CHONQING UNIVERSITY IMBA

China-ASEAN Free Trade Agreement: Impact

on Regional Economic
Development
SIMON, BENEDICT & ANDY
11/12/2010

[
Table of Content

1.0 Introduction[Benedict]...................................................................................................................3
2.0 Macroeconomic Environment .......................................................................................................6
2.1 ASEAN [Andy].....................................................................................................................6
2.2 CHINA [Simon]..................................................................................................................11
3.0 Free Trade Agreement[Benedict].................................................................................................13
3.2 Trade in Goods [Simon]......................................................................................................21
3.3 Trade in Services [Ben].......................................................................................................22
3.4 Foreign Direct Investment [Andy]......................................................................................24
Trade in investment between China and ASEAN...............................................................................24
4.0 Impact on Region.........................................................................................................................26
4.1 Trade in Goods [Simon]......................................................................................................26
4.2 Trade in Services [Ben].......................................................................................................30
4.3 Foreign Direct Investment [Andy]......................................................................................37
5.0 Conclusion[Andy]........................................................................................................................41
 1.0 Introduction[Benedict]

The ASEAN and China agreed to forge an agreement with one another, since they both recognized that a

free trade agreement (FTA) is the best means to achieve further growth and development in the region.

The FTA sets in place a mechanism that allows for strengthened cooperation between the parties,

paving the way for a more stable and stronger East Asia economy. Through the FTA, all parties have

agreed to work towards further minimizing barriers and deepen economic linkages among the parties,

increasing intra-regional trade and investment, increasing economic efficiency, creating a larger market

with greater opportunities and larger economies of scale for business, and enhancing the attractiveness

of the Parties to capital and talent.

The ASEAN–China FTA reflects the active response of ASEAN and China to the challenges brought

about by intensifying regionalism in the global economy and the growing ties among them. It is a

significant development in East Asian integration. China, Brunei, Malaysia, Indonesia, Myanmar,

Singapore, and Thailand gave tariff cuts to each other on 7,455 kinds of commodities.. Under the

accord the Early Harvest Program was implemented on 1 January 2004; tariff negotiations for trade

in goods were completed in November 2004 and implemented in July 2005. Negotiations on a

dispute settlement mechanism were finalized in 2004 for implementation in 2005. In January 2007,

an Agreement on Trade in Services was signed and the Investment Agreement was signed in August

2009. As the world’s third largest FTA, CAFTA has a combined GDP of US$6.6 trillion, a market

of 1.9 billion people and a total trade of US$ 4.3 trillion.

The move towards a FTA as a result of rational calculations by their political leaders of possible costs

and benefits of the pact. For ASEAN, an FTA with China is seen as a first important step in

integration with Northeast Asia in order to promote regional cooperation, strengthen its position,

and have its voice heard in the global arena. Mutual economic benefits and integration have been

possible because China has chosen to pursue development strategies characterized by peace and

partnership. Southeast Asian economies have recognized the rise of China and begun to collaborate

and adapt to the new order of changing competitive advantages, global financial flows, and trade

links.

Under the FTA, China will benefit from better access to ASEAN’s 410 million consumers, China

specifically hopes to strengthen its economic and political relations with ASEAN. With growing

institutionalized economic cooperation with ASEAN, China aims to develop a relationship of trust

and partnership with Southeast Asian countries, thus promoting China’s foreign policy objective of

ensuring peace in the region. Statistics from the ASEAN Secretariat showed that the China–ASEAN

trade volume has been growing at an average speed of 40 percent over the past three years, reaching

US$46.59 billion, or an increase of 25.96 percent three months after some 7,000-item tariff-

reduction program was carried out on July 20, 2005. It is estimated that the China–. China is

currently the third largest trading partner of ASEAN after Japan and EU, with a trade value of

US$192 billion in 2008. This makes up for 11% of ASEAN’s total trade with external parties. The

ACFTA is a market of 1.91 billion consumers that have a combined GDP of about US$5.83 trillion

(2008). It will become the third largest global trading region after the European Union and the

North American Free Trade Zone but in terms of consumer market size, the ACFTA is the biggest

FTA in the world

 2.0 Macroeconomic Environment

2.1 ASEAN [Andy]

A] Definition:

Association of Southeast Asian Nations, commonly abbreviated ASEAN is a geo-political and

economic organization of 10 countries located in Southeast Asia, which was formed on 8 August

1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand. Since then, membership has

expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. Its aims include the

acceleration of economic growth, social progress, cultural development among its members, the

protection of the peace and stability of the region, and to provide opportunities for member

countries to discuss differences peacefully.

The motto of ASEAN is “One Vision, One Identity, One Community”.

A1] ASEAN Flag

The ASEAN flag represents a stable, peaceful, united and dynamic ASEAN. The colours of the flag --

blue, red, white and yellow -- represent the main colours of the flags of all the ASEAN countries.
The blue represents peace and stability. Red depicts courage and dynamism. White shows purity and

yellow symbolizes prosperity.

The ten stalks of paddy represent the dream of ASEAN's Founding Fathers for an ASEAN comprising

all the ten countries in Southeast Asia bound together in friendship and solidarity. The circle

represents the unity of ASEAN.

A2] History evolution:

On 28 July 1995, Vietnam became the seventh member. Laos and Burma (Myanmar) joined two years

later in 23 July 1997. Cambodia was to have joined together with Laos and Myanmar, but was

deferred due to the country's internal political struggle. The country later joined on 30 April 1999,

following the stabilization of its government.

B] Country profile

Countries The Economy The People The Environment The Infrastructure

Gross Growth Exchange Total population Unempl Total Forest CO2 Road Railways Mobile
Inflation Popula
domestic rate of rate at oyment land area area emission length phones
rate (year- thousand tion km
product gross end of rate
on-year density km2 as per km per 1000
domestic period
at current growth of percent percentag capita person
product1 (national
prices (US$ CPI at end e of land metric
/ currency
million) of period) area tons
at =US$ 1)
constant
prices

2009
2009 2009 2009 2009 2009 2009 2009 2009 2007 2009 2009 2009
19.8/9
Brunei 14,1467 -0.5 1.42 1.9 406.2 70 3.7 5,765 75.9 3,728 n.a 1,018.0
0.3/17
Cambodia 10,3682 0.1 4,221 5.3 14,957.8 83 0.8 181,035 n.a 178.8
9
1,860,3 1.8/13
Indonesia 546,5270 4.5 9,400 2.8 231,369.5 124 8.4 n.a
60 0
0.3/18
Lao PDR 5,579.2 7.6 8,506 8.5 5,922.1 25 1.3 236,800 73,323 n.a. 2 52.3
4
7.3/58
Malaysia 193,1077 -1.7 3.42 1.1 28,306.7 86 3.6 330,252 55.8 9 0,127 8 78.6
0.3/18
Myanmar 24,9728 4.8 n.a. n.a. 59,534.3 88 4.0 676,577 4 ,990 4.2
5
0.8/15
Philippines 161,3576 1.1 46.36 4.4 92,226.6 307 7.4 300,000 29,650 659.3
9
7,02 12.1/2
Singapore 182,7017 -1.3 1.40 -0.6 4,987.6 2.2 710 3,325 138 1,224.6
2 4
264,3228 4.1/96
Thailand -2.2 33.32 3.5 66,903.0 130 3.2 513,120 9 8,053 4,043 804.2
96,3171 331,05 1.3/14
Vietnam 5.2 17,941 6.9 86,024.6 260 1.3 2,577 271.6
1 7
4,435,6
ASEAN 1.5 n.a. 590,638.3 133 n.a.
70
ASEAN 4: Term use to call the four poorest countries in ASEAN, including: Brunei, Lao PDR,

Cambodia and Myanmar.

ASEAN 5: Thailand, Indonesia, Malaysia, Philippines and Singapore

ASEAN +3

In 1990, Malaysia proposed the creation of an East Asia Economic Caucus composing the then-

members of ASEAN as well as the People's Republic of China, Japan, and South Korea, with

the intention of counterbalancing the growing influence of the United States in the Asia-Pacific

Economic Cooperation (APEC) as well as in the Asian region as a whole. This proposal failed,

however, because of heavy opposition from the United States and Japan. Despite this failure,

member states continued to work for further integration and ASEAN Plus Three was created in

1997.

ASEAN+6

At the second East Asia Summit (EAS) held on 15 January 2007 in Cebu, the Leaders of ASEAN

and six other nations (China, India, Japan, S Korea, Australia and New Zealand, agreed to

launch a study on a Comprehensive Economic Partnership in East Asia (CEPEA) among EAS

participants. An underlying ambition was the establishment of an ASEAN + 6 FTA.

C] ASEAN AND CHINA

C1] Formation:

The first meeting of ASEAN-China Joint Cooperation Committee (ACJCC) was held in Beinjing in

26-28 February 1997.

On 5 November 2002, ASEAN and China signed a framework agreement in Phnom Penh that

commit them to establish ACFTA within ten years, beginning in 2010.

The ASEAN-China FTA – the world’s third largest free-trade area – came into effect on 1 January

2010. The FTA has a combined GDP of US$ 6.6 trillion, 1.9 billion people and total trade of
 US$ 4.3 trillion.

2.2 CHINA [Simon]

Following a basic overview of China economic and trade situation will be laid out. The facts are

base on WTO data.

Having a population of about 1.3 billion and a GDP of almost 5 billion US$ in 2009 China is

emerging as one of the most powerful economies. Its trade per GDP ratio stands at 58.6 %, showing

its deep integration in international trade. China ranked 1st and 2nd in global merchandise exports

and imports, respectively.

Annual percentage change

2009 2000-2009 2008 2009

Real GDP (2000=100) 245 10 10 9

Exports of goods and 283 12 -9 -12

services(volume,
2000=100)

Imports of goods and 222 9 -13 -6

service(volume, 2000=100)

In 2001 China finally become a member of WTO and has now a tariff binding coverage of 100%
MFN tariffs Final bound Applied 2009
Simple average of import duties
All goods 10.0 9.6
Agricultural goods (AOA) 15.7 15.6
Non-agricultural goods 9.2 8.7
Non ad-valorem duties (% total tariff lines) 0.0 0.5
MFN duty free imports (%, 2008)
in agricultural goods (AOA) 0.7
in non-agricultural goods 48.4
Services sectors with GATS commitments 93

Its share of world total exports in merchandise were 9.62% in 2009. And can be further broken

down into: Agricultural products 3.4%, fuels and mining products 2.9 %, Manufactures 93.6.

The main destinations of its merchandise trade exports were: European Union (27) 19.7 %, United

States 18.4%, Hong Kong, China 13.8%, Japan 8.1%, Korea 4.5.
China share in world total imports or merchandise were 7.93%, of which agricultural products

accounted for 7.6%, fuels and mining products for 24.9 5, and manufactures for 67.1%.

Main origin of these were Japan 13.0%, European Union (27) 12.7%.

Commercial services trade only plays a minor role in exports as well as imports.
 3.0 Free Trade Agreement[Benedict]

3.1 FRAMEWORK AGREEMENT

The framework agreement was signed on 4 November 2002 in Phnom Penh by eleven heads of

government. This Agreement provided the legal basis for ASEAN and China to negotiate enabling

agreements that have led to the creation of the ASEAN-China Free Trade Area (ACFTA) on 1

January 2010. Desiring to minimise barriers and deepen economic linkages between the Parties;

lower costs; increase intra-regional trade and investment; increase economic efficiency; create a

larger market with greater opportunities and larger economies of scale for the businesses of the

Parties; and enhance the attractiveness of the Partiesto capital and talent. Recognizing the different

stages of economic development among ASEAN Member States and the need for flexibility, in

particular the need to facilitate the increasing participation of the newer ASEAN Member States in

the ASEAN-China economic co-operation and the expansion of their exports, including, inter alia,

through the strengthening of their domestic capacity, efficiency and competitiveness;

TIMELINE FOR THE CHINA-ASEAN FTA

Nov 2001 China and the 10-member Association of south East Asia Nations (ASEAN) began
negotiation to set up a free trade area.
Nov 2002 The “China- ASEAN Framework Agreement on Comprehensive Economic
Cooperation” was signed
1 January 2004 Implementation of the Early Harvest Program (EHP); tariffs on certain products were
reduced over a period of three years, and zero tariff no later than 1 January 2006. The
EHP covers over 130 agricultural and manufacturing products. In return ASEAN
counties agree to give tariff concession to China under the Harmonized System (HS)
for agricultural products, including meat, fish, fruits, vegetables, and milk
November 2004 The China-ASEAN Protocol on Enhanced Dispute Settlement Mechanism (DSM)
and the Agreement on trade in goods was signed at the Tenth China-ASEAN summit.
July 2005 The Agreement on trade in Goods under Framework Agreement on ASEAN-China
comprehensive Economic cooperation became effective. The gradual lowering and
removal of the trade threshold encouraged new industrial structural adjustment and
offer new choices for market development of enterprises.
January 2007 Agreement on Trade in Services between China and ASEAN countries was signed.
August 2009 On August 15, 2009, the investment Agreement was signed, making the successful
completion of main CAFTA negotiations.
1 January 2010 Full-implementation of the CAFTA
B] OBJECTIVES OF THE AGREEMENT

Strengthen and enhance economic, trade and investment co-operation between the Parties;

• progressively liberalize and promote trade in goods and services as well as create a transparent,

liberal and facilitative investment regime

• explore new areas and develop appropriate measures for closer economic co-operation between the

Parties

• facilitate the more effective economic integration of the newer ASEAN Member States and bridge

the development gap among the Parties

C] Measures For Comprehensive Economic Co-operation

The Parties agree to negotiate expeditiously in order to establish an ASEAN-China FTA within 10

years, and to strengthen and enhance economic co-operation through the following:

progressive elimination of tariffs and non-tariff barriers in substantially all trade in goods;

a. Progressive liberalization of trade in services with substantial

b. Sectoral coverage; establishment of an open and competitive investment regime that

facilitates and promotes investment within the ASEAN-China FTA;

c. Provision of special and differential treatment and flexibility to the newer ASEAN Member

States;

d. Provision of flexibility to the Parties in the ASEAN-China FTA negotiations to address their

sensitive areas in the goods, services and investment sectors with such flexibility to be

negotiated and mutually agreed based on the principle of reciprocity and mutual benefits;

e. Establishment of effective trade and investment facilitation measures, including, but not

limited to, simplification of customs procedures and development of mutual recognition

arrangements;

f. Expansion of economic co-operation in areas as may be mutually agreed between the Parties

that will complement the deepening of trade and investment links between the Parties and

formulation of action plans and programmes in order to implement the agreed sectors/areas

of co-operation; and
 g. Establishment of appropriate mechanisms for the purposes of effective implementation of

this Agreement.

D] COVERAGE OF THE AGREEMENT

TRADE IN GOODS

The Agreement on Trade in Goods, signed on 29 November 2004 in Vientiane, Lao PDR, is one of

the enabling Agreements under the 2002 Framework Agreement. It laid down the modality for tariff

reduction and elimination for tariff lines categorized in either the Normal Track or the Sensitive

Track: Normal Track: Tariffs on almost all tariff lines in this category have been eliminated by

ASEAN-6 (Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand) and

China as of 1 January 2010. The remaining few products in this category (i.e. not exceeding 150

tariff lines) will have tariffs eliminated not later than 1 January 2012, as part of the flexibility

provided in the modality. For Cambodia, Laos, Myanmar and Viet Nam, tariff elimination will have

to be completed by 1 January 2015, with flexibility to eliminate tariffs on products not exceeding

250 tariff lines by 1 January 2018. Sensitive Track: Products in this Track were further categorised

into the Sensitive (SL) and Highly Sensitive Lists and would be subject to tariff reduction within the

timeframes specified in the Agreement. Tariffs of products in the SL will have to be reduced first to

20% followed by a subsequent reduction to the 0-5% tariff band. For those in the HSL, tariffs will

have to be reduced to not more than 50%. The ACFTA does not allow exclusion of products. The

Rules of Origin for the ASEAN-China Free Trade Area follows a general rule of 40% regional value

content, with a limited number of products subject to some product specific rules.

The agreement on trade in goods was put in force by ASEAN on 1 July 2005 and was put in force

by China on 20 July 2005. As specified in the agreement, all parties are committed to reduce or

eliminate tariffs based on the following schedules:

1. Early Harvest Programme (EHP)

2. Normal Track

3. Sensitive Track
 a. Sensitive List

b. Highly Sensitive List 9

TRADE IN SERVICES

The Agreement on Trade in Services between ASEAN Member States and China, signed in Cebu,

the Philippines on 14 January 2007, is the second enabling Agreement under the 2002 Framework

Agreement. It aims to liberalise and substantially eliminate discriminatory measures with respect to

trade in services among the Parties in various services sectors.

The main objective of the agreement is to expand trade in services in the region through improved

market access and national treatment for those specific sectors and subsectors where the Parties

made specific commitments.

The agreement takes into account that special and differential treatment shall be given to Cambodia,

Lao PDR, Myanmar, and Vietnam, which would allow these countries to open fewer sectors and

liberalize fewer transactions. The agreement paves the way for a more liberalized services sector for

both the ASEAN and China through provisions such as market access and national treatment. The

provision of market access entails that each party shall give services and service suppliers treatment

that is no less favorable than the terms, limitations, and conditions agreed upon by the Parties. On

the other hand, National Treatment means that each party shall give the services and service

suppliers of any other Party, treatment that is no less favorable than what the former accords its own

services and service suppliers. It is expected that the agreement would lead in the expansion and

growth of the four modes of trade in services, namely: cross-border supply, consumption abroad,

commercial presence, and movement of natural persons. Moreover, the agreement is expected to

spur higher levels of investments in the regions, especially in those sectors where commitments

have been made by each Party. The market access commitments of both China and the ASEAN are

contained in the first package of the agreement. Both ASEAN and China agreed to progressively

liberalize trade in services with substantial sectoral coverage. China committed to open up new

markets for the ASEAN countries in 26 branches of 5 service areas on the basis of original WTO
commitments, namely construction, environmental protection, transportation, sports and commerce.

China also made commitments in: Computer and Related Services, Real Estate Services, Other

Business Services, Construction and Related Engineering Services, Environmental Services,

Recreational, Cultural and Sporting Services, and Transport Services. On the other hand, the

ASEAN committed to open their markets to China in finance, telecommunication, education,

tourism, construction and medical treatment, among others. The Parties have also agreed that

successive rounds of market access negotiations be held to broaden the coverage of the Trade in

Services Agreement.

TRADE IN INVESTMENT

To promote and facilitate investment flows, ASEAN and China also signed an Investment

Agreement on 15 August 2009 in Bangkok, Thailand. The Agreement aims to create a favourable

environment for the investors and their investments from ASEAN and China.

AREAS OF COOPERATION

Aside from the agreements on the liberalization of goods, services, and investments, the Parties also

agreed to strengthen their cooperation in the areas of agriculture, information and communications

technology, human resources development, investment, and the development of the Mekong River

basin. It was also agreed that cooperation will be extended to other areas such as banking, finance,

tourism, industrial cooperation, transport, telecommunications, intellectual property rights, small

and medium enterprises (SMEs), environment, bio-technology, fishery, forestry, and forestry

products, mining, energy and sub-regional development. Activities to promote cooperation in the

above mentioned sectors shall include but not be limited to the following:

a. promotion and facilitation of trade in goods and services, and investment, such as:

i. standards and conformity assessment;

ii. technical barriers to trade/ non-tariff measures;

iii. customs cooperation

b. increasing the competitiveness of SMEs;

c. promotion of electronic commerce;

d. capacity building; and

e. technology transfer

MOST-FAVOURED NATION TREATMENT

According to the agreement China shall be accorded Most-Favoured Nation (MFN) Treatment

consistent with WTO rules and disciplines to all the non-WTO ASEAN Member States upon the

date of signature of this Agreement.

DISPUTE SETTLEMENT MECHANISM

Agreement on dispute settlement mechanism” has 18 items and regulates China and ASEAN how

to cope with trade dispute. The agreement, based on WTO dispute settlement mechanism and in line

with character of free trade area, made corresponding stipulation on many detail problems.

INSTITUTIONAL ARRANGEMENTS FOR THE NEGOTIATIONS

The ASEAN-China Trade Negotiation Committee (ASEAN-China TNC) that has been established

shall continue to carry out the programme of negotiations set out in the Agreement. The Parties may

establish other bodies as may be necessary to co-ordinate and implement any economic co-

operation activities undertaken pursuant to this Agreement. The ASEAN-China TNC and any

aforesaid bodies shall report regularly to the ASEAN Economic Ministers (AEM) and the Minister

of the Ministry of Foreign Trade and Economic Co-operation (MOFTEC) of China, through the

meetings of the ASEAN Senior Economic Officials (SEOM) and MOFTEC, on the progress and

outcome of its negotiations. The ASEAN Secretariat and MOFTEC shall jointly provide the

necessary

Secretariat support to the ASEAN-China TNC whenever and wherever negotiations are held.

AMENDMENTS

Amendments for the framework of the free trade area mostly concerned Vietnam. These

amendments were designed to assist Vietnam lower tariffs and put forth dates as guidelines.

TARIFFS
The free trade agreement reduced tariffs on 7,881 product categories, or 90 percent of imported

goods, to zero.This reduction took effect in China and the six original members of ASEAN: Brunei,

Indonesia, Malaysia, the Philippines, Singapore and Thailand. The remaining four countries will

follow suit in 2015. The average tariff rate on Chinese goods sold in ASEAN countries decreased

from 12.8 to 0.6 percent on 1 January 2010 pending implementation of the free trade area by the

remaining ASEAN members. Meanwhile, the average tariff rate on ASEAN goods sold in China

decreased from 9.8 to 0.1 percent. The six original ASEAN members also reduced tariffs on 99.11

percent of goods traded among them to zero.

D] MODALITY OF A CHINA-ASEAN FREETRADE AGREEMENT

In theory, under CAFTA, China and ASEAN will inevitably increase intraregional trade and

investment as trade barriers are lowered and costs reduced. With access to a larger and more

integrated market, businesses in the region become more competitive due to economies of scale. A

more integrated market also tends to attract more inward investments from developed countries,

creating employment and increasing economic welfare of member states. Trade between ASEAN

and China has indeed grown substantially since mid-1990s (Figure 1). Between 1995 and 2008,

bilateral trade increased more than tenfold, from about US$20 billion to US$223 billion, according

to Asian Development Bank. Growth has even been more rapid since 2001, when China joined

WTO and the two initiated talks to create CAFTA. Between 2001 and 2008, bilateral trade grew by

around 30% a year on average, relative to 15% for the years between 1995 and 2001. Consequently,

China became ASEAN’s third largest trading partner and ASEAN China’s fourth largest by 2008.
In the meantime, ASEAN countries are also trading more with each other. Between 2001 and 2008,

intra-regional trade within ASEAN grew from US$164 billion to US$481 billion. Intra-ASEAN

export also rose slightly, from about 22% to 26% (Figure 2). Moreover, bilateral investment has

also grown considerably, although they constitute only a small portion of bilateral FDI. For

example, between 2002 and 2008, ASEAN’s FDI to China grew from US$3.3 million to US$5.5

million, accounting for only about 6% of China’s total utilized FDI

China’s role as an overseas investor to ASEAN is even smaller. By 2008,China's total accumulated

investments to ASEAN reached US$4.9 billion, accounting for only 2.6% of China’s total outward

investments.
3.2 Trade in Goods [Simon]

Within the framework and with in the spirit of the “Agreement on Comprehensive Economic Co-

Operation Between the Association of Southeast Asian Nations and The People's Republic of

China” a supplemental agreement on trade in goods was established. This “Agreement on Trade in

Goods” was ratified by the ten member states of Asean and China at Vientiane, Lao PDR on

November 29, 2004.

The overall goal of this agreement was to establish the ASEAN-China Free Trade Area (ACFTA)

covering trade in goods by 2010 for ASEAN 6 and China and by 2015 for the newer Asean Member

States. Applied MFN (most favoured nation) tariff rates on listed tariff lines are to be gradually

reduced and where applicable, eliminated. Tariff lines are divided into two broad groups: Normal

track and sensitive track.

The agreement also prohibits the introduction of quatitiative retrictions and aims at reducing all

non-tariff barriers. WTO safeguard measures remain unharmed. ASEAN safeguard measures are

permitted if not concurrent with WTO safeguard measures and if the importation of a certain

product from a the partner country “threaten[s] to cause serious injury to the domestic industry of

the importing Party that produces like or directly competitive products”. Another exeption is made

if a serious imbalance of payments is threatening or actually causing external fincancial difficulties.

Besides exeptions based on security concerns, further ten general exception are granted on the

conditions that they are neither arbitrary nor unjustifiable discrimminatory.

Three Annexes further clarify the matters pertaining to the agreement. Annex 1 provides clear goals

in reduction of tariffs of products placed in the normal track. ASEAN 6 and China commit to cap

their tariff to maximum 20% in 2005, with subsequent gradual elimination by 2010. Viet Nam will

reduce its tariff from maximum 60% in 2005 to 0% in 2015. Cambodia, Lao PDR and Myanmar are

permitted slighly higher tariffs in the 2005 to 2010, but ultimately also reduce their tariffs to 0% by

2015.
 Annex 2 specifies the tariff lines places in the sensitive track. ASEAN 6 and China are awarded 400

tariff lines and a maximum of 10% of the total import value (2001 base). Cambodia, Lao PDR,

Myanmar and Viet Nam are each granted 500 tariff lines. Furthermore, tariff lines placed the

sensitive track can be further subdivided into Sensitive List and Highly Sensitive List.

ASEAN 6 + China Cambodia, Lao PDR, Viet Nam

Myanmar
2012 2018 2015 2020 2015 2020
Sensitive List 20% 0-5% 20% 0-5% n.a. 0-5%
Highly Sensitive 50
List
Tariffs lines categorised into the Highly Sensitive List should be reduced to 50% by ASEAN 6 and

China by 2012, and by 2018 by the newer ASEAN Member States.

Annex 3 specifies the rules of origin. Not wholly produced or obtained product shall be deemed to

be originating in a country if at least 40% of its content originates from a Party country or if the

final manufacturing process is performed at the exporte's country and not more than 60% of the

FOB value are sourced from abroad.

3.3 Trade in Services [Ben]

ASEAN-China Agreement on Trade in Services

Overview

ASEAN and China reached another milestone at the ASEAN-China Summit in Cebu, the Philippines

as Leaders from the ten ASEAN Member Countries and China witnessed the signing of the Trade in

Services Agreement under the Framework Agreement on Comprehensive Economic Co-operation

between ASEAN and China (TIS Agreement) by the ASEAN Economic Ministers and China’s

Minister of Foreign Affairs. The TIS Agreement, which entered into force in July 2007, aims to

expand trade in services in the region. Under this Agreement, services and services

suppliers/providers in the region will enjoy improved market access and national treatment in

sectors/subsectors where commitments have been made.

The market access commitments of the Parties to the TIS Agreement are contained in the first

package of specific schedule of commitments that are attached to the Agreement. The TIS Agreement

provides for liberalization on substantial coverage of sectors/subsectors especially in more than 60

additional subsectors committed by ASEAN Member Countries which are parties to the GATS/WTO.

In terms of level of ambition, the first package also shows higher market access commitments. It is

expected that trade in services in the region would expand and grow in scale through the four modes

of service delivery, namely: cross-border supply, consumption abroad, commercial presence, and

movement of natural persons.

Aside from increased trade, the TIS Agreement is also expected to bring about higher levels of

investments in the region, particularly in sectors where commitments have been made, namely:

(a) business services such as computer related services, real estate services, market research,

managementconsulting (b) construction and engineering related services(c) tourism and travel related

services(d) transport services; educational services(e) telecommunication services(f) health-related

and social services(g) recreational, cultural and sporting services(h) environmental services

and(i) energy services.

Successive rounds of market access negotiations to substantially improve the level of commitment

and broaden the subsector coverage of the TIS Agreement will be undertaken over the next one year

as the Agreement contains a built-in agenda for the conclusion of a second package of commitments

one year from its entry into force. The TIS Agreement is the second agreement concluded and signed

under the Framework Agreement for Comprehensive Economic Co-operation between ASEAN and

China, which was signed by the Leaders in November 2002. The Trade in Goods Agreement was

signed by the Economic Ministers from ASEAN Member Countries and China in November 2004.
Since the Framework Agreement on Comprehensive Economic Cooperation between China and

ASEAN (Association of Southeast Asian Nations) signed by China and ASEAN in November

2002, in which it is decided that the establishment of China-ASEAN Free Trade Area in 2012,
 the negotiation of service trade has been going on several years. The Service Trade Agreement

was finally signed on January 14, 2007 and took effect on July 1, 2007. According to the

Agreement, on the basis of the commitment made to the WTO, China will make new

commitment in 26 sectors under construction, environment preservation, transportation, sports

and business. On the other hand, ASEAN makes commitment to open its markets in finance,

telecommunications, education, tourism, construction, and medicines, including the further

opening up of these markets and permission of solely-funded and equity joint ventures and

other cooperation for other party, relaxing in the limit of stake proportion in establishing

companies.

In general, there are differences between two parties in each other’s development basis, industrial

structure, and developing stage. These differences create the complementary trade in service

3.4 Foreign Direct Investment [Andy]

A] Definition:

Foreign direct investment (FDI) or foreign investment refers to long term participation by country

A into country B. It usually involves participation in management, joint-venture, transfer of

technology and expertise. There are two types of FDI: inward foreign direct investment and

outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of

foreign direct investment", which is the cumulative number for a given period. Direct investment

excludes investment through purchase of shares.

Between ASEAN and China the FDI is characterized by the ability of China to attract more foreign

domestic investment (FDI) than any of the countries in the ASEAN.

Trade in investment between China and ASEAN

To promote and facilitate investment flows, ASEAN and China also signed an Investment
Agreement on 15 August 2009 in Bangkok, Thailand. The Agreement aims to create a favourable

environment for the investors and their investments from ASEAN and China, and therefore

stipulates key protection elements that will provide fair and equitable treatment to investors, non-

discriminatory treatment on nationalisation or expropriation and compensation for losses. It has

provisions that allow transfers and repatriation of profits to be made freely and in freely usable

currency as well as a provision on investor-state dispute settlement that provides investors recourse

to arbitration.To promote investments and to create a liberal, facilitative, transparent and

competitive investment regime, the Parties agree to: enter into negotiations in order to progressively

liberalise the investment regime; strengthen co-operation in investment, facilitate investment and

improve transparency of investment rules and regulations; and provide for the protection of

investments.
 4.0 Impact on Region

4.1 Trade in Goods [Simon]

The impact of a free trade area could be analysed by using the customs union theory as a theoretical

framework, treating a free trade agreement as a variant of a customs union. Advantages accrue from

specialization and trade. Resources are allocated more efficiently and benefits are reaped

commonly. This positive effect is called trade creation. On the other hand, negative effects are also

possible. If a purchaser buys a more expensive product of another FTA member just because its

price is more competitive compared to a non-member due to a tariff advantage, trade diversion has

taken place at an higher economic cost.

Seven factors are generally considered in assessing the ecomic impact of a free trade agreement.

These factors all influence trade creation and diversion. In case where the former is higher than the

latter, an oveall economic gain has taken place. The factors are as follows:

 size of market

 pre-union level of tariffs among members and against nonmembers

 pre-union level of intraregional and extra-regional trade

 level of economic development

 geographical proximity and transport infrastructure

 substitutability between products of member states and products of nonmember states

 complementarity in economic structures among member states

Trade between ASEAN, especially ASEAN 5, was picking up after the Asian Financial Crisis,

accelerating from around 2002 and was only slowed down by the 2009 Financial Crisis. So it seems

that the ACFTA did not markedly influence the already emerging trading pattern. It may be pointed
out that as explained above, the tariff reduction is spread over several years, numerous exeptions are

allowed and thus the final impact will only materialize with time. Moreover, trade between ASEAN

member countries and China accounts only for about 10% of their foreign trade.

Overall Exports
200000000
180000000
160000000
140000000
120000000
100000000 ASEAN to China
China to ASEAN
80000000
60000000
40000000
20000000
0
1996Export
1998 of 2000 2002 and
machinery 2004transport
2006 2008
equipment
1995 1997 1999 2001 2003 2005 2007 2009
60000000

50000000

40000000

30000000 China to ASEAN

ASEAN to China

20000000

10000000

0
1996 1998 2000 2002 2004 2006 2008
1995 1997 1999 2001 2003 2005 2007 2009

China acts as the manufacturing base for the European and American consumer markets.

Intermediate goods like machinery, plastics, fats and oils, rubber and organic chemicals represent

the major part of China's imports from ASEAN. These imports are used as inputs for manufacturing
finished products to be exported again. This also explains the dip in trade between the two caused

by the 2009 financial crisis. China exporting less to Europe and America, needed less inputs from

ASEAN countries; subsequently ASEAN feeled the ripple effect in their trade.

Since the higher developed ASEAN member countries are at a similar economic stage as China, the

questions remains if there is really room for specialization or only cut-throat competition.

Interestingly the trade in machinery and transport equipment is not only the one with the highest

volume but also the one quickest expanding. This might indicate that there is still room for

specialization and trade creation also in other sectors over the long run.

Sectoral Impacts of ACFTA on Output (% Deviation from the Base)

Member Total Agricultural Food Extractive Manufacturing

Country exports products products industry
Light Heavy Technology-
intensive
Indonesia -0.17 2.78 4.99 0.91 1.19 -2.12 2.10
Malaysia 3.68 -8.81 23.45 3.22 6.76 -1.03 0.28
Phillipines -0.33 5.04 0.46 1.89 -2.33 0.78 2.59
Singapore 9.07 0.27 58.59 13.60 3.07 2.11 2.24
Thailand 0.39 10.58 -3.24 21.11 -2.78 1.01 0.22
Vietnam 1.92 2.10 -1.86 3.28 4.30 -0.20 9.78
Cambodia, -0.04 -1.15 -3.25 1.41 1.50 -1.06 -2.44
Laos,
Myanmar
China 0.08 -1.16 -1.22 -1.33 0.31 0.33 0.17

The country benefiting most seems to be Singapore, archieving output growth in all sectors,

especially food products and extractive industry. Vietnam seems set to reap benefits in the

technology-intesive sector and logging 2% overall growth in exports with ACFTA parties.

Malaysia's increase in total export output is mainly based on its food product and light

manufacturing sector. China's export output remains overall more or less unchanged.

Using a CGE model Park et al. (2009) simulated the impact of ACFTA on a structural level. So

structurally weaker, this simulation predicts consistent gains for Cambodia, Laos and Viet Nam in
all 7 analysed sectors, expecially in manufacturing they seem to have good prospects compared to

their other ASEAN peers, with Viet Nam being a n exeption to be noted. The gains for China seem

to be rather moderate. Philippines' and Indonesia's heavy manufacturing industry exports are

expected to decline whereas exports from Thailand, CLM and China are expected to rise. One

reason might be that countries depended on imports of raw materials are getting easier access to

these and thus their competitive disadvantage is lessened. The impact of China's agricultural sector

are two-faced. As explained by Zhang et al (2007), ACFTA will represent a boon for China's

Northeastern agricultural sector but a bane for its souther, tropical agricultural sectors.

Being freed from tariffs ASEAN extractive industry is poised to boom.

Sectoral Impacts of ACFTA on Exports (% Deviation from the Base - 2001)

Member Total Agricultural Food Extractive Manufacturing

Country exports products products industry
Light Heavy Technology-
intensive
Indonesia 1.45 -7.71 20.14 0.54 0.03 -3.95 3.70
Malaysia 1.30 45.19 31.99 4.89 10.16 2.61 -0.72
Phillipines 2.83 64.81 -1.06 16.58 -3.77 -2.72 2.54
Singapore 1.90 -0.77 90.34 15.65 1.84 0.84 1.19
Thailand 4.63 27.30 -10.78 60.05 -8.65 5.88 1.24
Vietnam 15.28 12.55 34.90 15.79 8.03 -2.95 36.97
Cambodia, 10.46 11.70 31.29 9.84 10.21 7.10 28.56
Laos,
Myanmar
China 3.44 -1.64 2.90 4.65 2.81 3.59 3.84
Besides these sector specific implications, overall ACFTA will help China and ASEAN to become

less dependend on Europe or America as export destinations in future. China is able to secure more

stable and easy access to natural resources in resource-rich countries within Asia and may also serve

the growing middle-class in ASEAN countries. ASEAN member countries get access to a hugh

market. The growing technological prowess of China puts pressure on ASEAN countries to upgrade

their machinery and production methods. Less developed ASEAN countries may benefit from a

migration of labour-intensive industries to them. As in the case of machinery a successful

specialization and trade creation may take place. This calls for integrated sourcing and production
networks.

4.2 Trade in Services [Ben]

1. The volume and structure of China’s Service Trade

China’s service trade has been developing rapidly. The total volume of service’s import and export

in 2007 is 25 times the size of that in 1990. The average annual increase rate is up by 18.4%, which

is two times over that of the world. While the international competitiveness in our service trade is

still lower than the developed countries and even some developing countries. From 1990 to 2007,

China’s service export volume as a share in its total export is keeping lower than 10%, which is

only half of the world’s average level. The total service’s import and export volume in 2007 is 250.9

million dollars, up by 30.88% sharply than previous year, but it is only account for 4% of the

world’s service import and export. Meanwhile China’s trade in service has been being in deficit for

a long time. In 2007, China’s services exports grew faster than imports. Deficit in services trade

shrank noticeably to 7.7 billion, down by 14.6%over the previous year, and 20.3% lower than the

largest deficit in 2004, the year with the largest trade deficit in services. All detail data is provided

in Table 1.
As showed in Table 2, the overall competitiveness of China’s service trade is weak. Its TC index is

keeping negative, which indicates China’s service trade is of comparative disadvantage and not

being improved for a long time. During the same period, the TC index of EU and the USA is

0.8 and 0.12 respectively. As for sector, China’s service import and export is unbalance. The TC

index of only both travel and other commercial service is keeping in positive, with certain

competitiveness. While the transportation is being in negative because of its turning to capital

and technological-intensive service manner, in which China is weak comparatively. The TC

index of construction has been getting better in recent five years as a result of rich labor

resource and lower labor cost. For most part of time, the index of communication, computer

and information is in positive by taking advantage of national monopoly. As for the index of

high value-added service sectors, such as insurance, finance, royalties and license fees,

consulting, film, audiovisual, and so on, is negative, which shows that the competitiveness of

China’s capital and technological-intensive service trade is comparatively lower even though it

is improving unceasingly.

2. Comparison of Advantage in Service Trade between China and ASEAN

China’s service trade with ASEAN has been developing rapidly of late years. ASEAN has become

the key export market of China’s investment, contract engineering, labor service collaboration.

Meanwhile the investment from ASEAN in marine and air transportation, financial service,

construction and engineering service is also an important composed part of China’s service

import. The actual economic benefit gained from the service trade has become the important

basis and powerful motive force for the development of relations between China and ASEAN.

Table 3

Country Sector with advantage Sector needed to be developed

China Construction, marine transportation, Financial service, insurance,
travel, Consulting
computer and information
Brunei Travel and related service, financial Commercial service, transportation
service,
cooperative exploitation of oil and
natural gas
Cambodia Travel and relating service, Commercial service,
construction and telecommunication service,
related engineering environment and public facility
Indonesia Transportation, communication, Financial service, insurance, travel
post and
cable service, consulting
Laos Electricity, travel and related service Transportation, communication
Malaysia Travel and related service, financial Commercial service
service
Myanmar Energy exploitation, construction, Energy and human resources
mining exploitation, travel, transportation
communication
The Philippines Information and related service, Travel, banking and security
paging hub,
commercial purchasing service
Air transportation, financial service, Gambling, construction
Singapore hotel,
exhibition service
Travel, environment and financial Construction and related service
Thailand service
Labor service Education, commercial service,
Vietnam technological service, financial
service

The above comparison in table 3 indicates that China and the 10 nations of ASEAN have their own

advantages in terms of sector structure, which result in the great complementary between two

parties. The Chinese businesses should attach great importance to the ASEAN market and

choices offered by the opening up of service trade market at both sides and catch the business

opportunities.
3.0 Countermeasures for enhancing cooperation in service trade between China and ASEAN

To sum up, there is competition in the service sector basis, resources, development of service trade

and outsourcing between China and ASEAN, but their level of economic development and

sector structure are multistoried and ladder shaped, which create the diversity and

complementary in aspect of both parties’ comparative advantages. So the bilateral cooperation

in service trade should endeavor to enhance collaboration in their complementary fields, to

achieve mutual –development and win-win in their competitive fields.

3.1 To keep on strengthening the competitiveness in traditional service sector

The distinctive natural and cultural sceneries of both China and ASEAN serve as plentiful travel

resources and are also the basis for forming and developing the competitiveness of each other’s

travel service. As travel accounts for big share in both China and ASEAN’s service trade

export, and as developing countries, both have had gained their own competitiveness in this

traditional travel service at the same time, there should be more competition than cooperation

in travel service field between China and ASEAN. Under the pressure from ASEAN after the

further opening of travel market, China should be devoted to develop the distinguish and

diversity travel services, such as green travel, cultural travel, submarine travel, ecological

travel, internet travel and other creative travel projects. The knowledge-based economy is

changing the traditional competitive manner from resources and passenger flow direction to

technology and information. The competition in future travel service will focus on creating

travel resources and particular travel services according to the passengers’ desire, interest,

economic situation and required time instead of selling certain scenery point or travel rout

only. Meanwhile, China should enlarge the opening of travel and use foreign capital to adjust

the investment structure of its service. For example, we can transform the service projects of

our old and famous national hotel by using foreign capital, outsource human resources training

of our travel agents, the information system‘s developing and managing, landscape hotel and

other low-value-added links in order to advance the management level of China’s travel agents.
3.2 To consolidate the cooperation in transportation and finance

In the field of transportation, the half of the import and export between China and ASEAN is

carried by marine transportation. The volume of transportation trade from China to ASEAN has

increased by 22.7% within recent five year, and the Mekong River transportation is further

developed at the same time. The increasing transportation of cargo and passengers between

China and ASEAN build the solid basis for developing the transportation service of both side.

So different from travel, there are more cooperation than competition in transportation service

between China and ASEAN. China should reinforce the construction of logistic infrastructural

facilities in order to speed up the development of modern transportation and logistics,

meanwhile, take advantage of the huge population of China-ASEAN Free Trade Area to

develop the scale economy. Finance is usually regarded as “the first driving force” to the

development of regional economy. For the purpose of larger scope, wider field and higher lever

cooperation, both sides should enhance their collaboration in the field of finance in order to

make finance play its function of configuration guidance and market regulation. For middle and

long term, the cooperation between China and ASEAN should focus on financial supervision

and currency in order to avoid the fluctuation and financial crises caused by hot money, and the

illegal activities, such as arbitrage of exchange, money laundering, swindle, and so on, which

will damage the financial system and solid economy greatly.

3.3 To improve the level of high-technology service

Technology service is the core of world’s service trade. Computer and information services are of

high increasing potential as high-value-added sectors. Except Singapore, the competitiveness in

computer and information service of China and other ASEAN members is almost the same and

needs to be improved further. Both as being developing countries should prioritize the

development of these sectors. While the volume and risks of investment in these sectors are

huge, so it is necessary for the government to provide guidance and subsidies in their R&D

and production International Journal of Economics and Finance capability. On the other hand,
 facing the entering of transnational corporations from Singapore, who has been of international

competitiveness in computer and information services, China should guide its FDI efficiently to

those high-value-added sectors, meanwhile it should develop its software outsourcing in order

to build solid basis development software and export services related computer and information

in overseas market.

3.4 To enhance bilateral investment and enlarge service trade

The signing of the Service Trade Agreement by China and ASEAN is inevitably bringing out more

bilateral investment. China’s enterprises’ investment in ASEAN market, which owns 500

million consumers, not only benefit for enlarging the present advantages of manufacturing

industries but also promote the service export related to the manufacturing industries. Because

of the difference of service trade development among the members of ASEAN, their process of

opening the service trade and acceptability are not the same at all. China should choose

pointedly the investment project according to each country’s different characteristic. For

example, Singapore is of comparative advantage in the knowledge-intensive service, capital,

management, attracting investment and facility in language. Then invite investment from

Singapore and put into our high-technology service sectors. On the other hand, China can

invest in the service sectors of ASEAN market in order to promote the economic development

of both sides. In conclusion, there is great potential cooperation in service trade between China

and ASEAN. Only if both parties engage in enlarging collaboration, making resources

conformity sufficiently, building up systems and coordination policies well, can they survive

from the new round of industrial restructure with service and advance the service industry

successfully.

Challenges

. The nature of services trade

It should first and foremost be noted that trade in services is inherently more complex than trade in

goods. As such, assessing the liberalizing content of regional agreements on services is a

 complex and challenging question. This is due to the characteristics of services as well as to

the numerous ways in which services can be traded. As Findlay, Stephenson and Prieto state,

“Service activities are intangible and non-storable on the whole, require the proximity of

consumers and producers in their trade, demonstrate both capital and labour mobility associated

with their forms of trade, and show a high prevalence of regulatory intervention to counteract

market failure and achieve non-economic social objectives” (Findlay, C., Stephenson, S., &

F.J. Prieto, p.3 2002). It follows that barriers to trade in services involve regulations, laws,

decrees and administrative practices - phenomena which are much less transparent than tariffs

and quotas that affect trade in goods. In the case of goods, tariff levels before and after the

formation of a preferential trading arrangement can be compared. In the case of services it is

the degree of application of the national treatment principle, or the extent to which

discriminatory treatment has been removed among members that must be compared with the

type of treatment that is accorded service providers from non-member countries. Accordingly,

liberalisation of services trade must be evaluated quite differently from that of trade in goods.

The lack of data on services trade for ASEAN

Secondly, the lack of services trade data in ASEAN prohibited us from being able to form any

meaningful picture of the degree and scope of intra and extra-ASEAN trade flows. The best

available data source for services trade is the WTO’s statistical database on services trade.

However, this does not disaggregate services trade data enough to enable us to either ascertain

trade data by the 7 services sectors of relevance, or by flows of services data between ASEAN

countries and China. Nevertheless, to provide contextual information for what is about to

follow, we present in Table 3 below, the best available data for services trade in ASEAN. This

breaks down services trade data into 3 sub-sectors, these being ‘transportation’, ‘travel’ and

‘other

commercial services’. Given the limitations with trade in services data, in order to understand the

importance of services trade to ASEAN and further develop the background against which
 progress in AFAS can be assessed, Figure 1, below presents data for services as a percentage of

GDP.

Source: ASEAN Statistical Handbook 2004 (taken from materials provided on ASEAN Forum on

trade in service.

4.3 Foreign Direct Investment [Andy]

A] Impact in ASEAN

A1) Positive impact:

Sarah Y. TONG & Catherine CHONG Siew Keng in “CHINA-ASEAN FREE TRADE AREA IN

2010:A REGIONAL PERSPECTIVE” said that on the whole, inward investment from elsewhere to

CAFTA shall rise, with a more harmonized region. According to the United Nations’ FDI statistic s,

after China’s CAFTA initiation in early 2001, total FDI to ASEAN doubled from about US$20

billion in 2001 to US$40 billion in 2005, and increasing further to US$70 billion in 2007. ASEAN’s

share in total FDI to developing countries also increased from 9.4% in 2001 to 13.1% in 2007.

Correspondingly, FDI to China has also risen significantly. Between 2000 and 2003, the share of

FDI to China and ASEAN in total FDI to developing countries rose sharply from 25% to 43%. It

had since dropped gradually to 27% in 2008, although the total amount continued to increase.

The ACFTA attract FDI from others countries like US, Japan, EU included China and Non-acfta
areas and make ASEANs countries more competitive with Asia’s next giant countries.

Top ten sources of foreign direct investment inflow to ASEAN

Country/region1/ Value Share to total inflow

2007 2008 2009 2007-2009 2007 2008 2009 2007-2009
European 17,765.5 9,520.1 7,297.2 34,582.8 23.9 19.2 18.4 21.1

Union (EU)-25
ASEAN 9,682.0 10,461.5 4,428.9 24,572.4 13.0 21.1 11.2 15.0

Japan 8,828.7 4,657.8 5,308.4 18,794.9 11.9 9.4 13.4 11.5

USA 8,067.6 5,132.6 3,357.7 16,557.9 10.8 10.4 8.5 10.1
Cayman Island 1,595.4 4,605.4 3,015.2 9,216.0 2.1 9.3 7.6 5.6
Republic of 2,715.5 1,583.5 1,421.8 5,720.8 3.7 3.2 3.6 3.5

Korea
China 1,684.3 2,109.5 1,509.5 5,303.3 2.3 4.3 3.8 3.2
Hong Kong 1,495.6 1,447.3 1,582.1 4,525.0 2.0 2.9 4.0 2.8
Bermuda 3,259.2 58.6 1,164.4 4,482.2 4.4 0.1 2.9 2.7
Taiwan (ROC) 784.8 1,745.1 687.9 3,217.8 1.1 3.5 1.7 2.0
Total top ten 55,878.6 41,321.6 29,773.1 126,973.3 75.1 83.5 75.1 77.7

sources
Others2/ 18,516.7 8,178.3 9,849.9 36,544.8 24.9 16.5 24.9 22.3
Total FDI inflow 74,395.3 49,499.8 39,623.0 163,518.1 100.0 100.0 100.0 100.0

to ASEAN
Source: ASEAN Foreign Direct Investment Statistics Database (compiled/computed from data submission, publications

and/or websites of ASEAN Member States' central banks, national statistics offices, and relevant government agencies

through the ASEAN Working Group on Foreign Direct Investment Statistics

ASEAN nations are attracted by the opportunities brought about by China’s economic expansion

and trade liberalization.

Benefit for poorer ASEAN-4 members. The liberalization policies of China stimulate a boost for

ASEAN-4 in term of FDI.

The FTA is like “balance of power” between their own integration (AFTA) and a ploy to engage

larger trading partners, such as Japan, the United States, and the EU.

The FDI from China and intra-industry trade within the ACFTA will create important linkages and

are expected to improve the production-chain with ASEAN.

Important investment in short-run which create displacements in labour-intensive industries such as

textiles, garments, footwear, toys manufacturing, foodstuff processing, and large capital-intensive

production such as steel manufacturing and machinery and equipment serving the domestic markets
within ASEAN.

Chinese companies invest in Southeast Asia, this somewhat mitigates China’s competition for FDI

with ASEAN.

B2) Negative impact:

Loss of market share to China in most of the countries in South East Asia because of the

inexhaustible unskilled labor and huge amounts of FDI, China may pose an especial challenge to

the ASEAN-4 in their home or third-country markets especially in those countries that have similar

goods and markets globally.

Some of the FDI going into ASEAN now may end up going into China.

Ability of China to pull more (FDI) than any of the countries in ASEAN. China attracted $92.4

billion worth of foreign direct investment in 2008, a 23.6 percent increase from 2007 while ASEAN

countries attracted $60.17 billion in 2008, a decrease from $69.48 billion in 2007 due to the global

economic crisis.

C] Impact in China

C1) Positive impact:

Greater market access in resource- and agro-based products and some manufactured goods for

ASEAN’s poorer four newer members.

Expansion of domestic market and Chinese companies become more powerful by investing in

ASEAN countries, especially in the poorest members of ASEAN.

Low cost of raw materials for Chinese company which stimulate investment.

C2) Negative impact:

The FDI that is currently going into China for China’s intrinsic value is unlikely to be distracted by

an FTA with ASEAN.

It is an issue for the others giant countries like Japan, US and EU to conquest Chinese market by

investing in ASEAN’s countries.

Conclusion for FDI

The ACTFA affect the FDI between China and ASEAN positively as negatively. It’s creating

cannibalization effect in the market. China actually, can benefit from it but presents a risk in the

long-run and give opportunities to others rivals economic countries to enter in his market. In the

other hand ASEAN’s countries profit this agreement to expend their investment in a huge market

but faces difficulties by competing with China.

5.0 Conclusion[Andy]

The establishment of an FTA between ASEAN and China created an economic region with 1.7

billion consumers, a regional GDP of about US $ 2 trillion and total trade estimated at US $

1.23 trillion. This makes it the biggest FTA in the world in terms of population size. The

lowering of trade and investment barriers will result in an enlarged integrated market, promote

specialization and trade according to comparative advantage, and enable exploitation of scale

economies, contributing to lower costs and increased economic efficiency. Trade creation

occurs when domestic production is replaced by lower cost imports from an FTA member,

boosting regional income and welfare. In addition, there may also be welfare gains or losses

due to terms of trade changes. ACFTA will also attract more investments, both from regional

investors as well as investors from non-ACFTA countries.

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