Doing the Rounds: ASEAN's New FTA Commitments

By Jonathan Hopfner

After years of warnings that they were failing to capture the attention of a foreign investment community increasingly fascinated with China as a market and production base, the members of the Association of Southeast Asian Nations (ASEAN) may now stand accused of doing too much. At an early November summit in Phnom Penh, Cambodia, the leaders of Thailand, Laos, Cambodia, Myanmar, Vietnam, Indonesia, Singapore, Brunei, Malaysia and the Philippines not only pledged to boost intra-ASEAN cooperation - in the areas of tourism and counter-terrorism in particular - but also committed themselves to closer economic linkages with the meeting's three guests - China, Japan and India.

On the surface, the summit was hailed by Cambodian Prime Minister Hun Sen as "historic" it does indeed appear to have produced some impressive results. Chief among these is the "Asia-China Framework Agreement on Economic Cooperation," designed as a blueprint for the creation of an ASEAN-China Free Trade Area (FTA) within the next decade. Under the framework pact, negotiations will begin on the elimination of tariffs on a range of agricultural and livestock products earmarked for an "early harvest" program next year. This is seen as a preliminary step toward free trade and investment in "substantially all" products and areas by 2010. The pact was particularly kind to ASEAN's newer, and less developed, members – Myanmar, Laos, Cambodia and Vietnam – who will be given an extra five years to prepare their fledgling markets for the initiative. They were also granted special trade concessions by the Chinese government.

The agreement was far-reaching enough for ASEAN Secretary-General Rudolfo Severino to tell the press shortly after the summit that ASEAN had shown, once and for all, that it was taking concrete action to address the issue of China grabbing an ever-larger share of the region’s foreign direct investment flow – apparently by adhering to the old adage that “if you can’t beat ‘em, join ‘em.” Severino argued that the creation of an ASEAN-China free trade zone would encourage foreign firms to use ASEAN as a production center and “gateway” to China’s billions of consumers, while the ASEAN business community would have free access to the world’s most potentially lucrative market.

That ASEAN firms would stand to gain at least some degree from China’s elimination of tariffs on their products is difficult to contest. Trade between the two sides has already evidenced steady growth, reaching US$38 billion in the first three quarters of this year, a 27 percent increase on the same period in 2001. But it may prove more difficult to reap other promised benefits.

The region's firm belief that signing on to an FTA with China will increase its luster as a production center seems misplaced. Two factors have driven much of the recent rush to establish manufacturing facilities on Chinese shores - market access and cost. While theoretically, ASEAN could indeed act as a "gateway"to the mainland in an FTA situation, especially considering Beijing's recent ascension to the WTO, most firms determined on doing business with China will no doubt elect to set up shop there. The current trend of shifting production to China has already demonstrated that the often superior infrastructure and comparatively friendly investment environments that ASEAN’s more developed members possess have done little to convince companies that Southeast Asia is the best place to be based.

In addition, while countries like Malaysia may be able to compete with China for some time yet as manufacturing centers for high-end goods such as computer parts, automobiles and electronics, those that have established themselves as outsourcing centers for more basic goods such as food and textiles - including Thailand, the Philippines and Indonesia - will still find themselves unable to compete with China's skilled labor costs, FTA or no FTA. Even the members of ASEAN able to compete with China on the pricing front – Cambodia and Vietnam, for example, both of which possess burgeoning textile industries – seem set to fall behind in terms of infrastructure and human resources. This is to say nothing of the region’s perceived instability, which could again be highlighted if the Bush administration launches an attack on Iraq, angering Southeast Asia’s millions of Muslims in the process.

Less obvious, but still far from addressed, are concerns that despite the agreement, an ASEAN-China FTA may not arise by 2010 - or at least not in the shape so ambitiously laid out in the framework pact. Negotiations will commence with agricultural products, perhaps because consensus on these may be hardest to reach. While Singapore, unable to produce enough food of its own, may have no problems slashing excise taxes on Chinese vegetables, the other nations of ASEAN will no doubt find the process more trying. Farmers in Northern Thailand are already up in arms over an influx of cheap Chinese garlic and mushrooms, a situation that their leaders will no doubt capitalize upon come election time. This pattern is likely to repeat itself throughout ASEAN as heavily agriculture-based economies prepare themselves to deal with sudden onslaughts of Chinese goods. Past experiences in the implementation of the ASEAN Free Trade Area (AFTA) itself have shown that when the time comes, certain nations simply refuse to discard sensitive aspects of their import tax regimes, regardless of their past promises – witness Malaysia's reluctance to liberalize its auto sector and the Philippines' backpedaling on its commitments to drop duties on petrochemical products. What may emerge from the China-ASEAN FTA, if the 10-year deadline is to be adhered to, is an agreement so hobbled by compromises and "exceptional cases" that it does not resemble an FTA at all.

Another potential difficulty is the fact that ASEAN may simply be too busy – given the likelihood that negotiations on a FTA with China will be time-consuming and fraught with obstacles – to give the framework pact the attention it deserves. Before the ink had even dried on the China-ASEAN agreement, ASEAN leaders signed on to a Comprehensive Economic Partnership (CEP) with Japan, which also commits both sides to work toward a FTA in the next decade. Just a day later, the leaders of ASEAN and India released a statement after their Phnom Penh meet that claimed they would also explore the possibility of creating an India-ASEAN free trade zone by 2012. Add to this the US’s recent unveiling of the “Enterprise for ASEAN Initiative,” under which Washington plans to establish FTAs with ASEAN nations meeting certain economic conditions, and the host of bilateral trade agreements that individual ASEAN countries have already or are striving to seal. This includes Singapore with the US and Japan and the US with Thailand and the Philippines. The result is a host of programs, dialogues and deadlines that will no doubt tax the region’s severely limited manpower. Secretary-General Severino himself has admitted that there are “valid concerns” surrounding ASEAN’s capacity to juggle so many obligations at once.

The effort to forge partnerships with nations outside ASEAN’s borders may also take a toll on AFTA itself, which is set to come into full force in the new year. While many intra-ASEAN tariff cuts have been implemented successfully, heavy duties on politically sensitive products remain squarely in place, customs procedures are still disjointed, and trade in services is no freer now than it was a decade ago. ASEAN leaders would do well to remember that their work within the grouping itself is not done – and plan carefully their efforts to establish FTAs with other countries, or risk losing the credibility they are fighting so hard to gain.