept of China-ASEAN Free Trade Area (CAFTA) was proposed only five years ago but has now created such a striking impact that its designer could not image. By now, the construction of CAFTA jointly by China and 10 ASEAN countries has been thoroughly initiated. What is the most striking is that CAFTA is a free trade area with the most population in the world and thus being called as the third economic entity of the world in future. We are creating a new pattern for development of the East Asia in the course of expediting the pace of opening-up.
Undoubtedly, the critical point of this grand innovation lies in us 11 countries how to cooperate in the opening and how to realize the “win-win” goal during promotion of cooperation. This is also the authentic reality that we must face during the construction of CAFTA.
I. Recent Situation of Regional Integration of Global Economy
By the end of June 2007, 328 regional trade arrangements had been reported to WTO. Most of them emerged in recent year. Only from January to June 2005, 21 were added. Except Mongolia, all WTO members have participated in one or more trade arrangements of free trade area or regional trade. Some trading power such as America and Japan, including those important developing countries such as India, Brazil and South Africa, attach great importance equally to the WTO multilateral trade negotiations and the negotiation of free trade area. They treat the negotiation of free trade area as an important component of the policy of foreign trade or even the policy of foreign affairs. It can be said that the process of regional economic integration on all continents of the world is being expedited. As anticipated by the WTO Secretariat, at least 50% of the current international trades are conducted under the various regional trade arrangements.
There is no exception to China. On one hand, China greatly emphasizes the multilateral trade negotiations represented by WTO in actively participating in the Doha Round. On the other hand, it actively adjusts to the new circumstance of regional economic integration, actively enters talks on free trade area with relevant countries and regions and thus makes significant headway in this connection. Normally speaking, in the selection of countries or regions for jointly constructing free trade area, China would take into accounts of three factors. Firstly, it should be of good political relationship or of great significance in developing friendly relationship. Secondly, it should have strong complementarity in economy and trading. Thirdly, it should have certain market space. Up to the present, there are totally 9 free trade areas in China that are under negotiation, covering 27 countries and regions. In 2004, the trade volume between China and these countries and regions approached to an amount of USD 300 billion, accounting for approximately 1/4 of the total foreign trade volume of China. More developing potentials are anticipated.
By the end of November 2004, China and 10 ASEAN countries entered Agreement on Trade in Goods of China-ASEAN Free Trade Area. According to this Agreement, the tax reduction was on full implementation starting from July 2005. Currently, among the top 20 countries and regions with foreign trade with China, there are five ASEAN countries. The trade volume between China and ASEAN accounts for 9.2% of the total volume of foreign trade of China. ASEAN has become the fourth largest trade partner of China, while in 2004, China jumped over to the third largest trade partner of ASEAN following the USA and the EU. From January to October 2005, the total trade volume of China with ASEAN reached USD 105.24 billion, increasing by 24.4% than that of the previous year.
CAFTA is the first free trade area for China and ASEAN as well that is established with outside world. It has brought about a series of new changes and stimulated the economic integration of the East Asia.
II. Ten Great Changes in CAFTA
1. The friendly relations between China and ASEAN and its member countries are heading for a new stage for development. Political mutual trust and institutionalization of friendly relation are of primary importance to the establishment of CAFTA. Chinese accession to Treaty of Amity and Cooperation in Southeast Asia, as well as the declaration of the Plan of Action to Implement the Joint Declaration on ASEAN-China Strategic Partnership for Peace and Prosperity have established the strategic partnership for peace and prosperity with ASEAN. A new type of diplomatic relation between China and ASEAN will be beneficial to the regional stability and development as well as to the establishment of CAFTA.
2. The establishment of CAFTA has turned from table talks to the practical actions. In recent years, the countries like Japan, Australia, New Zealand, USA, EU and India etc. are on the way to expediting the negotiation for establishment of free trade area with ASEAN. However, China has become the forthgoer in signing the framework agreement for free trade area with ASEAN. As early as in 2004, the Early Harvest Program between China and ASEAN was initiated; in July 2005, Agreement on Trade in Goods under Framework Agreement on ASEAN-China Comprehensive Economic Cooperation became effective for implementation. The gradual lowering and removal of the trade threshold are encouraging new industrial structural adjustment and bring about new choices for market development of enterprises.
3. In China, people are gradually familiar with the concept of “Free Trade Area” (FTA) and more and more come across this phrase of rich connotation in the course of constructing CAFTA, Like the word of WTO, the phrase of FTA will become a popular word in that it will bring about new changes to the daily life and work of the ordinary people. As to enterprisers, the consciousness of FTA is a must to meet the new challenges. In the academic circle, the “Heat of Southeast Asia Research” is also rising to surface.
4. Construction of CAFTA has expanded from governmental conducts to enterprise’s activities. With the implementation of Framework Agreement on ASEAN-China Comprehensive Economic Cooperation entered by the governments of China and ASEAN countries, more and more enterprises become concerned about CAFTA, and thus the bilateral trade volume and the bi-directional investment have increased to great extent.
5. In the field of international trade, the characteristics of competition and cooperation between China and the Southeast Asia are undergoing new changes. The transition from competition to cooperation will bring about win-win result. Cooperation is an important means for strengthening the capacity of competition. With the establishment of CAFTA, China and ASEAN will adjust the economic structure, integrate the resources and strengthen the advantages on a broader area. Since the objectives of cooperation of both parties have been finalized, the new cooperation will enhance the competitive capacities of local products in the international market and help to attract more foreign investments.
6. The economic cooperation and trade between China and ASEAN quickly transfers from general trade to the overall cooperation. With the impetus of the government, a series of multi-field cooperation have been initiated and are undergoing a remarkable breakthrough in development, such as sub-region economic cooperation, sci-tech cooperation, tourism cooperation, resources development cooperation, agricultural cooperation, energy resources cooperation, information industrial cooperation and professional training cooperation etc.
7. The sector markets of China and ten ASEAN countries are now merging into a big market. Establishment of CAFTA will help to realize the trade and investment liberalization and facilitation and, accordingly, will also have new requirements on such facilitation for the personnel and monetary circulations. As to enterprisers, however, they must give consideration to a new strategy for development through trans-national operation and development of new markets.
8. The mutual investment between China and ASEAN countries has now changed from the one-way investment by ASEAN enterprises to China to the bi-directional investment between China and ASEAN countries. In recent years, investments on ASEAN countries by Chinese enterprises keep increasing and are anticipated to boom up within a period in the future.
9. The cooperation among the business associations of China and ASEAN countries are increasingly active and closer. With the establishment of CAFTA, the cry for inter-enterprise cooperation becomes stronger, which will bring many new requirements on the cooperation of business and trade associations both of China and ASEAN countries while, on the other hand, provide with vast space. As a result, China-ASEAN Business Council (CABC) emerges as the times require. During a period in the future, the new cooperation between the business associations both of China and ASEAN countries will create numerous business opportunities for the enterprises.
10. The “opportunity in China” is shifted to the “mutual opportunity in China and ASEAN”. Facing the continuous rapid economic growth and market opening of China, ASEAN proposes the “theory of opportunity in China” to strive after prosperity with China. The initiation of CAFTA has aroused the concerns of some countries outside this area who, accordingly, have concluded or are negotiating the establishment of free trade relation with ASEAN and other countries. Without question, this is beneficial to the economic growth of ASEAN. With the establishment of CAFTA, a new area with mutual prosperity will rise to view in the world.
III. Ten Problems to be Solved or Prevented by Chinese Enterprises with Investment in ASEAN Countries
At the time of mutual market opening between China and ASEAN countries, many Chinese enterprises are concerned about the new opportunities and challenges brought by CAFTA. For example, how to effectively develop the opened markets of the ten ASEAN countries? What issues should be attended to during trade and investment with ten ASEAN countries? In my opinion, there are ten major problems to be solved or prevented by Chinese enterprises with investment in ASEAN countries: (i) Lack of the knowledge of the rules of CAFTA; (ii) Lack of the consciousness in developing ASEAN markets and the long-term strategic plan; (iii) Lack of the information about commercial channels of ASEAN countries and make wrong choice of cooperating partners; (iv) Cut-throat price competition of like products in ASEAN markets; (v) Export of counterfeit and shoddy goods to ASEAN markets; (vi) Irrational investment due to insufficient feasibility study on the ASEAN markets; (vii) Simply duplicating the corporate culture and the domestic marketing experiences in trading and investment to the ASEAN markets without adapting to the local conditions; (viii) Nontransparent and unstable investment environment of some ASEAN countries, especially those under-developed countries; (ix) Trade and investment barriers of some ASEAN countries; and (x) Lack of marketing professionals who are capable of developing ASEAN markets.
As the solution to these problems, Chinese enterprises should quickly acquaint themselves with the details of the Agreement on Trade in Goods through the following means when they plan to invest in or trade with ASEAN countries: (i) Investigate the market and choose the right cooperating partners with the help of the embassy, chamber of commerce and reputed agency; (ii) Have a grasp of the marketing characteristics of ASEAN markets and expedite the introduction and training of professionals; and (iii) Acquire the knowledge of the market conditions via the official website of CAFTA. Facing a new market, an enterprise must timely formulate and adjust the strategy and policy for the market development. Only in this way can an enterprise seize the market opportunity.
It is an urgent demand after the opening of the mutual markets to create a transparent, free and convenient mechanism for trading and investment and enhance the cooperation between China and ASEAN. At the eighth ASEAN and Chinese leaders meeting held on November 2004, Premier Wen Jiabao stressed in his speech of Deepening the Strategic Partnership and Promote Overall Cooperation that, we should “earnestly implement the Agreement on Trade in Goods of CAFTA and the Agreement on Dispute Settlement Mechanism of CAFTA and expedite the negotiation for service trade and investment in the CAFTA”.
IV. Prospect: Win-Win Cooperation
In July 2005, the Agreement on Trade in Goods of China-ASEAN Free Trade Area became effective. It is a great event for the economic integration of East Asia and for the global regional economic cooperation. Construction of CAFTA will inevitably bring about active and significant changes to this region and thus will emerge a pattern of brand new, active and all-round cooperation.
1. Good beginning is the important safeguard for the successful establishment of CAFTA.
As a Chinese saying goes, “Well begun is half done”. Since CAFTA is the first free trade area that China participates in construction, we must endeavor to complete it.
(i) Implement the “Early Harvest Program”. Even though the volume of trade in goods planned in the “Early Harvest Program” does not count much proportion in the total trade volume between China and ASEAN, its great impacts cannot be ignored. Firstly, it is necessary to expedite the pace of trade facilitation of both sides. Secondly, it is to strengthen the consciousness of “Early Harvest Program” of the enterprises, assist the enterprises to be prepared for the market opening. In the first year of the “Early Harvest Program”, due to the lack of knowledge, many Chinese enterprises had paid much duties that could have been saved. Such has hampered further development between two sides in the “Early Harvest Program”, from which, some lessons should be learnt. Similarly, the businessmen from the four new ASEAN member countries should also avoid such problems.
(ii) Implement the Agreement on Trade in Goods. Firstly, it is required to learn lessons from the implementation of the “Early Harvest Program”. Since the “Early Harvest Program” is the “experimental plot” for tax reduction and exemption, we should be fully alive to the experimental results therein. Secondly, it is to make efforts to facilitate the liaison and cooperation of the business associations of China and ASEAN in jointly discussing the new changes, new challenges and new business opportunities therefrom the market opening, including the industrial interior division, coordination and optimization, thus further to expand the trade creation and investment cooperation and improve the regional competitive capacity. Thirdly, It is to expedite the negotiation of Agreement on Investment and Agreement on Service Trade between China and ASEAN, improve the opening framework of CAFTA. All these are the real choices for mutual cooperation and mutual development as well as the objective requirements for the successful establishment of CAFTA.
2. Promotion of cooperation is the basic principle throughout the whole process of construction CAFTA.
CAFTA is born along with the quick growth of trade volume between China and ASEAN countries. As early as in November 2001, China had reached an common understanding of construction a free trade area. In 2002, the trade volumes of both sides increased by 32% than that of the previous year. In November 2002, both China and ASEAN entered Framework Agreement on ASEAN-China Comprehensive Economic Cooperation. In 2003, the trade volume of both sides increased by 433%. In October 2003, China made its accession to the Treaty of Amity and Cooperation in Southeast Asia, establishing the strategic partnership for peace and prosperity with ASEAN. On January 1, 2004, the “Early Harvest Program” of the free trade area was fully initiated, and within the same year, the growth of trade volume of both sides increased by 35%.
China and the ASEAN countries have their respective advantages in natural resources and different characteristics of industrial structures, indicating strong complementarity and great cooperating potentials. In these years, on the basis of equality and mutual benefit, exchanges and cooperation between China and ASEAN countries are bourgeoning, covering the fields of trading, investment, finance, agriculture, tourism, transportation, energy resources, science and technology and human resources etc.. As a result, a new pattern of regional cooperation is gradually formed with the characteristics of multi-field, multi-level, widespread supporting as well as governmental and non-governmental participation. At the eighth ASEAN and Chinese leaders meeting in 2004, China signed the Plan of Action with ASEAN, which is treated as the “general plan” for comprehensively deepening and promoting the partnership and mutual cooperation during the period of 2005-2010. This general plan will greatly facilitate the construction of CAFTA.
With the full initiation of the CAFTA construction, China and ASEAN members should make great effort to enhance the strength, enrich the contents, broaden the fields and innovate the means of cooperation.
3. Look into the future and actively exert the promoting function of CAFTA in East Asia economic integration. CAFTA is a free trade area with significant influence. Common consensus, contribution of efforts and win-win creation will not only benefit ourselves but also the whole East Asia. It is well known that the regional economic integration is changing the global economic trading pattern. In recent years, the economic integration of the East Asia takes on an active situation of fast growth, which we believe, would have the close relationship with the construction of CAFTA. CAFTA is not only a catalyst, but also an important component of the economic integration of the East Asia. Looking into the future, we can realize that economic integration of the East Asia propelled by the joint efforts of China and ASEAN members in constructing CAFTA will serve the common interest of economy and the demand of economic growth. The cooperation between China and ASEAN as well its member countries have become the important impetus for Asia to realize the great rejuvenation and prosperity.