China and ASEAN

http://www.oxan.com/worldnextweek/2008-10-30/TalkingPointFri_ChinaandASEAN.aspx

Friday, October 31

The initial phases of the China-ASEAN Free Trade Agreement (FTA) have brought significant benefits for both parties, helping to absorb external pressures at a time of slowing global growth. On October 22, Chinese Vice Premier Wang Qishan told the fifth China-ASEAN Business and Investment Summit that it is paramount for the two partners to accelerate their economic cooperation in the face of weakening global demand. ASEAN officials also stated their wish for deeper economic ties with China, stressing the need to reduce the bloc's exposure to slowing demand from the United States, Europe and Japan.

ASEAN doubts.
However, despite their hopes that Chinese demand will help compensate for slowing exports to OECD economies, ASEAN leaders have less positive expectations for the relationship than their Chinese counterparts. Political and business leaders are worried about their ability to expand or even retain market access in China. There are several concerns:

Structural shift. China's economy is moving away from traditional processing and assembly operations, sourcing more components domestically as its industries move up the value chain. South-east Asia lacks the technology and skills to provide many of the required high-end imports and raw materials. It thus risks the prospect of a shrinking trade surplus with China and greater vulnerability to currency fluctuations.


Third markets. China is likely to move more aggressively into low-cost markets as import demand slumps in the United States and Western Europe, intensifying competition with ASEAN suppliers. Diplomatic relations have already been strained over China's undercutting of rice, footwear, toys, clothing and textile products. Similar frictions are likely over exports of high technology goods, such as chips and disk drives.
Farm tensions. Pressure to dismantle tariffs on agricultural goods will become a key issue during the final stage of implementation of the FTA 2010-2015, as farm sectors underpin the economies of the less advanced ASEAN members. Although the six advanced countries have gained from an 'Early Harvest' programme of lower tariffs, Vietnam, Cambodia, Laos and Burma fear they will be at a commercial disadvantage.
Investment outlook.
Investment is likely to accelerate in both directions as the FTA takes full effect, but will be influenced by development trends within the respective markets:

Policy flips. China is becoming more selective with the type of investment it wants as it confronts economic instability resulting from excess capacity and a reliance on FDI rather than domestic consumption. On ASEAN's side, the bloc has been unable to achieve consistent investment policies among its own members due to internal rivalries and self interest, undermining efforts to promote the region as a single, unified market.
Growth triangles. Inadequate infrastructure is hampering efforts to use the FTA as an investment springboard for less developed regions through special economic zones, such as the Indonesia-Malaysia-Thailand Growth Triangle and China's Beibu Gulf Economic Area. Although communications are being improved under the Greater Mekong Subregion grouping, investors cite higher costs for a reluctance to support fringe areas.
China links its investment priorities closely to foreign policy objectives, with Burma, Cambodia and Laos of particular strategic importance. ASEAN, originally established as an anti-communist bloc during the Cold War, banned contact with China until the early 1990s. Although commercial interests now prevail, there is potential for latent mistrust of China's political and security ambitions to resurface in future.

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SOUTH-EAST ASIA: Region looks to China as OECD slows -- The Oxford Analytica Daily Brief (subscribers only)
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Despite their hopes that Chinese demand will help compensate for slowing exports to OECD economies, ASEAN leaders have less positive expectations for the relationship than their Chinese counterparts.
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