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Free trade: No pain, no gain

Updated On: May 12, 2011
The impact of the ASEAN-China FTA has caused unhappy rumbles, which states must move to better manage
by Hank Lim and Simon Tay
This commentary was published in TODAY, 12 May 2011
The free trade agreement between the Association of South-east Asian Nations and China (ACFTA), implemented in January last year, was heralded as creating the world's largest market with 1.8 billion consumers, and helping link up Asians with Asians.
Yet 16 months since it came into effect, tensions have been rising. Businesses in Indonesia and some other countries have protested the impact of Chinese imports and political concerns have been signalled.
Is the risk of a trade war rising? Do ASEAN economies really gain from the agreement with the rising China? How can the ACFTA help rather than hurt?
The ACFTA is having a real effect on bilateral trade. Last year, trade volume reached US$300 billion (S$369 billion), an increase of 55 per cent year over 2009. Import duties are being reduced gradually on a wide range of items - including many consumer items such as garments, leather products, ceramics, food and beverages, and electronics, as well as petrochemicals, iron and steel.
Imports from China have surged and some domestic producers have felt the impact as consumers switch to these imports. In Indonesia - ASEAN's largest economy - manufacturers have complained to the government and dragged Trade Minister Mari Pangestu to the national congress. Similar sentiments are being expressed in the Philippines, Vietnam and Thailand.
Some accuse China of dumping goods into ASEAN markets, artificially making prices low to unfairly compete for market share. Calls have come for ASEAN governments to re-negotiate the FTA or else to impose countervailing taxes against Chinese imports. There is also talk of other, non-trade barriers such as requiring labels to be in the local language. Such measures would be questionable under international trade law and might spark friction with China.
It remains to be seen if ASEAN governments can resist such calls, especially when domestic manufacturers can influence and lobby, or are state-owned. Part of the challenge is to balance between short-term pain with longer-term gains.
The gradual phasing out of the tariff gives ASEAN businesses some time to adapt. But inevitably, some businesses will prove unable to compete in the new market. Business closures and worker layoffs will then follow in the short term, visible and politically sensitive.
Facing this, ASEAN governments should initiate structural domestic reforms to nudge domestic producers to adjust and move up the value chain, or move to other products. Policies to ensure employment or else provide welfare benefits for affected workers will also be needed.
ASEAN should undertake this in view of the longer term benefits to be gained. As China grows economically, its domestic market offers a large potential market for ASEAN exports, provided ASEAN manufacturers can be competitive. Furthermore, as wages and costs continue to increase in China, there will be a push factor to increase China's investment in ASEAN countries.
This has already been felt in sectors for resources, energy, and minerals. But there are also emerging signs that some Chinese companies and other multinationals are relocating some parts of the manufacturing supply chain from China to selected ASEAN economies. An investment agreement recently signed in Bangkok can support this.
By lowering market risk and uncertainty, not just Chinese and ASEAN investors but also American, European and Japanese companies can be attracted to invest in the integrated market. Whether this eventuates depends on ASEAN governments adapting their economies.
For instance, even if companies want to relocate manufacturing to ASEAN, countries must provide sufficient and secure electricity for the factories that will be built. This is otherwise a bottleneck for foreign manufacturers looking to invest.
Intra-ASEAN trade barriers must also be dismantled so that manufacturers can disperse different parts of their supply chain across ASEAN, to maximise efficiency. In this way, governments must give effect to the ASEAN economic community in tandem with ACFTA. Only a more integrated ASEAN can effectively trade with China.
The calculus of gains and losses from freer trade is complicated. While losses are often immediate and visible, benefits may not be readily apparent and require policy adjustments to take hold. Political leaders have to provide leadership not only in signing FTAs, but even more in following up with prompt structural changes.
More research and data collection and dialogue with various stakeholders before the signing the ACFTA may have assisted. But the need now is not to rescind the agreement but to move to better manage and gain from it.
This is not only in the calculation of the domestic interests of some manufacturers. It is important for consumers, investors and the wider ASEAN economy as well as for the political and strategic relations between China and ASEAN. China is rising and ASEAN must learn to live and compete with, and gain from its neighbour.
Hank Lim is senior research fellow and Simon Tay is chairman of the Singapore Institute of International Affairs.