China-ASEAN FTA

Changes ASEAN’s
Perspective on China

WANG Yuzhu and Sarah Y TONG*

China’s initiation of a free trade agreement with ASEAN was primarily

politically driven to ease rising concerns of a “China threat” in Southeast Asia.
Before China’s WTO accession, concerns were rising among ASEAN members
of strong competition from China in both export and attracting foreign
investment. While it was a sensible move to allay such apprehension, the
China-initiated FTA also gave China a political advantage to become a more
important force in the region.

THE CHINA-PROPOSED FREE Trade Agreement (FTA) with ASEAN

(Association of Southeast Asian nations) countries 10 years ago was mainly a political
decision. Responding to ASEAN countries’ concerns over the possible adverse impacts
of China’s World Trade Organization (WTO) access, Premier Zhu Rongji proposed a

* WANG Yuzhu is Associate Professor of the Institute of Asia-Pacific Studies, Chinese Academy
of Social Sciences. Sarah Y TONG is Research Fellow at East Asian Institute, National
University of Singapore.

east asian policy 47

China-ASEAN FTA, which was accepted readily by ASEAN leaders. Expert groups
were subsequently set up to conduct feasibility studies, which mostly yielded supportive
results.
The FTA proposal involved two parallel considerations on the part of Premier Zhu.
On the one hand, it was to dispel the growing concerns among ASEAN nations of a
“China threat”. As a regional power, China’s rapid rise naturally caused uneasiness
among its neighbours, who were uncertain about China’s intentions. Economically, such
sentiment rose from the fear that, as a WTO member, China would become an even
stronger competitor for ASEAN’s export to third markets as well as for ASEAN’s
efforts to attract foreign direct investment
(FDI).
Such fear was especially rampant among
As the first FTA of its kind Southeast Asian countries hard hit by the
in Asia, the FTA initiative 1997 financial crisis which resulted in a drastic
decline in FDI inflow. Indeed, most ASEAN
between China and nations and China are similar in their
ASEAN gave China a development levels and economic structures.
Thus China presents significant challenges to
diplomatic advantage. countries like Indonesia that relies on exports
Soon afterwards, Japan, of labour-intensive products. For Chinese
leaders, economic integration with ASEAN
worried that China might through free trade arrangement seemed a
favourable option to alleviating such anxieties.
dominate the region, was On the other hand, the China ASEAN
compelled to follow suit. Free Trade Agreement (CAFTA) initiation
was also a useful tool to reinforce domestic
support for China’s WTO accession. In fact,
China’s bid to join the WTO was not totally free of domestic resistance. Some argued
that some industries as well as the agriculture sector would suffer from intense import
competition. Forming a bilateral trade arrangement with ASEAN offered a good
alternative to reduce domestic concerns. For Premier Zhu, who strongly advocated
China’s WTO accession, CAFTA appeals to both domestic and external audiences.
Even though the CAFTA initiation was based mainly on political calculations,
economic interests were also important from the very beginning. Chinese leaders were
fully aware that ASEAN, a large potential market with 500 million people and rich in
various natural resources, could play a crucial role in China’s long-run growth.
Somewhat surprisingly, this reactive decision has proved to be quite successful,
both diplomatically and economically. As the first FTA of its kind in Asia, the FTA
initiative between China and ASEAN gave China a diplomatic advantage. Soon
afterwards, Japan, worried that China might dominate the region, was compelled to
follow suit. This was welcomed by ASEAN as it enhanced ASEAN’s international
eminence.
Following the CAFTA initiation, bilateral trade picks up speed quickly (Table 1).

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Between 2001 and 2008, bilateral trade between China and ASEAN grew by about
28% a year in nominal terms, from US$42 billion to US$231 billion, significantly faster
than that of China’s total trade. The rapid growth in China-ASEAN trade was partly
attributed to the FTA and had far outpaced some estimates. It is interesting to note that
bilateral trade between China and ASEAN was US$213 billion, a decline of eight
percent in 2009 from 2008, considerably smaller than a decline of 14% in China’s total
trade.
However, CAFTA has also drawn some concerns. For example, with the
implementation of the Early Harvest Programme (EHP), certain sectors of some ASEAN
countries were negatively impacted due to strong competition from Chinese products.
Thailand, whose garlic planters in the northern part felt huge competition pressure from
cheaper Chinese garlic, had expressed grave concerns. The Philippines, due to internal
pressure, was hesitant to take part in the EHP, and had only joined in 2007 with a very
short list of tariff lines.
This reminded the Chinese leaders of the need to generate more concrete gains for
ASEAN members. In the subsequent years after the signing of the FTA in 2002, China’s
import from ASEAN grew much faster than China’s export to ASEAN; China’s trade
deficit with ASEAN climbed from US$4.8 billion in 2001 to more than US$20 billion
in 2004.
Since the mid-2000s, China’s trade relations with ASEAN have remained robust
and relatively stable. Currently, export to ASEAN constitutes about eight percent of
China’s total export, while around 10% of China’s import comes from ASEAN.

TABLE 1 CHINA- ASEAN TRADE, 2001-2008

China’s Exports to China’s Imports from China’s

ASEAN ASEAN China’s trade
trade with balance
Share in Share in
Amount China’s total Amount China’s total ASEAN with
export import ASEAN

2001 18.4 6.9 23.2 9.5 41.6 -4.8

2002 23.6 7.2 31.2 10.6 54.8 -7.6
2003 30.9 7.1 47.3 11.5 78.3 -16.4
2004 42.9 7.2 62.9 11.2 105.9 -20.1
2005 55.4 7.3 75.1 11.4 130.4 -19.6
2006 71.3 7.4 89.5 11.3 160.8 -18.2
2007 94.2 7.7 108.4 11.3 202.6 -14.2
2008 114.1 8.0 116.9 10.3 231.1 -2.8
2009 106.3 8.8 106.7 10.6 213.0 -0.4

Source: The Ministry of Commerce, P.R.C.

east asian policy 49

From Economic Interdependence to a FTA Strategy
The emphasis of China’s external economic relations has gradually shifted from building
economic interdependence to formulating FTAs. One sign of such a change is that
China’s leaders began setting targets for China-ASEAN trade. The successor of Premier
Zhu, Wen Jiabao, is more focussed on the building of CAFTA. Encouraged by the
favourable development and optimism of CAFTA’s future, Premier Wen set US$100
billion and US$200 billion as the bilateral trade targets for 2005 and 2010, respectively.
Both were achieved well in advance. In 2004, China’s former vice-minister of foreign
affairs, Wang Yi, also projected that China-ASEAN trade would eventually make up a
quarter of China’s total foreign trade.
Chinese leaders believe that deeper bilateral
Satisfied with the economic relations will not only generate direct
economic benefits to both, but more importantly
successful experience have far-reaching positive impact on China-
with ASEAN, China ASEAN relations. It is natural for China, a rising
economic power, to build positive reputation and
was encouraged to foster influence among its close neighbours
through a mutually beneficial cooperation.
extend the approach to By focussing on economic cooperation,
its engagement with especially bilateral trade, the Chinese government
believes that useful economic interdependence can
other countries and be developed. By encouraging more export from
regions, an approach ASEAN to China under the FTA, bilateral trade
and the trade imbalance that favours ASEAN will
which may be termed a reach a point where ASEAN’s heavy dependence
“FTA Strategy”. on Chinese market might provide China with
more leverage in the bilateral relationship.
At the same time, the mutually beneficial
cooperation would also encourage a friendly atmosphere for both sides to discuss
certain sensitive issues, such as the South China Sea and bilateral territorial disputes.
Inspired by such thinking, the China-ASEAN expo was launched to provide an additional
forum to further deepen the bilateral relationship.
However, good China-ASEAN relation is conditioned on stable China-US relations.
Any changes in China-US relations and the subsequent attitude changes in ASEAN
towards a rising China would induce a Chinese policy adjustment towards ASEAN.
With deepening economic interdependence, bilateral trust between China and
ASEAN has been built up steadily with CAFTA contributing significantly to such a
positive change. Satisfied with the successful experience with ASEAN, China was
encouraged to extend the approach to its engagement with other countries and regions,
an approach which may be termed a “FTA Strategy”.
The “FTA Strategy” was launched in 2007, according to a high ranking official from
the Ministry of Commerce. Since then, or even before that, China has signed bilateral
FTAs or made similar arrangements with nine countries or regions. Currently, another

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five bilateral FTAs are under negotiation, while feasibility studies for FTAs with India
and Korea are ongoing (Table 2).
These efforts to formulate FTAs were aimed at promoting bilateral economic
cooperation while cultivating a friendly international environment for a smooth and
peaceful development of China.

CAFTA to Promote Economic Integration

The 2008 crisis diverted the leaders’ attention away from promoting further
interdependence. In fact, global economic imbalances were highlighted as a cause of
the crisis, where export-oriented economies were held responsible. In particular, China,

TABLE 2 CHINA’S FTA INITIATIVES WITH REGIONAL PARTNERS

Initiative Year Signed Partners

CEPA Signed in 2005 Hong Kong, China
CEPA Signed in 2005 Macao, China
ASEAN-China FTA Framework agreement, signed ASEAN (10
in 2002; Early harvest program, members
2005;Trade in goods, 2005;
Trade in services, 2007;
Investment, 2009
China-Pakistan FTA Signed in 2006 Pakistan
China-Chile FTA Signed in 2005 Chile
China–New Zealand FTA Signed in 2008 New Zealand
China-Singapore FTA Signed in 2008 Singapore
China-Peru FTA Signed in 2008 Peru
China-Costa Rica FTA Signed in 2010 Costa Rica
China–GCC Framework agreement in 2004, Gulf Cooperation
under negotiation Council (five
members)
China–Australia FTA Negotiation from 2005 Australia
China–Iceland FTA Negotiation from 2006 Iceland
China-Norway FTA Negotiation from 2006 Norway
China–SACU FTA Study from 2005 South African
Customs Union (five
members)
China–ROK FTA Feasibility Study from 2006 Republic of Korea
China–Indian FTA Feasibility Study from 2005 India
Source: Ministry of Commerce of the People’s Republic of China, www.mofcom.gov.cn
Note: China-Singapore FTA and China-Peru FTA were not included in this survey since the
interviews were done before they were signed.

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due to its huge trade surplus with the United States, has been under mounting pressure
to help rebalance the world economy.
From China’s viewpoint, the blame on China for the global imbalance was another
way of expressing the “China threat” conviction of some in the West. In response,
China called upon the US to rethink and rebalance its over-borrowing habits. At the
same time, the sharp decline of the world economy and the resultant slowing down of
China’s economic growth is an alarming reminder to the leadership. They realised that
China cannot sustain smooth growth if it continues to be overly dependent on export to

TABLE 3 CHINA’S TRADE WITH ITS MAJOR TRADING

PARTNERS, 2009
(Billion US$ and %)
Ranking 1 2 3 4 5 6 7
Trade partners EU USA Japan ASEAN Hong Kong Korea Taiwan Total
Bilateral trade 364 298 229 213 175 156 106 2207
Growth over 2008 -14.5 -14.9 -14.2 -7.9 -14.1 -16 -17.8 -13.9
Share in China’s total trade 16.5 13.5 10.4 9.7 7.9 7.1 4.8 100.0
Source: The Ministry of Commerce, PRC.

the Western markets. Table 3 shows that EU, US and Japan remain China’s top
trading partners.
The economic crisis may also lead to a new wave of protectionism in advanced
economies, such as the United States and European Union, where China would be the
main target. Indeed, several measures have already been proposed or implemented in
the US to curb import from China for products such as tyres and steel pipes.
As a result, a shift in China’s trade composition to diversify China’s export markets
has become even more pressing. The importance of CAFTA has thus become more
prominent. The low utilisation rate of CAFTA’s preferential arrangements has prompted
the Chinese government to assign a research group to examine the reasons and make
recommendations to how enterprises can benefit more from CAFTA. The objective is
to further increase China-ASEAN trade.
In a recent study on the effectiveness of CAFTA commissioned by China’s Ministry
of Commerce, it is found that only one fourth of China’s enterprises involved in trade
with ASEAN took advantage of CAFTA’s preferential arrangement using Form-E under
the CAFTA rule of origin. The main reasons include a lack of the basic knowledge
about CAFTA, the high cost in the Form-E application and the low utilisation rates by
their trading partners.
In recent years, there has also been more emphasis on trade in services and cross-
border bilateral direct investment, with the recent inclusion of both under CAFTA.
With the opening of the service sectors, further economic integration may be expected.
For direct investment, ASEAN’s investment to China is likely to continue its

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dominance, while China’s direct investment in ASEAN in all likelihood will remain quite
small. In the future, bilateral investment is expected to grow strongly. First, China’s
overall outward FDI has grown rapidly in recent years. As shown in Figure 1, China’s
total outward FDI in 2008 reached US$56 billion, nearly doubling its amount for 2007.
China’s direct investment in ASEAN also experienced rapid growth. According Chinese
statistics, China’s direct investment in ASEAN was about US$2.2 billion in 2008, more
than twice the cumulated amount by 2000. The recently signed Agreement on Investment
under CAFTA, which guarantees national treatment, is expected to propel further growth
in bilateral FDI.
Generally speaking, the global economic crisis has led China to view CAFTA in a
more positive light, which is beneficial to China’s interests as it is important to diversify
China’s trade relations and to counter its over-dependence on export to advanced
economies.

FIGURE 1 CHINA’S FDI OUTFLOW, 2000-2009

Source: China Statistical Yearbook, various years, and Ministry of Commerce for 2009
website.
Note: Figure for 2009 is non-financial FDI only.

What Next?
China and ASEAN have just celebrated the fulfilment of CAFTA. In contrast to the
festive atmosphere in Nanning, there have been concerns and complaints about import
competition from China by several ASEAN members since late 2009. For example,
Indonesian Industry Minister Fahami Idris said that Indonesia is “not ready” for CAFTA
because Indonesian products cannot compete with Chinese products according to
Jakarta Global. This suggests that despite CAFTA’s positive impact on the two regions’
economies, certain sectors will suffer in the short run.

east asian policy 53

 This is also true of some Chinese sectors. On the part of the Chinese leadership,
there are several important considerations if CAFTA is to be successful.
First, to rebalance the global economy means that China needs to diversify its trade
relations so as to reduce its heavy dependency on the western market. According to
China’s Customs Statistics, export to the United States and European Union accounted
for 38% of China’s total export in 2009. As China’s fourth largest trade partner, ASEAN
naturally receives greater attention in this effort. Chinese leaders have appraised the
China-ASEAN cooperation during the past 20 years highly and hoped that CAFTA
can serve as a model for China’s bilateral relations with other countries and regions.
Second and perhaps more important, as a rising power, China wishes to maintain
stable, harmonious and friendly relations with its neighbouring countries. To this end,
China will continue to work with ASEAN. As a mutually beneficial arrangement, CAFTA
could be a useful institutional framework for the two sides to deepen their overall
relationship.
Third, an emerging strategy of Shaping Neighbouring Relations also highlights the
importance of CAFTA. To improve China’s soft power among neighbouring countries,
this strategy, like the Peaceful Rise pledge and Building a Harmonious World concept,
will most probably be experimented first in Southeast Asia.
In practice, China would focus on improving the mechanisms of the already signed
agreements under the CAFTA. At present, there is still much work to be done to
increase the utilisation of the various agreements, in trade in goods and services, and in
cross border direct investment. Institutions may need to be adjusted and rules harmonised.
Businesses also need time to learn about the new opportunities and to familiarise
themselves with the new arrangements.
The proposed Economic Community between China and ASEAN after the CAFTA
seems a little farfetched from China’s viewpoint as various CAFTA agreements are still
in their infancy. New proposals will be considered but the focus is still on more urgent
matters like improving the implementation of CAFTA. 

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