Why Chinese oranges in Indonesia are cheaper than local ones - and why the ASEAN-China Free Trade Area is a good idea anyway - By Christoph Hein
As the new year began, many borders were overcome in Asia. On Jan. 1, the free trade zone negotiated between the Association of Southeast Asian Nations, also known as ASEAN, and China took effect, marking the culmination of negotiations that began in 2002. Measuring by its population of 1.9 billion, it is the biggest free trade area in the world. The vision of a closely interconnected Asia that could serve as a counterweight to Europe and the Americas, has moved another step closer. But there is already controversy. Indonesia wants to renegotiate some elements of the deal and companies and business associations from Malaysia and the Philippines have warned of a flood of Chinese imports.
The economic crisis pushed Asia's internal partnerships forward. As with the currency swap agreement, which aims to ensure sufficient US dollar liquidity in the event of a financial crisis, Asia realizes that it has to pull itself out of the global slump by its own bootstraps. Thanks to its economic stimulus package and its yuan policy, which aims to keep its currency artificially low in value, China appears as a reliable, generous partner.
The first stage of the treaty includes the six founding members of ASEAN: Indonesia, Brunei Darussalam, Malaysia, the Philippines, Thailand and Singapore. Because it excludes Myanmar, Cambodia, Laos and Vietnam, as well as certain product groups, the treaty is at this point being considered as mainly symbolic. "In the initial stages, I think the political implication of the free trade agreement overwhelms the economic significance," said Tan Khee Giap, economics professor at Nanyang Technical University in Singapore. But in the longer term, the treaty's importance is likely to grow significantly.
"For decades, the target of reference for Asia's leading economies was the West," said Sreeram Chaulia, an international affairs professor at the Jindal Global University in Sonipat, India. "The credit card-swiping American consumer and high-paying Western client firms were the end points for most exporters of goods and services in Asia. But the financial meltdown has reconfigured these horizons and brought home the imperative for Asian producers to diversify their export markets."
However, the agreement is not quite all it seems to be because Southeast Asian nations have historically been adept at establishing non-tariff-based hindrances to trade. For example, tariffs may fall but then "import charges" or "luxury taxes" pop up. And so far, ASEAN has implemented at best one third of the laws that have been passed.
Many Europeans view the increasing ties between Asian countries as an advantage. For one thing, European corporations are hoping to use gigantic production facilities in China to eventually serve the Southeast Asian market. They are also hoping Beijing will take on the role of taskmaster. "The Chinese will increase the pressure on Southeast Asia to integrate," said Joachim H. Ihrcke, chairman of the EuroCham Trade Committee in Singapore. "That will make it easier for the EU to find negotiating partners here that speak with one voice." Singapore will be the first ASEAN country to begin free trade negotiations with Europe. Talks start March 8.
002.jpg As far back as 2005, China and ASEAN had agreed upon a free exchange of goods and services; in August last year, investments were also included in the deal. The seven countries involved have now eliminated 90 percent of all tariffs. The four stragglers, Myanmar, Cambodia, Laos and Vietnam, are required to eliminate all tariffs by 2015. However, there are still significant exceptions, in particular the auto industry. By 2015, the countries intend to reduce tariffs on the remaining "sensitive goods" to a maximum of 50 percent.
Based on the trade volume of the partners of around $200 billion (?143 billion), the agreement constitutes the third largest free trade region on earth after the EU and the North American Free Trade Agreement (NAFTA). Ten years ago, the trade volume of the Asian countries only constituted $39.5 billion. Since then, China has become Southeast Asia's third largest trading partner after Japan and the EU has surpassed the US. "When China grows, ASEAN has to ensure that we are on the supply line towards that growth," said ASEAN Secretary General Surin Pitsuwan.
China is especially interested in raw materials such as palm oil, rubber, wood and natural gas in Myanmar, Thailand and Indonesia. In addition, the Chinese are very interested in creating a yuan-trade zone in Asia. Southeast Asia is hoping for higher revenues but probably primarily for stronger investments from China and an opening of that country's construction and service sector. Beijing for its part wants to offset the slowdown in sales of its goods to Europe and the US.
Some Southeast Asian nations are concerned precisely about this possibility. They fear that their markets will be flooded with cheap goods "made in China." Indonesia wants to retroactively exempt more than 200 product groups from the reduction of tariffs. Its association of shoe manufacturers warned that the share of Chinese manufacturers in the Indonesian shoe market would rise from 40 to 60 percent, with the feared loss of at least 400,000 jobs. The steel market could also be greatly affected. Whereas in 2004, China exported half a million tons to Indonesia, this number was already 1.3 million tons by 2008 - which is greater than the Indonesian steel industry's entire production.
There has been vocal criticism from groups who see their interests damaged. The customs authority in Jakarta pointed out that the Indonesian state stood to lose about 15 trillion rupiah (?1.13 billion) if the tariffs are eliminated. At this point, oranges from Medan are more expensive in Jakarta's supermarkets than oranges from China - partly because the six Indonesian districts impose their own regional levies. The six Southeast Asian countries already have a trade deficit with China of almost $22 billion.