The Chinese market, the fastest growing domestic market in the world, is expected to provide significant export potential for the ASEAN countries. In 2008, China accounted for nearly 12 per cent of the total exports, 10 per cent of total imports, and nearly 11 per cent of total trade in ASEAN.
The special treatment and development assistance to CLMV countries in the ACFTA will further provide opportunities for emerging economies in ASEAN to take advantage of the special provisions in ACFTA. The ACFTA is seen as a catalyst as well as a platform for the creation of a larger free trade area consisting of ASEAN + 3 countries (China, Japan and Korea) and ASEAN + 6 countries (China, India, Japan, Korea, Australia, and New Zealand).
The potential gains of ACFTA for ASEAN remain unclear. The Chinese economy harbours a large pool of unskilled workers and has recently emerged as an important source of FDI investments overseas. The complementary effects of ACFTA are expected to be realised in the medium- to long-run as compared to the short-run adjustment costs on the industrial structures in ASEAN countries.
The impact of cheap imports from China to ASEAN could have important benefits to ASEAN consumers and producers using intermediate inputs from China. 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. There are also clear potential gains to ASEAN in the services sector, through liberalisation in the ACFTA, and in such sectors as aviation, logistics, tourism and financial sectors, from the growing middle-class in China.
The growing middle-class in China will provide strong markets for key services exports for ASEAN. These potential trade gains are likely to benefit more advanced countries within ASEAN, such as Singapore, Malaysia, Thailand and Philippines. There could be important short-run 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.
The short-run impact might be more significant for small and medium enterprises (SMEs) within the ASEAN. The competitive impact of Chinese exports in machinery and equipments are also expected to affect SMEs in more advanced countries such as Singapore, Malaysia and Thailand. The impact could be more significant for the CLMV countries and emerging countries such as Indonesia and the Philippines, which are still dominated by labour-intensive industries and exports. ACFTA could also diminish the role and importance of AFTA (ASEAN Free Trade Agreement) and the formation of AEC (ASEAN Economic Community), as the dominance of Chinese markets could shift the focus away from the ASEAN region.
Despite the short-run adjustment costs, the potential gains for ASEAN and China in the medium- and long-run are significant. To fully benefit from the ACFTA, ASEAN needs to address several key issues.
First, ASEAN needs to keep its momentum with the formation of AEC, and emphasise the importance of a united ASEAN, to fully gain from the potential returns from ACFTA. The integration of ASEAN into an economic community that consists of a ‘single market and production base’ will be crucial to the further evolution of ACFTA into a larger free trade region, such as EAFTA (East Asian Free Trade Agreement – ASEAN plus 3 countries) or CEPEA (Comprehensive Economic Partnership in East Asia – ASEAN plus 6 countries).
Second, considering the large disparity in growth among the ASEAN countries, a greater emphasis should be aimed at reducing the income disparity within ASEAN. For example, ASEAN could focus more on the capacity building of CLMV countries and develop stronger infrastructure to facilitate greater flow of trade.
Third, ASEAN should focus on human capital development to facilitate a smoother transition of workers from the displaced industries into the growing industries from the ACFTA and the ‘hollowing-out’ effects which accompany such transitions.
Fourth, developing strong SMEs within ASEAN will be important to take full advantage of the growing Chinese markets. In particular, SMEs in ASEAN should focus on developing their own indigenous R&D capabilities to complement the growing demand and industries in the region.
Finally, ASEAN should focus on behind border issues such as harmonising technical regulations and standards to international standards. This will be crucial to establish and maintain high product standards and to differentiate domestic products from poor quality imports from developing countries. The product quality differential will provide the domestic companies with an opportunity to maintain their domestic market share while capturing a global market share. The development and harmonisation of product standards will be a key factor towards the development of a global production value-chain in the ASEAN region and will help maximise the benefits of regional free trade agreements.