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On the first day of this month, the world’s third-largest free trade area - between China and the ten-member Association of Southeast Asian Nations - came into being. But the new tariff-free zone has gotten off to a bumpy start.
Trade between China and the ten-member ASEAN bloc has mushroomed over the past ten years, shooting up at an average rate of more than 26 percent each year between 2003 and 2008. China recently became the region’s third most important trading partner, after Japan and the EU.
The new pact, which was finalised in 2004, is meant to build on that momentum, especially as markets in Europe and the US have cooled recently. Officials hope that the deal will bring cheaper manufactured goods into ASEAN while providing China with easier access to ASEAN’s raw materials exports.
But critics argue that some ASEAN producers will be suffocated by the flood of cheap Chinese imports ushered in by the drop in tariffs. Some analysts predict that losses for industries in ASEAN countries like Indonesia and Thailand will be upwards of US$ 3 billion per year.
The day the deal took effect, tariffs immediately dropped to zero on about 90 percent of all goods traded between China and six ASEAN countries - Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. As a result, the average tariff on ASEAN goods imported into China has fallen from 9.8 percent to 0.1 percent, while the average tariff on Chinese goods imported into ASEAN countries now stands at 0.6 percent, down from 12.8.
The four other ASEAN members - Burma, Cambodia, Laos and Vietnam - will have an additional five years to reduce their tariffs.
The new China-ASEAN trade area is the largest in the world in terms of the number of people - 1.9 billion - who live inside it. The total volume of trade in the China-ASEAN zone is roughly US$ 4.3 trillion annually, making it the third-largest such area in the world after the European Union and NAFTA.
ASEAN has been on a tear recently when it comes to negotiating free trade deals. In addition to the pact with China, the bloc has also inked trade agreements with Australia, New Zealand and Japan. A separate deal with India also took effect at the beginning of this year. Talks toward a regional deal with the EU were begun in 2007 but were put on hold last March after nearly two years of little progress. Instead, Brussels has now begun negotiating bilateral agreements with each ASEAN country.
Indonesian exporters up in arms
While many government officials are hailing the landmark deal, some ASEAN producers are convinced that freer trade with China will do them more harm than good. Exporters in Indonesia, ASEAN’s largest economy, appear particularly concerned.
Thousands of workers staged a rally in the Indonesian city of Bandung earlier this month to protest the deal and call for a delay in its implementation.
“These sectors aren’t ready to compete with imported Chinese products. If the government implements free trade now, these industries are surely going to die,” Indonesian lawmaker Airlangga Hartarto told Agence-France Presse.
According to analysis from the Ikatan Sarjana Ekonomi Indonesia, an Indonesian research group, the new trade deal could lead to total losses of US$ 3.8 billion per year for seven Indonesian industries - petrochemicals, textiles, leather products, electronics, ceramics, foods and beverages, and steel and iron products.
The Indonesian government reacted, although only at the eleventh hour, by asking for an additional two years of tariff protections for 228 products.
“The letter of notification on negotiations to discuss modifications to the 228 tariff items was submitted on December 31,” Trade Ministry official Gusmardi Bustami said, according to a report by AFP.
Indonesian trade minister Mari Pangestu has insisted that the country will honour its trade commitments, but she has also stressed that consultations were ongoing.
“An informal communication process has been conducted to get a win-win solution,” the minister told reporters this week.
Ramming through any alterations to the deal could be a tall order, as all ten ASEAN members would have to agree to the new terms, as would China. Meanwhile, Indonesian exporters are already coming faceto face with the Chinese competition.
“What the government and the business sector have failed to do, I think, is to come up with the necessary strategy to contain these short-term potential losses,” says Alexander Chandra, head of the Southeast Asia programme of the Trade Knowledge Network, a development research group.
The pact was finalised in 2004 - in fact, Jakarta first signed on in 2002 - but the Indonesian government did not begin warning domestic industries of the potential negative effects of the agreement until August of last year, Chandra says. Even then, businesses did not have enough information to make requests for specific changes to the deal.
Surin Pitsuwan, Secretary-General of ASEAN, acknowledged that governments may have to act to help domestic firms compete with cheaper imports, but added that such support “should be short-term and does not remove the incentive to innovate and cut costs.”
In a statement, the ASEAN Secretariat noted that the trade deal includes provisions for safeguard actions in the face of serious injury to domestic industries and that countries have been allowed to retain tariffs on certain ‘sensitive’ goods.
ICTSD reporting; “ASEAN-China open free trade area,” AFP, 29 December 2009; “Indonesia wants China pact revised,” THE WALL STREET JOURNAL, 13 January 2010; “Mari Rebuffs Free Trade Agreement Criticism,” THE JAKARTA GLOBE, 18 January 2010.
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