China-ASEAN FTA: Will Indonesia Cry 'No Mas'?

I've almost forgotten to post about what I'm supposed to be researching--economic integration in Southeast Asia and the wider Asia region. For those of you interested in my line of work concerning Southeast Asian economic integration, the start of the year brought into play two important events: First, the first six members of ASEAN--Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand--have eliminated tariffs between them (at least for merchandise not on the sensitive goods list) at the start of the year. The newer accession countries--the so-called CLMV of Cambodia, Laos, Malaysia, and Vietnam will have to do the same in 2015 instead of 2010 although they too are progressively reducing tariffs. Here is a backgrounder from the Philippine Star:

Starting 1 January 2010, Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, and Thailand can import and export almost all goods across their borders at no tariff as the Common Effective Preferential Tariffs for Asean Free Trade Area (CEPT-Afta) takes effect. This move which will bring the total tariff lines traded under the agreement to 54,457 or 99.11 percent [of all goods] is a major milestone in efforts to transform Asean into a more integrated regional bloc economically, politically, socially, and culturally.

“The elimination of tariffs by Asean-6 underscores Asean’s commitment to dismantle tariffs and keep intra-Asean trade open. It will also serve as a catalyst for the development of the single market and production base projected by the Asean Economic Community (AEC) Blueprint,” the Jakarta-based Asean Secretariat said in a statement.

Dr. Surin Pitsuwan, Asean Secretary General, said the landmark agreement could mean savings for the 600 million Asean consumers depending on the market dynamics of the respective Asean-6 countries. “We sincerely hope that all parties will act to ensure that the man on the street will benefit from these reductions in tariffs,” he said.

The business community, especially the downstream producers, also stands to gain in this new regional setup, Pitsuwan said. “Lower cost of inputs will allow the business community a wider choice of goods, and in the process, they will move towards becoming more competitive globally, as envisaged in the AEC [ASEAN Economic Community] Blueprint,” he added.

Under CEPT-Afta, an additional 7,881 tariff lines will come down to zero tariffs for the so-called Asean-6, the secretariat said. “Additionally, with the reduction, the average tariff rate for these countries is expected to further decrease from 0.79 percent in 2009 to just 0.05 percent in 2010,” it said. In 2008, intra-Asean import value of commodities for these 7,881 tariff lines amounted to $22.66 billion, or 11.84 percent of Asean-6 import value within Asean.

The tariff lines include final consumer products such as air conditioners, and chili, fish, and soya sauces, as well as intermediate materials such as motorcycle components and motor car cylinders. Other products include iron and steel, plastics, machinery and mechanical appliances, chemicals, prepared foodstuff, paper, cement, ceramic, and glass.

The CEPT-Afta covers the whole range of products traded by the Asean members-states and provides for the gradual reduction in tariffs of these products starting 1993. It specifies zero-tariff by 2010 for Asean-6 and 2015 for the remaining four countries of Cambodia, Laos, Myanmar, and Vietnam. In 2010, these four countries will also see tariff reductions to 5 percent, where the average tariff rate will decrease from 3 percent in 2009 to 2.61 percent.

Under the CEPT-Afta, agricultural products such as tobacco, coffee, live animals, and animal products, which come under the Sensitive List (SL), will have their tariffs reduced to 5 percent on 2010 and to zero tariff by 2015. The Highly Sensitive List (HSL), comprising rice, will have their tariffs capped on a specified date. As for the General Exclusion List (GEL), the tariffs will remain based on factors such as national security and morals/health/aesthetic/archaeological grounds (e.g.: weapons and opium). As of today, 487 tariff lines or 0.89 percent of tariff lines for Asean-6 still remain in the SL, HSL, and GEL categories.

So far, so good. The other bit of business places ASEAN countries more into competition with a manufacturing dynamo everyone should be familiar with in China. Although this has been anticipated for quite some time, it's somewhat unfortunate that our Indonesian friends are bellyaching about it just now and even threatening to "review" the ASEAN-China FTA Obama and NAFTA-style. (Or Hillary "time out on trade"-style.) Let's begin with an excerpt of the Chinese ambassador to the Philippines Liu Jianchao's statement on this momentous event for regional trade. While it's a country-specific statement, the logic on offer is similar to the pronouncements of other PRC officials:

As today’s global economy offers unparalleled opportunities for all countries across the world, continuing to expand trade by lowering barriers of goods and services is in the common interest of China and Asean countries. Our concerted and unremitting efforts during the past decade will soon reap fruits with the full establishment of China-Asean Free Trade Area (Cafta) on January 1, 2010.

This means that more than 7,000 zero-tariff commodities could be traded among China and Asean countries. The removal of trade impediments will lower the costs of transactions, further increase China-Asean trade volume, and enhance economic efficiency. With market risk and uncertainties lowered, more investments would be generated from both Chinese and Asean companies into an integrated and rewarding market...

When the financial crisis struck in 1997, China held out by not depreciating RMB yuan, which served as a strong force for the recovery of the regional economy. Together with similar cultural tradition and history, complementarities and inter-dependence define the China-Asean bond which enables us to reach consensus towards common prosperity. Therefore, it is fair to say that we have secured a solid foundation for Cafta...

Cafta will bring greater opportunities to the Philippines. With strong export potentiality in electronics, agricultural produce, fruits, fishery products, and minerals, etc, the Philippines will enjoy considerable comparative advantages and expand market shares of its competitive goods. Furthermore, with the agreements on trade of services and investment coming into force, the Philippines would be well poised to boost service trade and attract investments. Tourism, English teaching, eco-medical and retirement care services are those areas where the Philippine government can really turn potential into profits. More incoming investments from both China and other Asean countries will give driving impetus to infrastructure development in the Philippines...

Cafta will spur two-way investment flow between China and the Philippines. The Chinese companies are willing to bring their infrastructure investment up to higher level in various fields such as transportation, power generation, water supply, and telecommunication. At the same time, China will do its utmost to get its policies well understood by Philippine companies in terms of foreign investment in China. We remain ready to invite Philippine enterprises to tap investment potential in China...

There have been, is, and will always be some concerns over the Philippines’ future after Cafta is up and running. Some voiced challenges in more fierce competition in manufacture industries, some stressed the vulnerability of domestic agriculture under price impact, and some even went as far as saying that free trade is not fair at all. However, the idea that free trade is fair only if countries share identical labor costs and economic regulations or if domestic producers are compensated for market losses to more competitive foreign producers does not hold water. The economic benefits of free trade derive from the fact that trading partners are different, allowing any country embracing world markets a chance to be competitive. Free trade is fair when countries with different advantages are allowed to trade with a minimum of restriction and capitalized on those differences.

The Philippines is the case in point. As I’ve just said, the Philippines is endowed with comparative advantages in terms of natural resources, wage costs, language skills, education levels and etc. And what is more, as I observed, this country has a very dynamic private sector which keeps growing even in times of the on-going crises. China held similar worries when standing at the threshold of entry into the WTO. When something new comes, it always takes time to learn, try and finally excel. Therefore, Cafta for the Philippines is more than just cloud’s silver lining, but a blessing in disguise.

Note that there are usually three components of any comprehensive deal with ASEAN: one for trade in goods, another for trade in services, and a third for investment. All have come into effect on 1 January 2010. However, the WSJ brings word that certain interests in Indonesia may be wimping out on the China-ASEAN FTA. Worse still, it may put the entire enterprise in some jeopardy:

Indonesia is hoping to renegotiate a free-trade pact between Southeast Asia and China that took effect this month amid concerns from local business about what they call unfair competition from low-cost Chinese imports. Indonesia's government has sent a letter to the Association of Southeast Asian Nations, or Asean, to ask for a one-year delay, until January 2011, in imposing zero tariffs on a number of goods, including textiles, steel and chemicals, to give local businesses more time to adjust, said Muhdori, a spokesman for the industry ministry. "We want to slow down the pace of this agreement so we are ready domestically," he said.

Some Indonesian business leaders complain the government failed to consult them in the process of negotiating the free-trade agreement. Many sectors are already reeling from competition with low-cost Chinese clothes, toys and electronic goods, which are often smuggled into Indonesia, and opening the borders will further hurt local business, said Sofjan Wanandi, chairman of the Indonesian Employers Association. "We're totally unable to compete and we'll have to close our factories," he said.

During 2008, two-way trade between China and the 10-member Asean totaled $193 billion. Under the free- trade deal signed in 2004, tariffs on China-Asean trade declined in stages to an average of 5% last year. On Jan. 1 this year, they dropped to zero on about 90% of their trade. Under a separate agreement, meanwhile, most tariffs on trade between six of Asean's economies -- Indonesia, Thailand, Singapore, the Philippines, Malaysia and Brunei -- also fell to zero at the start of 2010.

The Asean-China deal was billed by both sides as creating the third-largest free-trade area in the world after the European Union's single market and the North American Free Trade Area.

An Asean endorsement of Indonesia's request for a one-year delay in treaty terms now in effect is extremely unlikely...China would need to agree with any request for delaying treaty implementation, and that seems highly unlikely. On Tuesday, an official of the Chinese foreign ministry said no request for suspending an implementation date has been received. The ministry referred questions to the ministry of commerce, which didn't respond Tuesday.

The People's Daily newspaper last week quoted Yi Xiaozhun, vice-minister of commerce, as saying worries like those of Indonesian manufacturers are "understandable. But the free-trade agreement is mutually beneficial... with full consideration of economic development levels and market capacities of both sides, the free-trade agreement will advance the regional economic integrity by eliminating barriers of trade and investment."

Southeast Asia's trade with China has risen sixfold in the past decade. While the region exports agricultural products and natural resources to China, most countries import Chinese manufactured goods that have a higher total value than Asean's exports. In 2008, the last year for which statistics are available, Asean had a trade deficit with China of $21.5 billion...

To counter these concerns, the free-trade deal allowed for China and Southeast Asian nations to temporarily exclude items that add up to 10% of the value of their total imports from the new zero tariffs by putting those products on a "sensitive list," with barriers coming down gradually over the next few years. Some nations like Singapore, a rich, open economy and a major exporter of high-tech products, have few items on the list. But countries that compete directly with China to export lower-end manufactured products, such as Indonesia, the Philippines and Thailand, have excluded hundreds of items each...

"I don't know why they are complaining only now," Rodolfo Severino, a former Asean secretary-general, said about the Indonesian request for changes. Mr. Severino, who now heads the Asean Studies Center at the Institute of Southeast Asian Studies in Singapore, said that large nontariff barriers to trade in the region will continue to protect some domestic industries despite the free-trade agreement. These include cumbersome customs procedures, labeling requirements and product specifications that stanch the flow of trade, he said.

Severino makes the point I've reiterated here: the anti-trade crowd had six whole years to complain to the Indonesian government and ASEAN. Or, better yet, to actually prepare for this eventuality. They get no sympahty from me whatsoever. Moreover, I am not entirely convinced by the "Big Bad China Will Wipe Out Southeast Asia" argument. The economist types have this thing called the export similarity index (ESI) that does exactly what it says by comparing how much export competition occurs between countries. This can range from 0 (a pair of countries have entirely dissimilar export profiles) to 1 (they have entirely identical export profiles).

This helpful conference paper by Wai-Heng Loke uses a measure of net export similarity that nets out possible confusion over being part of identical supply chains to determine that figures are not very high--topping out at 0.3529 for Thailand in 2008. Moreover, the ESI between China and each of the five ASEAN countries mentioned has fallen from 2005 to 2008.

So, bring on the China-ASEAN FTA. Don't be a wuss about it; we aren't anti-globalization flunkies here, dammit.