ASIA: CHINA-ASEAN FREE TRADE AREA SPARKS CAUTIOUS OPTIMISM

BANGKOK, The world's largest free trade area that became a reality at the start of the year is being billed as a welcome shot in the arm for the countries comprising it, namely, China and six South-east Asian countries. It offers a route out of the global financial crisis, analysts said.

Such optimism stems from the China-ASEAN Free Trade Area (CAFTA), which went into effect on Jan. 1, almost eight years after it was signed on Nov. 4, 2002 in Phnom Penh, Cambodia.

"The CAFTA is an important vehicle for trade-led growth and recovery in ASEAN," said Ganeshan Wignaraja, principal economist at the Office of Regional Economic Integration at the Asian Development Bank (AsDB). "We expect trade-led recovery to grow from 3.9 percent in 2009 to 6.4 percent in 2010."

CAFTA dwarfs other free trade areas by the 1.9 billion people it will cater to, having a combined gross domestic product of six trillion U.S. dollars. Only the North American Free Trade Area and the European Union (EU) are larger in economic value.

The South-east Asian nations which will initially profit from such deeper trade ties with China are also members of the Association of South-east Asian Nations (ASEAN). They are Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. By 2015, the remaining four members of the ASEAN - Burma, Cambodia, Laos and Vietnam - will join CAFTA.

Beijing's interest to fortify this free trade terrain has been confirmed by the launch of a $10-billion infrastructure investment fund to improve roads, railways and airlines and strengthen telecommunication links between China and the ASEAN. The Asian powerhouse has also committed a $15-billion credit facility to promote regional integration.

"It will be good (for the ASEAN countries) to latch on to China's production network, to get into that value chain, and also sell to Chinese consumers," Wignaraja said during a telephone interview from the AsDB's Manila headquarters. "We think by 2017 the ASEAN region will gain 82 billion U.S. dollars at least, and this is a conservative estimate, from a zero scenario."

ASEAN countries will have to "adjust their thinking, offering a competitive advantage for companies to invest in this new climate," said Gyorgy Szirackzi, a senior economist at the International Labour Organization's Asia-Pacific office in Bangkok. "Some sectors in ASEAN will benefit early on, like the health service sector, tourism sector and the telemarketing sector."

But he cautioned that CAFTA would have birth pains, including loss of jobs in countries that cannot compete against the labour costs of their new trade partners.

"Some countries will gain, some will lose," Szirackzi told IPS. "Companies will consider how to increase their scale of production and may choose to operate from the country that makes economic sense for them."

Indonesia has already sounded such an alarm. The archipelago's trade minister, Mari Pangestu, wrote to the ASEAN secretariat this month stating that Jakarta wanted to "renegotiate" some features of CAFTA, noting that local industries like textiles and food were suffering from a flood of cheaper Chinese imports.

Filipino legislator and economist Walden Bello offered a more trenchant criticism. "The picture is more complex than that of a Chinese locomotive pulling the rest of East Asia along with it on the fast track to economic nirvana," he wrote in last Sunday's online edition of 'Business Mirror', a Manila-based newspaper.

"The reality, however, is that most of the advantages will probably flow to China," added Bello, who is also a senior analyst at Focus on the Global South, a Bangkok-based regional think tank.

The CAFTA has slashed tariffs on 90 percent of traded goods. These include final products from chilli, fish and soy sauces to manufactured products such as air conditioners, motorcycle parts and machinery. By 2015, goods described as "highly sensitive," such as rice, cars and petrochemical products, will be subject to a 50 percent import duty reduction.

Since CAFTA came into force, China has made deep inroads into ASEAN's economy. Trade between China and the regional bloc reached $193 billion in 2009, a fourfold increase since 2003. This rise has made China the ASEAN's third largest trading partner, replacing the United States, and next only to Japan and the EU.

According to the Jakarta-based ASEAN secretariat, trade between ASEAN and China grew at a rate of 20 percent annually between 2003 and 2008. Nearly a third of ASEAN exports to China consist of electrical and electronic products.

Against this picture of stronger China-ASEAN trade ties was the sobering reminder of how they collectively felt the impact of the global financial crisis, which saw export markets in the United States and the EU contract. China's exports dropped by 26 percent in early 2009 in contrast to the previous year, according to the World Bank, while Indonesia saw a 32 percent contraction, Malaysia 34 percent and the Philippines 41 percent during the same period.

Yet to enjoy the benefits of CAFTA, ASEAN countries have to address concerns over "trade facilitation," said Ravi Ratnayake, director of the trade and investment division at the Economic and Social Commission for Asia and the Pacific (ESCAP), a Bangkok-based United Nations regional body. "The region needs to simplify its trade procedures and documentation needed for exports."

There is a "lot of red tape" that exporters encounter at customs or with ministries of finance and some of them are "exhaustive," he said in an IPS interview. "Even if you reduce tariffs to zero, the trade is not going to see a boost unless you remove all the red tape."

In some ASEAN countries, delays caused by bureaucratic procedures for exports last from 22 to 29 days, an ESCAP study revealed. "The average number of documents and time required for import/export in many (Asian) subregions remain well above the (developed country) average."