China-ASEAN Free Trade Agreement economic potentials

Finally, the China-ASEAN Agreement on Trade and Goods took effect on January 1,
2010.

At the ASEAN Summit in 2000, then Chinese Premier Zhu Rongji proposed the creation
of the free trade area between China and ASEAN in 10 years. As a result, the Agreement
on Trade in Goods of the Framework Agreement on Comprehensive Economic
Cooperation between China and ASEAN Nations was signed during the 10th ASEAN
Summit in Vientiane, Lao PDR in November 2004, and to be fully implemented on 2010.
The agreement is expected to liberalize the flow of goods and investment between China
and its ASEAN neighbors starting January 1, and for the newer ASEAN members by
2015. The new economic block will be officially called ASEAN-China Free Trade Area
(ACFTA).

Though hailed as a landmark pact, and the economic benefits are inexorable between
these countries, the extent of gains derived from closer integration hinges on Sino-
ASEAN economic relationship which is both complementary and competitive in nature.
It should be noted that the “similarity of trade structures between these countries –
industrial and trade structures, makes these nations more competitive against its other
than complementary. At the same time, ASEAN and China are direct competitors for
foreign investment rather than significant investors in each other’s economy. (John Wong
and Sarah Chan, 2003) Meaning, the prospects for the bilateral trade to flourish depends
on how well China and ASEAN interlock their economies in the long run.

ACFTA when fully established is expected to rival other economic unions particularly
the North American Free Trade Agreement and the European Union. In fact, ACTFA has
the biggest potentials among other economic unions combined in terms of trade and
investment.

Outright, this ACTFA will create an economic region with almost 2 billion consumers.
With a Gross Domestic product of about US$6 trillion and total trade estimated at US$4
trillion, this makes it the biggest free trade agreement in the world in terms of population
size.

There were contentions that despite its huge population base, the region’s development
would be weighed down by high poverty rate in many of ASEAN nation members, and
therefore, “valid” customer base to support economic gains must be much lower. That
argument may have some basis, but grossly incorrect.

For the sake of argument, let us put it this way, and for lack of real figures, we can safely
assume that 30% of the population base in China and ASEAN nations belongs to the
middle class. That is roughly 600 million capable consumers! This is more than the 500
million entire population of the 27 countries belonging to the European Union, and more
than the population of the nations under NAFTA which is just less than 400 million.
High poverty incidence may be a dilemma, but with new opportunities, the situation
would easily reverse and transform excess labor into a treasure of human resources
instead. As experienced, the economic boom of China was made possible by excess labor
many of whom are willing to accept low pay. It served as the foundation that supports the
development of new businesses and increased investments. This does not include the fact
the China’s double digit GDP increases in the past years is bolstered by the improving
conditions of their poor population.

China would be the impetus of growth in the region compared to Germany for the EU
and USA for NAFTA. The demand for the 1.3 billion people of China could help
agriculture based-countries such as the Philippines boost their economies through
increased export. The agreement eliminates tariff barriers and removed maintenance and
quantitative restrictions of more than 7,000 commodities to China, that lowers the costs
of transactions. Simulations conducted by ASEAN Secretariat suggest that with ACFTA
“ASEAN exports to China will increase by 48% and China’s export to ASEAN by 55.1
percent. The free trade agreement increases ASEAN’s GDP by 0.9% or by US$5.4 billion
while China’s real GDP expands by 0.3 percent or by US2.2 billion in absolute value.”
(Raul L. Cordenillo, ASEAN Secretariat, 2005).

Critics to our membership with the World Trade Organization have in the past expressed
reservations that liberalization poses serious threat to our country. In their view,
Philippine producers are ill prepared for increased market competition, and are therefore
likely to close down resulting job losses.

Though winners may emerge (as this is the natural law of competition), our partial
experiences in the WTO showed that the number is smaller than those forced out of
business. Workers displaced by freer trade face adjustment costs in searching for new job
opportunities and developing the appropriate skills for new jobs.

Reduced prices are expected to harm producers, particularly the primary producers or
those at the top of the supply chain. In agriculture for example, the growing competition
provided by competitive imported fruits and vegetables are generally expected to push
down prices of tropical fruits and vegetables in the domestic market. With logistical costs
relatively higher for local farmers, increased trade would reduce farm incomes and
increase poverty in rural areas. (Ramon Clarete, 2005)

It cannot be denied that trade liberalization fell short of the expectation the it could result
to significant positive effects to poverty in the Philippines. Sadly, the country failed to
seize the opportunities created by the free trade.

It is my contention, that we have to face the issue of transaction cost, an area that we
failed to appreciate. The government should stop protecting our industries if we want to
integrate into the ACFTA trading system. Our over zealousness attempt to protect our
industries, undeniably also caused its failure to compete globally. Lower transaction costs
are necessary in freer trade. Improved economic performance can only happen if freer
trade is coupled by the increase number of economic agents engaged in cooperative,
competitive, and mutually gainful exchange of assets to create additional wealth. All
these cannot be achieved without lower transaction cost.

ACFTA is our country’s new chance. We should stop just being contented with the
export of our labor force but instead concentrate and invest on developing and improving
existing products that we find to have the competitive advantage. It would be stupid for
us to lease our lands to Chinese and other foreign companies to produce products for
export. Instead, the government should make bold moves to restructure our own
industrial and manufacturing sector that has barely changed since half a century ago.

As China developed, it sucks more imports from its ASEAN neighbors. Naturally, it
could have negative effect to poor countries than the economically advanced ASEAN
countries particularly to the small and medium enterprise sector who could be easily
dislocated by the flood of cheap imported products. But this may just be temporary
particularly during the adjustment period. With proper policy and government support, it
would not be very hard for the businesses to adopt.

The government must act immediately by supporting the redirection of our capital market
and our industries to optimize the opportunities offered by ACFTA. It seems that our
ASEAN neighbors have started to prepare for this event almost a decade ago, while we
were too busy with our politics.

For comments. E-mail to roldanalex@yahoo.com