ASEAN-China Economic Relations 9789812306562

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ASEAN-China Economic Relations

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Reproduced from ASEAN-China Economic Relations edited by Saw Swee-Hock (Singapore: Institute of Southeast Asian Studies, 2006). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publishing, an established academic press, has issued more than 2,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publishing works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world. ii

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ASEAN-China Economic Relations EDITED BY

Saw Swee-Hock

Institute of Southeast Asian Studies Singapore

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First published in Singapore in 2007 by ISEAS Publishing Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Singapore 119614 E-mail: [email protected] Website: All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. This book is published under the ASEAN-China Study Programme funded by Professor Saw Swee-Hock. © 2007 Institute of Southeast Asian Studies, Singapore The responsibility for facts and opinions in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the publisher or its supporters. ISEAS Library Cataloguing-in-Publication Data ASEAN-China economic relations / edited by Saw Swee-Hock. A collection of papers originally presented at ASEAN-China Forum 2006 on Economic Cooperation and Challenges Ahead, Singapore, organized by ISEAS from 20 to 21 April 2006. 1. Southeast Asia—Foreign economic relations—China—Congresses. 2. China—Foreign economic relations—Southeast Asia—Congresses. 3. ASEAN countries—Foreign economic relations—China—Congresses. 4. China—Foreign economic relations—ASEAN countries—Congresses. I. Saw, Swee-Hock, 1931– II. Institute of Southeast Asian Studies. III. ASEAN-China Forum (2nd : 2006 : Singapore) DS525.9 C5A842 2006 2007 ISBN-13: 978-981-230-408-7 (soft cover — 13 digit) ISBN-10: 981-230-408-8 (soft cover — 10 digit) ISBN-13: 978-981-230-422-3 (hard cover — 13 digit) ISBN-10: 981-230-422-3 (hard cover — 10 digit) Typeset by Superskill Graphics Pte Ltd Printed in Singapore by Utopia Press Pte Ltd iv

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Contents The Contributors Preface

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1

ASEAN-China Economic Relations: A Review Saw Swee-Hock

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China’s Economy in Search of New Development Strategies John Wong

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ASEAN in Introspect and Retrospect Linda Low

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Developing Stronger Business Networks between ASEAN and China Sarasin Viraphol

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ASEAN-China Trade Relations: Origins, Progress and Prospect Chen Wen

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ASEAN-China Free Trade Agreement: Negotiation, Implementation and Prospect Lu Bo

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ASEAN-China Free Trade Agreement: Legal and Institutional Aspects Wang Jiangyu

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ASEAN-China Economic Relations: Moving Towards Services Chang Chiou Yi

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ASEAN-China Financial Cooperation in the Asian Bond Market Sun Jie

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ASEAN-China Investment Cooperation: Status and Prospects Jose L. Tongzon

203

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ASEAN-China Energy Cooperation Elspeth Thomson

226

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China’s Aid to Southeast Asia Zhang Haibing

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China and the CLMV Countries: Relations in the Context of the Mekong Sub-region Mya Than

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China’s Economic Relations with ASEAN: Developments and Strategic Implications Sheng Lijun

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Strategic Dimension of ASEAN-China Economic Relations Eric Teo Chu Cheow

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Bibliography

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Index

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The Contributors CHANG Chiou Yi is Economist in UBS AG. She was formerly a Research Associate at the Institute of Southeast Asian Studies (ISEAS), Singapore. She received her M.Sc. in Economics from the University of Oxford. CHEN Wen is Associate Professor in the Department of Economics, Xiamen University. She is presently a Visiting Scholar at the University of Illinois. She received her Ph.D. in Economics from Xiamen University. Her research interests are international economics and development economics. Her publications include ASEAN Regional Economic Cooperation (co-author) and China-ASEAN Trade Relations: A Discussion on Complementarity and Competition (co-author). LOW, Linda is Head of Strategic Planning, Department of Planning and Economy, in Abu Dhabi, United Arab Emirates and Associate Senior Fellow at the Institute of Southeast Asian Studies, Singapore, where she was formerly Senior Associate Research Fellow. Prior to that, she was Associate Professor in the Department of Business Policy in the Business School of the National University of Singapore. She obtained her Ph.D. in economics from the National University of Singapore. Her research focus is on human resources development, public policy development, and trade in the service sector. She has served as a consultant to many international and local agencies in Singapore. Among her most recent publications are The Political Economy in a City-state Revisited in 2006 and Political Economy of East Asia: A Business Model in 2004.

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LU Bo is Associate Research Fellow and Deputy Director of World Economy and Trade Research Department at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, People’s Republic of China. He was Visiting Fellow under the ASEANChina Study Programme in the Institute of Southeast Asian Studies (ISEAS), Singapore. He served in the Chinese diplomatic service in Uganda and Bahamas. He received his B.A. from Beijing Normal University. His publications include WTO System and China’s Membership; Transformation of State-Owned Enterprises with Foreign Direct Investment; and Service Trade Liberalization and China’s Strategy. MYA Than is Visiting Fellow at the Institute of Security and International Studies, Chulalongkorn University, and Associate Senior Research Fellow at the Institute of Southeast Asian Studies (ISEAS), Singapore. He was formerly a Senior Fellow at the Institute of Southeast Asian Studies and a Senior Researcher in the Institute of Economics, Yangon. He received his Ph.D. from the University of Agriculture, Prague. His research interests are in regional and sub-regional cooperation and economic and social development in new ASEAN member countries. His publications include ASEAN Enlargement: Impacts and Implications (co-editor); Myanmar in ASEAN: Regional Cooperation Experience; ASEAN Beyond the Regional Crisis: Challenges and Initiatives; ASEAN Enlargement: Impacts & Implications (co-editor). SAW Swee-Hock is Professorial Fellow at the Institute of Southeast Asian Studies (ISEAS), Singapore, and Advisor to its ASEAN-China Study Programme. He was Founding Professor of Statistics in the University of Hong Kong and the National University of Singapore. He has held visiting appointments in the London School of Economics, Cambridge University, Princeton University, and Stanford University. He received his Ph.D. in Statistics from the London School of Economics. He is a member of the Board of Trustees of the National University of Singapore and a recipient of its Distinguished Alumni Service Award. His research interests are in statistics, demography and investment. Among his major publications are Economic Problems and Prospects in ASEAN Countries (co-editor); ASEAN Economy in Transition (editor); Growth and Direction of ASEAN Trade (co-editor); ASEAN-China Relations: Realities and Prospects (co-editor); Southeast Asian Studies in China (co-editor); Malaysia: Recent Trends and Challenges (co-editor); Singapore-Malaysia Relations under viii

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Abdullah Badawi (co-author); A Guide to Conducting Surveys; Securities Market in Singapore; The Labour Force of Singapore; The Population of Singapore; and Population Policies and Programmes in Singapore. SHENG Lijun is Senior Fellow at the Institute of Southeast Asian Studies (ISEAS), Singapore. He received his Ph.D. from the University of Queensland. His research interests are on China’s foreign relations in East Asia, especially ASEAN-China relations and the Taiwan issue. His main publications include China’s Dilemma: The Taiwan Issue; China and Taiwan: Cross-Straits Relations under Chen Shui-Bian; and ASEAN-China Relations: Realities and Prospects (co-editor). SUN Jie is Senior Fellow and Deputy Director of the Research Centre for International Finance at the Institute of World Economics and Politics, Chinese Academy of Social Science, Beijing. He was Visiting Scholar at the University of Illinois. He received his M.A. from Peking University. His research interests are monetary economics, international money and finance, and corporate finance. Among his major publications are Money and Finance: A Comparison of International Monetary System; Exchange Rate and Balance of Payment; and Capital Structure, Corporate Governance and Agency Cost: Theory, Evidence and Enlightenment. TEO, Chu Cheow Eric is Managing Director of Savoir Faire Corporate Consultants in Singapore, and teaches a course at the Institute of Defence and Strategic Studies’s (IDSS) Master of Science Programme in International Political Economy, Nanyang Technological University, Singapore. He is a Council Member of the Singapore Institute of International Affairs. He served in the Singapore Diplomatic Service. He received his Ph.D. from the Foundation Nationale des Sciences Politiques, Paris. He was conferred the Chevalier de l’Ordre National du Merit by the French Government. He is a resource panel member of the Singapore Government Parliamentary Committee on Defence and Foreign Affairs. He specializes in political and economic risks analysis and the political economy of East Asian countries. THOMSON, Elspeth is Visiting Research Fellow at the East Asian Institute (EAI), National University of Singapore. She has taught at Simon Fraser University in Vancouver and Lingnan University, Hong Kong. She received her Ph.D. in Chinese Economic History from the School of Oriental and ix

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African Studies, London. Her research interest is centred on energy resources, particularly in China. She is the author of The Chinese Coal Industry: An Economic History. TONGZON, Jose L. is Senior Lecturer at the Australian Maritime College, Tasmania. He was formerly Associate Professor in the Department of Economics, National University of Singapore, Special Assistant to the Deputy Minister for Trade, Philippines, and Chief Economist at the Port of Melbourne. He received his Ph.D. in Economics from the University of Tasmania. His research interests are ASEAN, transitional economies, port management, and international trade and finance. His publications include The Economies of Southeast Asia Before and After the Crisis; Institutional Changes in Southeast Asia; The Economies of Southeast Asia; The Growth and Development of ASEAN Economies 2002; and Southeast Asia Regional Port Development: A Comparative Analysis. VIRAPHOL, Sarasin is Executive Vice President of Charoen Pokphand Group, with substantial business in animal feed production, vertical livestock integration, crop integration, aquaculture, and food processing in China. He served in the Thai diplomatic service in China and Japan, and as ambassador to the Republic of the Philippines. He received his Ph.D. in History/East Asian Languages from Harvard University. His professional interests span the various issues related to international trade, development and food production. WANG Jiangyu is Associate Professor of Law at the School of Law, Chinese University of Hong Kong. Before joining the Chinese University, he was Assistant Professor of Law at the Faculty of Law, National University of Singapore. He has practised law in the Legal Department of the Bank of China, and also in Chinese and American law firms. He received his SJD in Law from the University of Pennsylvania. He is a member of the Chinese Bar Association and the New York Bar Association. He specializes in Chinese law, international economic law, and corporate and securities law. WONG, John is Research Director at the East Asian Institute (EAI), National University of Singapore. He was formerly Director of the Institute of East Asian Political Economy, Singapore, and Lecturer in Economics at the University of Hong Kong. He was Fulbright Visiting Professor in Florida State University and Chair of ASEAN Studies in the University of x

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Toronto. He also held visiting appointments in Harvard’s Fairbank Centre, Yale’s Economic Growth Centre, Oxford’s St. Anthony College, and Stanford University. He received his Ph.D. from the University of London. Among his major publications are The Political Economy of China’s Changing Relations with Southeast Asia; The Political Economy of Malaysia’s Trade Relations with China; ASEAN Economy in Perspective: A Comparative Study of Indonesia, Malaysia and the Philippines; Regional Industrial Cooperation: Experience and Perspective of ASEAN and the Andean Pact; China-ASEAN Relations: Economic and Legal Dimensions (co-editor); Southeast Asian Studies in China (co-editor). ZHANG Haibing is Deputy Director of the World Economy Studies at the Shanghai Institute for International Studies. She was Visiting Fellow under the ASEAN-China Study Programme at the Institute of Southeast Asian Studies (ISEAS), Singapore. She received her Ph.D. in Economics from the Shanghai Academy of Social Sciences. Her research interests currently are on studying China’s foreign aid, and China’s regional cooperation in East Asia. She is the author of Research on European Union Institution.

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Preface Under the ASEAN-China Study Programme launched in 2003, the Institute of Southeast Asian Studies (ISEAS) organized the ASEAN-China Forum: Realities and Prospects on 23–24 June 2004. From this forum, a book entitled ASEAN-China Relations: Realities and Prospects edited by Saw SweeHock, Sheng Lijun and Chin Kin Wah was published in the following year to provide a more permanent source of useful information for a wider audience. Under the same Programme, the Institute of Southeast Asian Studies and the East Asian Institute (EAI) of the National University of Singapore jointly organized the Conference on Southeast Asian Studies in China: Challenges and Prospects on 12–14 January 2006, and a book bearing the title Southeast Asian Studies in China edited by Saw Swee-Hock and John Wong was published jointly by the two institutions in late 2006. The third event under the ASEAN-China Study Programme was the ASEAN-China Economic Forum: Economic Cooperation and Challenges Ahead on 20–21 April 2006. This forum was designed to evaluate the present status, challenges and prospects with regard to the economic linkages and cooperation between ASEAN and China. This book on ASEAN-China Economic Relations incorporates not only the revised version of the conference papers in eleven separate chapters, but also four specially commissioned chapters appearing as Chapters 1, 6, 8, and 12 to provide a greater insight into the dynamics of the economic relations between ASEAN and China. The book discusses the economic relations in terms of many important topics such as trade, the ASEAN-China Free Trade Agreement (ACFTA), investments, services trade, energy cooperation, cooperation in developing the Mekong sub-region, China’s aid to Southeast Asian countries, developing stronger business networks, and the political dimensions of China’s economic relations xiii

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with ASEAN. The book, with contributions from specialists intimately familiar with their topics, will be useful to businessmen, analysts, academics, students and policy-makers. I would like to thank the chapter writers for their excellent cooperation, Mr K. Kesavapany, Director of ISEAS, for his encouragement in the organization of the conference and the publication of the book, and Mrs Triena Ong of ISEAS Publications Unit for overseeing the expeditious publication of the book. Saw Swee-Hock August 2006

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Economic Relations: A Review

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ASEAN-China Economic Relations: A Review Saw Swee-Hock

BACKGROUND The China phenomenon hardly needs any introduction, except that it is amazingly unabated, growing from strength to strength economically, politically, even socio-culturally. In time to come, some technological breakthrough may happen. By its geographical proximity and historical ties, it is inevitable that the Association of Southeast Asian Nations (ASEAN) is tied to the China factor. To capture the multi-dimensional aspects of ASEANChina economic relations, the Institute of Southeast Asian Studies hosted the “ASEAN-China Economic Forum: Economic Cooperation and Challenges Ahead” on 20–21 April in Singapore. This edited volume of fourteen chapters contains the eleven revised conference papers and three additional nonconference essays to give it the well-rounded balance. An overview in this chapter is meant to tease out the main findings and perceptions of each chapter, the details of which deserve the readers’ perusal. It also aims to draw together the common denominators and issues in ASEAN-China economic relations, identifies the areas and topics which deserve continuing research efforts and work in the Institute of Southeast Asian Studies and beyond. The dynamism in both ASEAN and China in the global economy context requires a constant pre-emptive mapping of emerging trends and developments for the future research agenda.

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MAIN FINDINGS John Wong’s insightful consideration of “China’s Economy in Search of New Development Strategies” is backed by statistical portrayals from 1990 to 2005. Readers are brought up to speed on China’s new spurt of high growth, the present state of the Chinese economy, the need to change gears and reorient with China’s rising international economic profile, sources of growth and need to fix many growth problems. Since China’s first debut in the world economy in the early 1990s, the current high growth trajectory has witnessed the “WTO effect” and domestic investment impetus. While the rest of Asia was mired in the 1997 financial crisis, China’s 2005 gross domestic product (GDP) almost trebled that of the early 1990s, a testimony of apparently unassailable growth. Garnered with chronic trade and capital surpluses translated into the world’s largest foreign reserve holding of US$854 billion in February 2006, China has gained more than respectability among the advanced First World countries. Wong sees 2005 as a “curious” turning point. It was no longer the overheating concern of 2004; no landing was required as the “political imperative of high economic growth” for political legitimacy became an overriding aim. Implicitly, urban-rural social issues and more balanced regional development, possible only with high growth, is the unstated agenda. The gear change suggested by Wong is patently clear. More of the same cannot ensure “sustainable growth”. A domestic implosion from the peasantry and regions may well arrest the seemingly unstoppable growth phenomenon, while it might have been more a case of institutional and big corporate plots which imploded in Japan. The plight seems inescapable for all leading economies when internal indigestion more than external factors disrupt their economic resilience. China has yet to institute automatic built-in measures for effective “redistribution with growth”. For its own sake, it has to pay attention to sustainable growth in terms of its impact on environmental degradation, and also before the negative pollution externalities incur the wrath of the international community. Whereas China is clearly the growth engine, Linda Low’s chapter on “ASEAN in Introspect and Retrospect” views the ASEAN engine with a population of half a billion, as inadequate. Internally, ASEAN’s schemes remains unfulfilled, reactive rather than proactive in response. It is challenged in terms of identity and middle-age crisis, both as an organization and as individual states attain industrial maturity and development. Internal issues are glossed over, and considered secondary to external challenges. Yet, ASEAN has to deliver on its many integration dreams tangibly before meeting with China on more equal terms.

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ASEAN had some three decades in a region sans China and India to plod along and grow, buffered by a generally favourable global economy, fast-tracked by information communication technology. Its expansion into ASEAN-10 is accepted both economically and politically. But its integration and deepening cannot be indefinitely excused by its widening. Low warns that neither the ASEAN monopoly-hegemony nor its buffer role to the West and other East Asian states can persist as ASEAN’s birthright. One scenario is ASEAN morphs, but “disappears” into the East Asian Summit even before ASEAN+3 blossoms in full. Another scenario may have ASEAN stand up and punch its weight vis-à-vis China, with implicit support from the rest of East Asia and, even the United States. Another scenario adds South Asia and the Middle East to the equation, with both regions going in the same direction of looking East in pursuit of the China market or to recycle petrodollars since the 11 September 2001 terrorist events. Low concludes that the new China phenomenon plus oil and Islamic economics in the mix is an opportunity for ASEAN, with caveats. ASEAN cannot remain too mired in its domestic issues. It must put more proactive initiatives to both billion-populated China and India. Small city-state Singapore is doing that and recognizes the Middle East signal in warm gestures. It always takes two hands to clap. Government initiatives in economic cooperation are only the bridges which the private sector must cross, and business builds more bridges. Sarasin Viraphol’s “Developing Stronger Business Networks Between ASEAN and China” seconds the role of business. ASEAN business can contribute to the evolution of business enterprises. A case study of Charoen Pokphand (CP) is a study in comprehensive connectivity with China, from its agri-business to big, organized retail business. The CP Group has distinguished itself as the first, and still only ASEAN business involved in China’s rural reform. It has both the distinctions of a typical overseas Chinese capital mobilization tradition and a Thai multinational corporation (MNC) in China. Both the CP’s traditional culture and nature of agri-business are suited to China’s rural drive through private business enterprises. CP seized the opportunity to grow into an integrated, value-added food production system, extending the supply chain into organized retail. China’s urban growth, consumerism and rising per capita income commensurate with quality of life makes the CP hypermarket business almost a no-brainer, except that remarkably, it is not only the first, but surprisingly remains the only, comer. Projecting CP’s success onto other ASEAN MNCs to jumpstart China’s lagging MNCs is encouraging. ASEAN MNCs are internationally experienced and can be useful allies for China. Besides the overseas Chinese connection,

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the ASEAN-China Free Trade Agreement (ACFTA) is another conduit. Viraphol proposes a “win-win” trade relation to minimize any “hollowing-out effects” and maximize “symbiotic arrangements” for both to remain globally competitive. As China’s MNCs step out, ASEAN is ready with its “hardware” side of business to make the partnership successful. Like Wong’s realistic alert, Viraphol cautions ASEAN to grasp the meaning of the new China “situation”. He has a checklist of what ASEAN should note and steps to take. Whether Viraphol’s practical business insights will be heeded and better still, amplified by others’ experiences in more case studies, is an exercise worth pursuing. Underpinning economic cooperation is trade, which brings on Chen Wen’s chapter on “ASEAN-China Trade Relations: Origins, Progress and Prospect”. For econometrically inclined readers, the literature review includes trade models, trade statistics between ASEAN and China since 1950, bilateral trade indices and commodity structure with interesting analyses. Trade prospects are generally good with the 2002 Framework Agreement on Comprehensive Economic Cooperation and ACFTA. Chen gives a balanced analysis of the advantages and disadvantages. Beside direct trade benefits, deeper integration with the globalized economy by China would spur its imports of ASEAN natural resources and intermediate products. New opportunities arise for enterprises and investment for both parties, also in response to industrial restructuring. Comparative advantage as in a typical production network for car manufacturing is a case in point for such global trade and logistical networks. On possible negative trade relations, Wen warns of the competitive developmental stage between ASEAN and China as demonstrated in export similarity indices. Political issues cloud the economics as well, not least territorial disputes, the Taiwan issue, Japan and the United States in big power plays in the Asia-Pacific region and the political economy of the ACFTA itself. The second of four non-conference papers is by Lu Bo on “ASEANChina Free Trade Agreement: Negotiations, Implementation and Prospect”. While Asia seems to be a latecomer to FTAs, the ASEAN-China FTA (ACFTA) seems an inevitable step and a foregone conclusion. It seems a matter of what and how it is to be negotiated. Equipped with the ASEAN FTA (AFTA) model, and enriched by FTA experiences of Thailand and Singapore and the Framework Agreement on Comprehensive Economic Cooperation, negotiations started with China’s average tariff higher than that of ASEAN’s. Yet, Lu notes both China’s readiness to contribute more, especially to the new ASEAN states. But Lu is critical of the structure and purpose of the framework agreement itself.

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The Early Harvest Programme seems as ambivalent as Lu joins other analysts to find “the real (political or strategic) intentions”. Lu hints at China’s food security concern in its ASEAN imports of agricultural and food products. ASEAN is also a test-case prior to China’s accession to the World Trade Organization (WTO). Lu analyses the Early Harvest Programme by product categories, implementation timetable, specific list, exclusion list and rules of origin. With planned implementation between 2004 and 2006 (though China and Thailand implemented according to their 2003 bilateral agreement), the statistics are only up to July 2005. ASEAN is China’s fourth biggest trading partner, while China is ASEAN’s fifth largest. China has an overall trade deficit with ASEAN, but a surplus with the four new ASEAN states. The expected negative influence of the Early Harvest Programme to China’s agriculture seems to exist. But the Philippines, in particular, has 1,292 tariff lines in direct competition from similar imported goods under ACFTA. Tariff lines in the sensitive track pose another problem. Lu looks beyond the agreement on trade in goods, into dispute settlement, trade in services and investment. China gave a headstart to Hong Kong and Macau in their respective Closer Economic Partnership Arrangement (CEPA). China is equally wooed by other countries, from South Asia to Australia, New Zealand, Latin America and the Gulf Cooperation Council (GCC). It is thus up to ASEAN to creatively play up the ACFTA to its historical and geo-political advantage. In another perspective, Wang Jiangyu’s chapter on “ASEAN-China Free Trade Agreement: The Legal and Institutional Aspects” explores the legal issues of tariff reduction, rules of origin, dispute settlement and other legal rights and obligations. Wang laments that ACFTA’s retention of contingency policies, as in anti-dumping, to defend against predatory pricing is clearly more protectionist at the cost of economic efficiency. Except for the negative list approach used by ACFTA, the legal aspects and provisions are generally similar to those in the WTO. Any ACFTA dispute is likely to be covered by WTO agreements, giving disputants an extra avenue to use. Wang opines that apart from the institutional aspect of this WTO relationship, an ACFTA tribunal is likely to borrow extensively the jurisprudence of WTO dispute settlement. ACFTA represents China’s first foreign trade agreement to resolve trade disputes through formal mechanisms, even if is characterized at a low level of legalism. But Wang questions the international legal personality of ASEAN, which is loose in institutional structure even if ACFTA is an international treaty. The ASEAN Way may have run out of date as what was suited in 1967 and

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the next three decades may now need a clearer decisive personality of ASEAN. Rather than the “selective” modality as observed by Wang, the legal nature of ACFTA and ASEAN’s legal personality have to be sorted out. Any legal ambivalence of ASEAN as an entity makes ACFTA doubtful as a bilateral agreement with China. This obviously has to be straightened out before CAFTA’s implementation. The third non-conference chapter on “ASEAN-China Economic Relations: Moving towards Services” by Chang Chiou Yi, attempts to work towards a more comprehensive understanding of the move towards services in ASEAN and China, keeping in view the global trend towards the services trade and investment, and the liberalization efforts made by China under the General Agreements on Trade in Service (GATS). In the process, it not only lays out a framework with which to assess the role of services within ASEAN and China but importantly, it provides a background to identifying opportunities for ASEAN-China services trade and investment. This is a helpful start for further research in this nascent topic, particularly given the scarce research and statistical deficiencies related to analysing ASEAN-China services trade. Based upon balance of payments (BOP), foreign direct investment (FDI) and mergers and acquisitions (M&A) data, Chang notes a rising trend towards trade and investment in services on a global scale. In the assessment of services liberalization efforts made under the ASEAN Framework Agreement on Services (AFAS) and in particular, China’s commitments under the GATS, Chang provides an updated progress report for the latter and finds that significant commitments have been fulfilled by China under the GATS, and in the process also identified opportunities for greater services trade and investment. Finally, selected key deals in services between ASEAN and China to date are highlighted so as to allow a more coherent and informed look at the potential in ASEAN-China services trade and investment. On the financial aspect, Sun Jie’s “ASEAN-China Financial Cooperation in the Asian Bond Market” starts off with a theoretical and international perspective. The progress of the Asian bond market to underpin ASEANChina cooperation is further reinforced by a case made from China’s macro and micro perspectives. Marshalling the requisite statistics on trade, capital flows, investment and foreign reserves, the case for the Asian bond market as a long-term financial instrument is clear. The United States, on the other hand, would have to make adjustments such as reducing its demand for capital inflow. All players need time to play the game given the huge global imbalance of Asian trade, capital and official reserves in contrast to the U.S. trade and capital deficits.

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Sun notes that the Chiang Mai Initiative for currency swaps is symbolic and supplemental to existing international financial arrangements rather than a true Asian Monetary Fund. The Asian Development Bank’s (ADB) move to publish the typical currency basket unit for the Asian currency unit is timely as a practical aspect to a common currency arrangement. But the Asian bond fund’s time has come. Sun examines lessons which can be learnt from practice as by the ADB, International Financial Corporation and bond issuances by banks or agencies from Korea and Japan. The obstacles and technical issues are reviewed for both the policymakers and practitioners in the bond and financial circles. For China in particular, Sun has set the homework to be done at the macro and micro levels to get China ready for ASEAN-China financial cooperation. Unsurprisingly, China has institutional and legal issues to resolve as well as for its financial infrastructure to be built, just as in other Asian economies. Between a policy-oriented or market-oriented task and roadmap, Sun recommends a long-term policy agenda with a market-driven cooperation process. Financial integration raises the inevitable exchange rate agreement such as on the soft peg against the U.S. dollar and sequencing of trade and capital account liberalization. Government prudential supervision and regulation are critical, but a lighter touch is recommended to balance between reducing risks and volatility on the one hand, and not restraining financial market development on the other hand. As the final stage of financial cooperation, Sun suggests four possible destinations with their pros and cons. The reward of a deep and welldeveloped bond market to overcome financial fragility is clear since the 1997 Asian financial crisis. Driven by ACFTA and closer ASEAN-China cooperation, the Asian bond market seems to have a good start. On investment, Jose Tongzon’s chapter on “ASEAN-China Investment Cooperation” is generally optimistic. He finds China’s need for ASEAN natural resources and intermediate products may escalate from pure importexport arrangements to investment opportunities. In particular, Tongzon sees enormous scope for joint venture arrangements in areas where complementarity exist. Both market sharing and resource pooling aspects of investment cooperation are favourable for identified merchandise and service products. He observes that while ASEAN foreign direct investment (FDI) continues to rise in China, China’s FDI into ASEAN has petered off since the 1997 Asian financial crisis. Higher domestic investment in more cost competitive China is the reason. This, however, does not preclude investment cooperation as Tongzon’s analysis of ASEAN and China’s top ten exports to the world

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shows there is a high level of intra-industry trade and complementarity. ASEAN as a group and China are only competitive in five out of ten top exports consisting of electronic components, storage units, telecommunication equipment parts, data processing machine parts and electronic microcircuits. On the other hand, ASEAN exports of palm oil, liquid natural gas and crude petroleum match China’s needs. ASEAN also complements China in other raw materials and intermediate goods. China can equally benefit in joint ventures in services like tourism, banking and finance, insurance, accounting, professional, medical, educational, and transport services. As China encourages its enterprises to invest overseas, together with its bountiful trade surplus and official reserves to be recycled, Tongzon’s optimism in investment cooperation mirrors the same conclusion of Wong and others. Obstacles and constraints in regulatory and legal regimes for investment are no more than what is typical of transition economies. WTO obligations help to keep all in line. In Elspeth Thomson’s chapter on “ASEAN-China Energy Cooperation”, China’s oil needs far exceed what ASEAN can provide. So China’s energy hunt goes to the Middle East, Africa and beyond. Even Indonesia has turned into a net oil importer in 2004 due to falling production and insufficient investment. Both ASEAN and China relies on Middle East for crude oil. China’s reliance on gas is low, only three per cent of its total energy consumption mix. China as the largest coal producer in the world may mean it can explore coal-to-liquid technology and other clean coal options. It has already tapped hydropower and nuclear power and is exploring other renewable energy sources. From this energy survey, Thomson sees a potential for greater energy trade between ASEAN and China apart from traditional partners in Japan and Korea. As China invests in oil pipelines and improvement in oil efficiency, ASEAN, on its part, needs a more concerted energy policy to look into hydropower development and others which have investment and territorial implications. When China begins to have a strategic petroleum reserve as in the United States, Japan and many others, its demand beyond its current three-week reserves would have a tremendous impact on oil prices. Some coordination in energy policies including the safety of the Malacca Strait, is noted. The fourth non-conference chapter is by Zhang Haibing on “China’s Aid to Southeast Asia”. In spite of China being a developing country, much depends on how aid is defined and used to achieve goals and policies. Zhang notes three stages of China’s aid to Southeast Asia: From the Cold War days, to Deng Xiaoping’s reform and open-door policy in the 1980s till

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mid-1990s, and the third stage since 1995 to connect aid with mutual beneficial cooperation. With China’s aid dispersed to ASEAN countries like Thailand and Malaysia which have higher per capita than China itself, the ASEAN-China Cooperation Fund to support human resources development and training shows its commitment to Southeast Asian prosperity and progress. Technical training is another important form of aid, especially in agricultural development. There is attention to infrastructure support, as in the Mekong Basin, with a new focus. Compared to Japan’s overseas development assistance (ODA), China’s unconditional aid to ASEAN still lacks a clear vision and coherent grand strategy. The overall assessment is China’s ODA as relatively small and ad hoc in nature as in disaster relief and humanitarian assistance. But technical assistance for training, also preferred by Singapore, is the way to go, as well as in research and policy studies. Mya Than provides updates in his chapter on “China and the CLMV Countries: Developing the Mekong Sub-region”, a unique China-CLMV project gaining credibility as an ASEAN+1 project. Intra-GMS trade is dominated largely by China and Thailand while between Yunnan and its fellow riparian countries, Myanmar is the largest border trade partner. Thailand is the largest investor in the Mekong region. Tourism is a new driver gaining momentum, with Japanese visitors as the largest group. To tap the full potential, serious efforts for adequate facilities in accommodation, transport and other infrastructure, including publicity and legal framework to support tourism development, are identified. Differentiating between the 1962 GMS Economic Cooperation and 1995 Mekong River Commission (minus China and Myanmar) or even the 1993 Golden Triangle may be more historical and sourced differently. Extending to the Mekong-Ganga Economic Cooperation is more exciting, as also linking with Bangladesh-India-Myanmar-Sri Lanka-Thailand-Economic Cooperation (BIMSTEC). Than notes that trust and confidence-building are more important to bond all parties. China can be exemplary as well as provide the growth momentum. Sheng Lijun takes a hard realistic view in his chapter on “China’s Economic Relations with ASEAN: Developments and Strategic Implications”. Alluding to strategic implications in China’s growing influence without a commensurate strong economic and social basis, he cautions on exaggerated China’s economic relations with ASEAN. Sheng’s detailed chronology of the evolution of the China-ASEAN economic relations also notes relatively low investment and economic aid from China. While starting from a low base, even the apparent rapid ASEAN-China growth in trade has to be carefully scrutinized, with

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double counting alluded to. Apart from Yunnan Province and Guangxi Autonomous Region which push China into the ASEAN market, Sheng notes a less coordinated effort from the rest of China. Whereas ASEAN “pulls” to engage China, China “pushes” into region without seeing ASEAN’s efforts. With the U.S. factor and the Taiwan issue compounding relations, diplomatic and governmental relations are complicated, especially without the ameliorating effects of private sector and non-governmental relations as social bonds. Sheng’s conclusion remains a darker side of China’s big power political push into ASEAN, which also creates an alert among other major powers. Inevitably, compensating and offsetting strategies occur as China deals with a two-tiered ASEAN. Unlike the United States which was invited into Europe at the end of World War II, or a better diplomacy through arousing enthusiasm before pushing itself into the region, Sheng thinks China’s learning curve can do with less manipulation and greater appreciation. In the last chapter on “Strategic Dimension of ASEAN-China Economic Relations”, Eric Teo is on the side of optimism. From China’s “peaceful rise” to its conscious attempts to reduce its image as a “threat”, Teo sees China projecting a “soft power” appeal to ASEAN in contrast to the United States’ heavy-handed way. Teo highlights the roles of ASEAN and China in building, firstly, regional trust and confidence, and secondly, the East Asia Community. Specifically, ASEAN-China economic and financial cooperation is a building block towards the East Asian Community as Teo points to the “spectacular” increase in Sino-ASEAN trade, increased investment from China, growing bilateral assistance and regional assistance. Teo’s enthusiasm of China is either from a more generous reading of statistics that Sheng has specifically warned about, or a glossing over of fundamental economics to portray a more benign China in pursuit of regional stability as a means to economic growth for all. Such a political security cannot be faulted even if it seems a tad over “atmospheric”. GOING FORWARD Chapters 2 to 15 provide a well-rounded and updated picture of ASEANChina economic relations. The authors have been fairly consensual in noting China’s rise as generally favourable once ASEAN can amicably manage China’s sheer size. Precisely because of the weight and size of China, it is clearly better as a friendly ally than a foe. Another discernible shared view is on trade and FDI statistics and how to portray them with globalization at work. It is befuddling what is made where

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in global production networks. Trade and investment data and information can be as illuminating as they may be fudged, consciously or otherwise, with the rise in cross-border activities in pursuit of cost competitiveness and global supply chain management. This may be an area for future research for a clearer global picture not just in ASEAN-China economic relations. With a greater sense that ASEAN needs China in economic cooperation more than the other way around as China is the declared factory of the world, ASEAN may use the lop-sided situation in investment to bargain for more Chinese FDI. With its bulging trade surpluses and official reserves, China may be induced to recycle its FDI into tangible ASEAN projects which are mutually beneficial as in energy and oil security and maintaining cost competitiveness. More joint ventures can help to solve China’s environmental problems or meet its demand for food, raw materials and intermediate products. Joint ventures in human resources development are of paramount importance. Both ASEAN and China value education, training and good health not merely as economic growth prerequisites, but as basic welfare needs. Other forms of consumerism like tourism may be part of the rising per capita phenomenon. But financial, banking and other professional services in legal, accounting and engineering services should carry more developmental weight. The various authors have other specific recommendations. A case-study approach to dig into the nuances and idiosyncrasies of ASEAN-China economic relations is insightful at the micro level. People bonding and business forging bridges from the ground up are more important and effective than grandiose government-to-government schemes and meetings. By the same token, students, medical patients and tourists are as effective as “ambassadors” to strengthen ASEAN-China economic relations. These areas need to be explored.

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2

China’s Economy in Search of New Development Strategies John Wong

A NEW SPURT OF HIGH GROWTH China’s economy in 2005 registered another year of surging growth, with its total GDP (based on recent revision) expanding at 9.9 per cent to reach 18.23 trillion yuan (or US$2.26 trillion).1 Growth in 2005 was just marginally lower than the 10.1 per cent of 2004. In fact, China’s economy since 2001, when China gained accession into the WTO, has experienced a new spurt of high growth with its GDP expanding at the average rate of 9.8 per cent for the period 2002–05, higher than the annual average of 9.6 per cent for the whole period of 1979–2004. (Figure 2.1). The last spurt of high growth occurred in the early 1990s when Deng Xiaoping embarked on a “grand tour of South China” (nanxun), which touched off an upsurge of investment (both domestic and foreign) and industrial production for the period of 1992–96, giving rise to double-digit rates of economic growth and also double-digit rates of inflation. Subsequently, Premier Zhu Rongji had to introduce tough macro-economic control measures to bring the economy to a soft landing in 1996. The present spurt of high growth had initially also sparked fears of overheating, which, however, never materialized. What are the underlying causes for the present spurt of dynamic growth? First, whereas the previous spurt of high growth was primarily investment

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Figure 2.1 China’s Economic Growth and Inflation, 1990–2005

16%

30% 14.2% 14.0% 24.10%

14% 12%

25%

13.1%

13.5% 12.6%

% GROWTH (GDP)

10.0%

10% 14.70%

9.9%

9.1%

17.10%

9.2%

10.1%

10.0% 9.3%

9.6%

8.4%

8.8%

8%

8.3%

9.5% 9.8%

9.5%

7.6%

15%

8.3%

7.8%

7.5%

7.1% 8.0%

10%

8.30%

6% 6.40%

3.8%

% GROWTH (CPI)

20%

10.9% 10.5%

5%

4%

3.90%

3.40%

2.80%

3.10%

0.40%

-0.80%

2%

1.80%

1.20%

-0.80%

0%

0.70% -1.40%

GDP (Original)

GDP (Revised)

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

-5% 1990

0%

CPI

driven, this time round it was fuelled by both high domestic investment (that is, domestic demand) and high exports (that is, external demand). For the period of 2001–05, as will be further discussed later, exports grew at the hefty average rate of 30 per cent while domestic investment grew at 24 per cent. Such dynamic expansion of exports in recent years bears the best testimony to the positive “WTO effects” on China. Indeed, China’s economy postWTO has become much more closely integrated with the global economy, leading to a large influx of foreign direct investment (FDI) and the rapid expansion of the export-oriented manufacturing activities. This explains why in recent years over 50 per cent of China’s exports are carried out by foreign invested enterprises. Furthermore, the WTO accession has led to the opening up of many domestic sectors from automobile to domestic retail to greater foreign competition. This in turn had led to a sharp rise in domestic investment for industrial expansion. Take the automobile industry. China produced 2.1 million units of automobiles in 2001. By 2005 China’s output of automobiles rose to 5.7 million units to become the world’s third largest producer after the United

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States and Japan. The rapid growth of the industry after WTO has led to explosive growth of many upstream and downstream industries. In 2001 China produced 152 million tonnes of steel. In 2005 it was the world’s top steel producer with a total output of 397 million tonnes, or 2.6 times in a matter of four years.2 Secondly, whereas the economic growth of many Asian economies had succumbed to the 1997 Asian financial crisis, the Chinese economy had hardly been affected by it. Even the SARS epidemic, which had badly ravaged several Asian economies, had not affected China much — industrial output and exports came down slightly for one quarter only. As clearly shown in Figure 2.2, China’s economy after 1997 continued to grow rapidly and then built up its momentum further when economic growth of its neighbours in East Asia and Southeast Asia had either collapsed or come down to a low level. The most important characteristic feature of the present spurt of high growth is the fact that it is fundamentally different from the previous one in the early 1990s. After a span of ten years, the Chinese economy is not just

Figure 2.2 China and ASEAN+5: Crisis and Recovery, 1996–2005

15.0 Singapore

China

GDP Growth Rate (% )

10.0

5.0

0.0 1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

-5.0 Malaysia

Philippines

Thailand

-10.0

Indonesia

-15.0

China

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14

Malaysia

Thailand

Indonesia

Philippines

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much larger in size, but also structurally different and much more mature. China’s total GDP in 2005 is almost three times that of the early 1990s. The structure of the Chinese economy in 2005 is much more mature (for example, a larger service sector) and technologically more sophisticated (for example, a much higher proportion of high-tech products in China’s exports). In the previous spurt, China’s economy was just making its first debut in the world economy. By 2005, China has emerged as the world’s foremost manufacturing base. China has become not just a leading engine of economic growth for Asian economies, but also one of the major drivers of world economic growth. On account of its sheer size and scale, China’s levels of production, consumption, imports and exports carry significant global implications. Apart from being an important source of global economic growth, China has also operated as one of the world’s most significant integrating forces, as it is a crucial link in the world’s many production networks. On the financial side, owing to its persistent surpluses in both capital and current accounts, China has accumulated the world’s largest foreign reserve holding, which stood at US$854 in February 2006.3 Indeed, China’s massive savings, much as the American huge spending, have contributed to the world’s macro-economic imbalances. Not surprisingly, every major bourse and every major capital market in the world has to watch closely the movements of China’s Renminbi or RMB. Viewed from a different angle, however, the present spurt of dynamic growth is not without its many dark sides. After many years of breakneck rates of growth, the economy has inevitably developed a lot of stresses and strains. More seriously, the socio-economic side-effects (that is, negative externalities) of high economic growth have surfaced. Accordingly, the Chinese government’s attention is focused on the many negative consequences of the past unbridled economic growth, from rural poverty to environmental degradation and wide income disparities, calling for “sustainable growth” and “balanced development”. Much of the new development paradigm is contained in the Eleventh Five-Year Programme (2006–10), which was endorsed by the recent meeting of the National People’s Congress in March 2006. What is sufficiently clear is that the recent spurt of high growth ending 2005 may go down in China’s economic history as an important turning point. After 2006, economic growth may well trade off a slower pace for broader social objectives. The Chinese leadership has made it clear that it will start new development strategies, more “balanced” and less GDPdominated, so that new policies can be introduced to cope with the many “growth problems”.

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THE PRESENT STATE OF THE CHINESE ECONOMY For a good glimpse into the medium-term outlook of the Chinese economy, a detailed analysis of the structure and performance of the Chinese economy in 2005 is the best starting point. Whereas the Chinese economic policymakers in 2004 were worried about economic overheating after the economy experienced breakneck growth rate of 10 per cent two years in a row, the fear of a “hard-landing” had subsided half-way through 2005. This is not because the government had been conspicuously successful in its macro-economic control efforts at bringing the economy to a “soft landing”. At the turn of 2004, the government did continue to rein in such overheated sectors as steel, cement, and aluminum; in April 2005, it also made concerted efforts to cool down the real estate market in some coastal cities. Still, the government failed to slow down the overall growth momentum. Most large scheduled infrastructure projects carried on while new ones for power and energy soon came on-stream. On the external demand side, the export boom continued despite rising protectionism in the United States and the European Union against Chinese textiles and garment. Hence the continuing strong performance of the economy. The economy in 2005 was in a curious state. It had experienced neither hard-landing nor soft-landing, but simply no landing! The issue is a clear testimony to three highly important features that the Chinese economy has developed over the years. China’s economy today after more than two decades of reform and dynamic growth has changed greatly. First, the economy has been extensively “marketized”, even though the system is still not quite a wellfunctioning market yet. It is becoming difficult for the government to intervene in the market effectively through such normal levers as fiscal or monetary policy; there is also increasing limitations for direct administrative intervention characteristic of the Zhu Rongji era. This explains the mixed results for Premier Wen Jiabao’s earlier desire to cool the economy. Secondly, China’s economic growth, though still heavily dependent on fixed assets investment, has become much more broadly based. The economy, fuelled by high liquidity and high domestic savings, just abounds in so many new investment opportunities. Before the government succeeds in dampening the growth of one overheated sector, new investment demand has already surfaced in the others. Thirdly, of equal importance but less well known to general observers, is the “political imperative of high economic growth” that has been firmly built into China’s development process. Not only the Communist Party of China in Beijing wants high growth to boost its political legitimacy, but virtually

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every province and below it, every city or even county has its own growth plans. Growth not only creates wealth and generates employment (and hence greater social stability), but is also widely used as a key performance yardstick for the career advancement of local leaders (not to mention more rent-seeking opportunities for local officials). Accordingly, local leadership has all become “growth oriented”, vying for more foreign direct investment (FDI) for their localities and pushing for more infrastructure projects like expressways or airports. This has often resulted in wasteful and uneconomic projects like building many showy city halls and mammoth city squares for the sake of “conspicuous production”. Of course, local competition for growth has also injected dynamism into the economic growth process, which in turn creates many beneficiaries to form powerful “growth interest groups”. The end result has been the rise of many local “growth biases” throughout China, making it difficult for Beijing to coordinate its macro-economic control policies. Now that the central government has openly de-emphasized its progrowth policy, how will Beijing try to rein the uncontrolled local “growth forces”? Can it succeed? How much is just political rhetoric? As argued earlier, economic growth is still the panacea for curing the many social ills, and the economic growth lobby may prove too powerful for Beijing to bring them down. Hence, there is still a great deal of uncertainty. THE NEED TO CHANGE GEARS AND TO RE-ORIENT By the middle of 2005, the Chinese leaders were no longer so concerned with economic overheating, which had never really materialized because of continuing low inflation, over-production and over-capacity. Increasingly, they were turning their attention to the many negative consequences of economic growth. From the outset, China’s development patterns have been blatantly urbanbiased, giving rise to serious rural-urban income disparities. This has led to rising rural discontent and numerous peasant protests. As a result of the single-minded pursuit of indiscriminate GDP growth, a lot of “negative externalities” like water and air pollution have been created. More and more intellectuals are beginning to publicly question the growing social side-effects of economic growth. Throughout most of 2005, the main theme of public discourse had, therefore, shifted from sustaining high rates of GDP growth to the nature of growth and its broad social implications. For the first time, government officials openly talked about “sustainable growth”, partly prompted by the

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realization that China’s rampant industrialization and urbanization have led to huge but highly inefficient use of energy and primary commodities. The cost of economic growth in terms of environmental degradation is indeed mounting.4 Government officials have also started to emphasize the issue of poverty and income distribution.5 Successful economic growth has brought xiaokang (or moderate affluence) to a large number of urban populations to become middle class, who now want better quality of life or “greener GDP”, a concept that has suddenly become popular among China’s intellectuals.6 All in all, 2005 should go down as a watershed in China’s economic development process. After two-and-a-half decades of spectacular growth, China’s economy needs to change gear and modify its mode of development so as to address the structural imbalances in the economy and deal with the social aspects of economic growth. Such new development strategies have been conveniently put under the broad ideological rubric of President Hu Jintao’s much vaunted concept of “scientific development”, which emphasizes “balanced growth” and the economy’s long-term sustainability. As for Premier Wen Jiabao, he has, from the start, shown special concern for the peasants; the new development concept fits well into his overall “propeople” stand. In fact, for two years in a row, the Number One Central Document from the State Council was about how to improve the conditions in the rural areas. To crown it all, this new paradigm of development was embraced by the Eleventh Five-Year Programme (2006–10) approved by the Fifth Party Plenum on 11 October 2005. RISING INTERNATIONAL ECONOMIC PROFILE The year 2005 also saw important developments on China’s international economic front. For several years, China’s economic growth has had a significant impact on its neighbouring economies. By 2005, China’s economic growth has, beyond doubt, produced important global impact because of its size, reinforced by its speed. On 20 December 2005, based on a large-scale national economic census, China’s National Bureau of Statistics (NBS) revised the 2004 GDP level 16.8 per cent higher by correcting the past underestimates of the service sector. As a result, China’s total GDP in 2005 reached US$2.3 trillion to become the world’s fourth largest economy after the United States, Japan and Germany, though China’s per-capita GNP, now at US$1,700, is still around the 100th in the world. In terms of PPP (purchasing power parity) GDP, that is, pricing Chinese output at international or U.S. levels, China

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has for many years already become the world’s second largest economy after the United States. In 2005, China’s exports soared at 28.4 per cent to reach around US$762 billion, giving rise to an all-time high trade surplus of US$102 billion. China has now become the world’s third largest exporting country after the United States and Germany. In 2005, China also continued to be a leading destination for FDI, with the total FDI inflow close to the 2004 peak of US$60 billion. But the most important external economic event from China in 2005 was the revaluation of the RMB by 2.1 per cent on 21 July, following the People’s Bank of China’s decision to abandon its fixed U.S.-dollar peg in favour of a more flexible exchange rate mechanism, much like the Singapore model based on a basket of currencies. Understandably, such a small revaluation would not be sufficient to fend off continuing pressures for further revaluation down the road, even though Premier Wen Jiabao has been adamant that the RMB exchange rate adjustment would follow a slow and gradual process. Mounting political pressures from the United States and EU apart, China’s monetary authorities have been confronted with an enormous problem of how to recycle profitably and smoothly its bulging foreign reserves back to the international monetary system. The problem worsened in 2005 because of China’s unprecedented huge “twin surpluses” on both capital and current accounts, along with its high domestic savings (at 45 per cent of GDP) and low fiscal deficits. The twin surpluses can be a great disruptive force to the international financial system while the latter generates domestic economic growth in China. It may be stressed that China is the only economy that has been running both current account and capital account surpluses consistently for sixteen years.7 As a result of its relentless pursuit of export-oriented development strategies, the Chinese economy has grown increasingly export-biased. As shown in Figure 2.3, China has all along chalked up a trade surplus, which was quite small in the 1990s, but has grown significantly in size in recent years. Many East Asian economies such as Japan, Taiwan, and South Korea had also in the past pushed their exports very hard and also incurred a large trade surplus year after year because their development strategies were very “outward-looking” on the export side, but with a restrictive import regime. But unlike those East Asian economies, China has also been aggressively promoting FDI and has been eminently successful in this regard. (Figure 2.4). Consequently, China has ended up with significant “twin surpluses” for a sustained period. The structural factors for the accumulation of the twin surpluses include China’s under-developed financial market, which cannot operate to channel

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Figure 2.3 China’s Trade Surplus

900

300% 232.42%

800

217.49%

230.77%

209.26%

200%

700 100% 25.99%

34.94% 7.55%

-7.09% -46.43%

500

-26.83%

400

0%

-6.47% -32.76% -17.52%

-16.30% -100%

-144.19%

300

-200% 200 -380.92%

-300%

100

-400%

Exports

Imports

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

0

% Growth in Trade Balance

Figure 2.4 China’s Capital Twin-Surpluses

80 70

In US$ Billions

60 50 40 30 20 10 0 -10 -20 Current Account

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20

FDI

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% G row th

In US $ Billions

600

China’s Economy in Search of New Development Strategies

21

smoothly China’s huge domestic savings into the needed areas of investment, and therefore producers have to depend on the imported capital (external borrowing or FDI) to meet their financial needs. But the main causes of China’s “twin surpluses” come from policy biases such as preferential policies towards FDI, and excessive export promotion such as export rebates and an under-valued exchange rate. Suffice it to say that the persistence of such twin surpluses is not viable. Apart from being a clear case of misallocation of valuable financial resources, the existence of large twin surpluses hampers China’s effective participation in the global economy. As has already happened, China’s persistent twin surpluses have resulted in the unwarranted growth of China’s foreign exchange reserves, which now stand as the world’s largest. This in turn adds pressure on the RMB to appreciate further. On the trade side, the twin surpluses have led to rising protectionism in the developed countries against China’s exports. Hence, along with the growth, the twin surpluses have given rise to numerous trade frictions for China vis-à-vis the United States and EU. In short, the excessive growth of the twin surpluses has proven to be both bad economics and bad politics for China in the long run. Already, more and more fingers are pointed at China for being one of the main culprits (the other being Japan) responsible for global macro-economic imbalances. In the years to come, China will have to step up its efforts of recycling back into the international financial system a significant portion of its financial surpluses through various means, including more outward FDI into Southeast Asia. SOURCES OF GROWTH The Chinese economy today is, operationally speaking, pretty much like “normal” market economy. Hence, it is relatively simple to analyse China’s economic growth pattern by the standard neo-classical economic framework of supply and demand, particularly since the NBS has consistently come up with an abundance of timely macro-economic data, thanks to its past central planning legacies. The NBS in recent years has made great efforts in improving its data quality to ensure the reliability of its key economic numbers (as opposed to the more “fuzzy” social numbers). This is because they are primarily meant for domestic consumption and are in fact widely used by China’s planners and policymakers. In simple terms, growth of an economy on the supply side is the sum total of its labour force increases and labour productivity growth. For a large developing country like China with elastic (or almost unlimited) labour supply, the main source of growth is necessarily associated with the transfer of

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its surplus labour from low-productivity agriculture to high-productivity industry for development. In other words, industrialization-cum-urbanization is the major cause of China’s strong economic growth. As shown in Figure 2.5, the share of secondary industry (manufacturing plus construction) as a proportion of China’s total GDP increased from 42 per cent in 1990 to 53 per cent in 2004 — or only 46 per cent after the recent upward revision of the 2004 GDP. As China is now highly industrialized, there exists a close relationship between its industrial production and its overall GDP growth, as clearly shown in Figure 2.6. In 2004, the 17 per cent industrial production growth translated into 10.1 per cent GDP growth. For 2005, with industrial growth in its first eleven months growing at 16.4 per cent, one could reasonably expect GDP growth also to be over 9.5 per cent. For China as for other market economies, demand analysis provides a far better picture of the sources of growth. Thus, economic growth as increases in GDP is fuelled by the rise in both domestic demand (domestic consumption and domestic investment) and external demand (exports). Except for a handful of small and highly open economies like Hong Kong and Singapore, domestic demand normally constitutes the mainstay of economic growth for most economies, particularly for such vast economies as China and the United States. In most economies, final consumption takes up more than 70 per cent of their GDP by the expenditure approach.

Figure 2.5 Changing Structure of Chinese Economy: Composition of GDP

Tertiary, 31.3%

Primary, 27.1%

Secondary, 41.6%

2004 (ORIGINAL)

Primary, 13.1%

Primary, 15.2%

Tertiary, 31.9%

Tertiary, 40.7%

Secondary, 52.9%

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2004 (ADJUSTED)

22

Secondary, 46.2%

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Figure 2.6 Growth of Industrial Production and GDP, 1990–2005

23.0% 21.2%

21.0%

19.9%

19.0%

18.4%

% Growth

17.0%

16.4% 16.7%

17%

15.0% 14.2%

13.9%

13.0%

14.0%

13.9% 13.1%

13.5%

12.1%

12.6%

11.0%

10.9% 10.0%

10.5% 9.2%

9.0%

9.3%

9.6%

10.0%

10.5%

8.8%

8.9% 8.1% 7.8%

7.0%

7.6%

9.6% 9.1% 8.4% 8.3% 7.5% 8.0%

10% 9.1% 8.3%

9.5%

10.1%

9.9%

9.5%

9.8%

7.1%

5.0%

GDP (Original)

GDP (Revised)

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1990

1991

3.8% 3.2%

3.0%

Industrial Production

But China is quite exceptional in having unusually high rate of capital formation, a hefty 44 per cent in 2004, with only 54 per cent for final consumption. In other words, China’s economic growth since the early 1990s has been basically investment driven. Viewed from a different angle, China’s high levels of domestic investment are not sustainable in the long run, and the government needs to expand domestic consumption to provide a more balanced source of economic growth for the future. Figure 2.7 brings out the domestic demand side of China’s economic growth showing that the growth of fixed assets investment has been consistently higher than that of final consumption. In 2004, its 10.1 per cent GDP growth was primarily driven by a 26.6 per cent rise in fixed assets investment along with an 11.8 per cent rise in final consumption. For 2005, fixed assets investment increased at a 25.7 per cent,8 with retail sales (as a proxy for final consumption) increasing at 12.9 per cent. It can therefore be safely surmised that GDP growth for 2005 should also be very close to the 2004 level. In China, the bulk of the fixed assets investment went to infrastructure development and industrial upgrading, with real estate investment accounting for only 19 per cent (for 2004).9

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Figure 2.7 Domestic Demand: Fixed Asset Investment and Final Consumption, 1990–2005

70.0% 61.8%

60.0%

44.4%

40.0% 32.8% 27.7%

30.4%

30.0%

26.6%

25.5% 18.9%

7.1%

6.6%

5.1%

11.8% 7.5% 2004

1998

1996

1995

1994

1993

1992

1991

7.9% 9.8%

6.5%

Fixed Asset Investment

16.9%

2003

8.9%

1999

8.8%

2.4%

1990

0.0%

14.8%

15.7% 7.7%

10.0%

25.7% 13.0% 10.3%

13.9%

2002

17.5%

2001

21.3%

20.0%

2000

23.9%

2005

26.5%

1997

% Growth

50.0%

Final Consumption Expenditure

China’s merchandise trade has continued to be the mainstay of its external demand. But the exact size of external demand as a source of China’s economic growth remains unclear. As a result of China’s dynamic exports, it was commonly thought that external demand as a source of China’s economic growth must be very high. Statistically speaking, the contribution of net exports (exports minus imports) to China’s GDP growth has all along been quite marginal, not more than 5 per cent. Even for gross exports (that is, without subtracting imports), external demand for many years accounted for less than 20 per cent of China’s GDP growth.10 In recent years, the contribution of external demand to growth has significantly increased as exports have been growing much faster than imports. However, the proportion should still be below 30 per cent. Accordingly, it is not external demand but domestic demand that has continued to constitute the major source of China’s economic growth. Still, the importance of exports to the Chinese economy should not be underestimated because a lot of indirect economic activities of the export sector are not captured in this type of statistical analysis. For example, a large portion of local services and local investment are connected with the export industries whose employees also generate “multiplier effects” on the economy.

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As can be seen from Figure 2.3 above, the export boom starting from 2002, the year of China’s accession to the WTO, had been sustained through 2005. Exports in 2005 grew at 28.4 per cent to reach US$762 billion, mostly manufactured products (93 per cent of the total in 2004). Compared to the 35 per cent surge in 2004, exports for 2005 had clearly come down, in part due to import restrictions on China’s textiles and clothing imposed by the EU and the United States.11 However, China’s merchandise trade surplus in 2005 surged to the record level of US$102 billion (largely due to a slower import growth), or more than triple of 2004’s surplus of US$32 billion. In particular, its bilateral trade surplus with the United States for 2005 could surge to US$180 billion (by U.S. methods of calculation). This will surely create more trade frictions with the United States and more pressures on the RMB to revalue further. The pattern of China’s direction of trade in 2005 had changed very little from that of recent years, as can be seen from Figure 2.8. For exports, the United States remained China’s top market, accounting for 21 per cent, followed by the EU (19 per cent), Hong Kong (16 per cent, but mostly for re-exports to the United States and the EU), and Japan (11 per cent). ASEAN-5 took up 6 per cent of China’s exports. On the import side, Japan captured the largest share of the China market (16 per cent), followed by South Korea (12 per cent), the EU (11 per cent) and Taiwan (11 per cent). Figure 2.8 China’s Top Ten Import and Export Destinations, Jan–Oct 2005

Exports

Canada 2%

Imports

Others 18% Others 28%

USA 21%

Japan 16%

Singapore 2%

ASEAN-4 4%

Korea 5%

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Russia 2%

Taiwan 2% EU 19% HK 16%

Japan 11%

25

Singapore 3%

EU 11%

Australia 2% USA 7%

Taiwan 11% ASEAN-4 8%

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Korea’s inroads into the China market are particularly noticeable. ASEAN-5 also captured 11 per cent of the Chinese market. Of greater economic significance is China’s unique pattern of trade balance with its major trading partners. Figure 2.9 shows that, as in the past few years, China in 2005 continued to run substantial trade deficits with its neighbouring economies, from Japan, Korea, Taiwan and ASEAN-5 to Australia and India. China turned around by incurring a large trade surplus with the United States and the EU. In this way, China could still end up with an overall trade surplus. China’s trade deficits with its neighbours also means that China has opened up its vast domestic market for their exports (both manufactured products and primary commodities), thereby operating as an engine for their economic growth. This will further add to China’s rising geopolitical and geo-economic influence in the region. The underlying economic implications of China’s overall trade pattern for both trading partners and trade balance can be even more profound. Since most of China’s exports are processed products (58 per cent of total exports in 2004) or final products generally with low domestic value-added and low domestic contents (domestic contents generally around 40 per cent, but can be 20 per cent or lower for some products), China must import in order to export. Since over half of China’s foreign trade is handled by its foreign-

Figure 2.9 China Trade Balance with Selected Countries (US$ billions)

Europe USA Australia India Thailand Philippines Malaysia Indonesia Singapore Hong Kong Taiwan Korea Japan

(60.0)

(40.0)

(20.0)

-

20.0

2004

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40.0

60.0

80.0

2005

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invested enterprises (on average 57 per cent in 2004 with much higher proportions for IT products), particularly those from Japan, Korea, Taiwan and Hong Kong, China’s foreign trade has become a critical link in the East Asian supply chains. It can further be argued that China, as shown in Figure 2.10, is becoming an important “integrator” of global production networks. Thus, China’s exports embody raw materials, parts and components, technology, and financial services from different Asian economies, converting “Made-in-Asia” into “Made-in-China” products for the world markets. Figure 2.10 China’s Foreign Trade in Global Economic Integration

Capital, technology, equipme nt, hi-tech parts & components

Primary commodities & natural resources, resource-based products

Japan, Korea, Taiwan

Asean, Australia

Surplus

Surplus

Europe

Hong Kong, Singapore

Surplus

M anufacturing and processing turning “Made in Asia” into “Made in China” for world markets

China:

Financial, commercial & legal services

Surplus

And, shipping to

Surplus

Surplus

USA

Rest of world

Viewed from a different angle, China’s export engine operates not just as a source of its own economic growth, but also as a catalyst for regional and global economic integration. In this way, China’s export sector has built a vital symbiotic economic relationship with the global economic community, and such economic inter-dependence has helped China weather rising protectionism and trade restrictions — more so for hi-tech products but less successful for the traditional labour-intensive products like textiles, clothing and footwear. NEED TO FIX THE MANY GROWTH PROBLEMS With over two decades of unbridled growth, China’s economic growth process has inevitably created and accumulated a great deal of socio-economic sideeffects, which are crying out for attention. The year 2006 will be an important

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one for Chinese policymakers to start rebalancing and re-orienting their development policies. China today with a per-capita GNP of US$1,500 has become what the World Bank used to call a lower middle-income economy. As such, China has the capacity and resources to deal with the negative consequences of economic growth if it also has the required political will and social consensus. It may be noted that the problems created by China’s past fast growth such as income inequality and rural-urban disparity are not new but are actually familiar to development economists, and it may be helpful to take a leaf from a standard economic development textbook in order to put them in proper perspective. To begin with, as pointed out by the Nobel Prize economist W. Arthur Lewis, all development processes are inherently inegalitarian as development cannot take place in all parts of a country and embrace all peoples and all classes at the same time.12 Hence, regional disparities and income inequalities are inevitable. Such is also the underlying wisdom of Deng Xiaoping when he embarked on China’s economic reform with the pragmatic policy of allowing some people to “get rich first”. Furthermore, most developing countries have experienced, in varying degrees, urban-biased patterns of development because industrialization itself is a process of transferring rural surplus for industrial development in urban areas. In most cases, even in the success stories of Japan, Korea and Taiwan Province, their peasants used to carry a heavy burden in the initial phase of industrialization, for example, the extremely regressive land tax at the time of the Meiji Restoration. For the issue of income inequality, Simon Kuzets, another Nobel Laureate, has argued that the relation between income distribution and development typically follows a U-shaped curve: income distribution can be equal before development but gets unequal as development proceeds. Eventually, income distribution will become more equal again after further development.13 Such is the well-known trickle-down process. What then has gone wrong in the Chinese case? To begin with, China’s regional disparities are serious but inevitable, given the historical circumstances of China’s economic reform and development. The government has launched several “regional development policies”, for example, the “Western Development”, to address the problem which will take years to produce concrete results. Secondly, China’s environmental degradation from water to air pollution has indeed become very serious. But most by-products of industrial development are not created by design — hence the term “negative externalities”. China’s environmental problems are largely the result of its

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immense scale of industrialization at high speed, though the government’s indiscriminately pro-growth policies together with its weak regulatory regime have also been a significant contributing factor. Most developing countries have followed the time-honoured policy of “develop first, clean up later”. But the recent Songhua River contamination accident should be a signal that the time has come for China to act urgently on its environmental problems. The government’s plans to increase energy efficiency by 20 per cent over the next five years are also the right steps forward. What has really gone wrong in the Chinese case is that its development process has no automatic built-in measures for effective “redistribution with growth”. It so happened that rapid economic development in China took place at the same time as economic reform (system transformation). In its earnest to introduce the market system step by step, the Chinese Government had not put in place beforehand an effective institutional framework to regulate or guide the operation of the market. Without effective institutional safeguards, the market tends to work for efficiency at the expense of equity. Accordingly, Chinese economic development has not been accompanied by an effective “trickle-down” process, and in some cases, development benefits have actually been “trickled up”, as evidenced by the worsening pattern of income distribution. Above all, a high proportion of Chinese peasants remain very poor in the wake of successful industrialization. The rural-urban income gaps have been widening instead of narrowing. Worse still, bad politics has reinforced bad economics, as many socio-economic problems in China are often aggravated by poor governance and widespread corruption of local officials. The case in point is the frequent evictions of peasants without adequate compensation. The rural problem, if left unresolved, can be a real time-bomb for Beijing.14 Premier Wen Jiabao’s recent policy initiative of building the “socialist new countryside” with a financial package of 340 billion yuan (US$42 billion) is a commendable effort and a noble goal. But political rhetoric apart, its effectiveness remains a big question mark. China today is, by all accounts, a highly industrialized economy. Agriculture is a “sunset” industry once modern economic development takes hold. Rural incomes will always lag behind urban incomes even with large government financial support. The agricultural population is also set to decline as industrialization continues making its progress. The actual number of peasants in China today is about 45 per cent if its total labour force and the proportion will decrease much further in future as agricultural productivity continues to improve — only 2 per cent for USA and 7 per cent for South Korea and Japan. The effective solution to the “rural problem” therefore comes from non-agricultural sectors

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outside the “rural areas”. It is not certain how the proposed “socialist new countryside” will actually resolve China’s many acute rural problems. Overall, the Chinese leadership has come to realize that China’s past development patterns are physically unsustainable and socially unacceptable. They have also broadly embraced the need to change. The new development paradigm is contained in the recently approved Eleventh Five-Year Programme. But the implementation process can be long and bumpy. NOTES 1. “China’s economy grew at 9.9 per cent in ’05”, China Daily (26 January 2006). 2. China Statistical Abstract 2005. 3. “China Forex Reserves to Become the World’s Biggest”, China Daily (28 March 2006). 4. Even before the recent adoption of the Eleventh Five-Year Plan Programme proposals, Premier Wen Jiabao talked about “sustainable development” as he was delivering the government work report to the National People’s Congress on 6 March 2005. (BBC Monitoring Asia Pacific, 6 March 2005). In his speech on 19 October 2005 outlining the Eleventh Five-Year Programme, he raised again the issue of “balanced development” and “sustainable growth”. . 5. In the wake of the publication of the draft proposal of the Eleventh Five-Year Programme, Chinese printed media and Internet were full of discussion and reports on such issues as income inequality and rural development. See, for example, “Focus on Balanced Growth”, China Daily (22 November 2005); and “Growth Model Needs Modification”, China Daily (5 November 2005). 6. For a more detailed discussion of this subject, see Guo Liangping, “How ‘Green GDP’ Becomes Fashionable in China”, EAI Background Brief no. 273 (15 February 2006). 7. See Yu Yongding, “China’s Twin Surpluses: Causes and Remedies”, EAI Background Brief (April 2006). 8. It should be noted that “fixed assets investment” here comes from the GDP accounts. Its real net increase could be less than 20 per cent, which is still very high, or more than twice the GDP growth rate. The author is grateful to Dr Yu Yongding of the Institute of World Economics, CASS, Beijing for this view. 9. As for the origins of funding, China’s fixed assets investment is predominantly from domestic sources (usually bank loans), with foreign investment accounting for only 5 per cent in 2004. This is understandable because of China’s high level of savings, which was 46.4 per cent of GDP in 2004. 10. For a more detailed discussion of this subject, see John Wong and Sarah Chan, “Why China’s Economy Can Sustain High Performance: An Analysis of its Sources of Growth”, EAI Background Brief no. 138 (14 November 2002).

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11. China signed an agreement with the EU in June 2005 to put ten types of Chinese textiles and clothing under quota restrictions. China also concluded an agreement with the United States in November 2005 to put twenty-one types of Chinese textiles and clothing under quota restrictions, effective 1 January 2006. (“Sino-U.S. textile agreement takes effect today”, China Daily, 1 January 2006.) 12. W. Arthur Lewis, “The Dual Economy Revisited”, the Manchester School (September 1979). 13. Simon Kuznets, “Some Facts about Income Levels and Economic Growth”, Review of Economic Studies (February 1960). 14. See comment, “In Rural China, a Time Bomb is Ticking”, International Herald Tribune (2 January 2006).

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3

ASEAN in Introspect and Retrospect Linda Low

INTRODUCTION There is extant literature on the Association of South East Asian Nations (ASEAN-10).1 ASEAN’s continued success as a group of developing countries seems to be by default. It had the right initial conditions internally and externally, galvanized by good leadership, relative to the speed and record of other under-performing groupings. Its progress towards its free trade area (AFTA) and ASEAN Economic Community (AEC) has been variously diagnosed. Grand ASEAN plans seem paradoxically retarded rather than boosted by individual economies’ nationalist-driven success or marginalized by the Asia-Pacific Economic Cooperation (APEC21) or ASEAN+3 (APT, China, Japan, Korea). Intra-ASEAN trade is one reason for ASEAN integration. Free trade remains the best policy. ASEAN’s greater extra-regional dependence on the United States and Japan may simply be replaced by China. In other words, unless intra-ASEAN trade becomes significant, the best scenario may realistically be to have AFTA-AEC diversify to more intra-Asian trade. Whether the Asian growth engine will be more powerful and sustainable than that of the triad (United States, Europe and Japan) is one unknown, whether AFTA-AEC is better off with exclusive Asian trade pacts, is another.

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The geometry of regional trade agreements (RTAs) gets more complicated and fuzzy as China, India and the synergy of information communication technology (ICT) join up with globalization and hyper competition.2 The ascendancy of RTAs and bilateral free trade agreements (FTAs) is both a cause and effect of the dysfunctional World Trade Organization (WTO), a victim of its own success in multilateralism as quantity enlarged through membership, is not commensurate with quality, given the increasing northsouth diversity. After its first thirty years, ASEAN’s comfortable momentum, or the ASEAN Way as a de facto regional hegemony and monopoly, is challenged. This chapter will argue that instead of viewing ASEAN in a success-failure dichotomy, ASEAN’s pragmatic and realistic re-invention and re-engineering3 may retain it as a lynchpin in the East Asian-Pacific equation. In fact, competition posed from within ASEAN and outside constitutes the “threat” and “opportunity” needed for ASEAN’s “strength” to be rallied against its “weakness”. Political will and commitment need to be refocused in AFTAAEC for deep economic integration. ASEAN has been muddling through with inventive ASEAN-minus-X or Two-plus-X formulations,4 “early harvest” and “down payment” promises. The reform pressure for transparency and best practices pushed from outside is more demanding and unforgiving. The ASEAN pathway must be understood and practised beyond mere declaration, more innovative schemes and creative acronyms. CHALLENGES FROM WITHIN There are four major areas of cooperation under the ASEAN framework, namely: political and security cooperation, economic cooperation, functional cooperation and development cooperation. Since the articulation of the ASEAN Vision 2020 in 1997 and the adoption of the Hanoi Plan of Action (HPA) in 1998, ASEAN entered into a more systematic and institutional process of development. Will the AEC as a common market with roadmaps for eleven priority sectors and an overall longer-term roadmap with the Common Effective Preferential Tariff (CEPT), ASEAN Investment Area (AIA) and ASEAN Framework Agreement on Services (AFAS) as building blocks, be more of the same or some radical re-engineering to deliver what is professed repeatedly? Taking a realistic look at national projects like Malaysia’s automotive industry, creative suggestions have included “regional units” (to collectively manage sectors not slated for liberalization, in “common market minus”) and ASEAN Bond Fund and ASEAN Bond Corporation.5 But ASEAN integration

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stops short at a common currency and monetary union. Unlike the European Union (EU) where the euro serves as a unified exchange rate, supranational sovereignty and complex network of uniform rules, ASEAN claims that its diversity makes it theoretically unsuited to be an optimum currency area. ASEAN states need exchange rate flexibility to adjust to differential trade shocks, so broad-brush convergence rules seem more fruitful for the organization than currency unity. Indeed, force majeure circumstances have brought reality and cognizance to social issues, ranging from labour migration in search of work to the environment, for example, the seasonal haze and tsunami, and, not least, health concerns from the severe acute respiratory symptom (SARS) to bird flu. Many missing dots remain, but the baby should not be thrown out with the bath water as economic and institutional reforms continue. While neither Rome nor the EU was built in one day, ASEAN’s comfort zone is being hurried along. Suffice to say, ASEAN leaders pushed by domestic political economy realities and more mature industrial structures and economic strategies provide a ripe phase for greater inter-ASEAN integration and collaboration. The state-centric priority of nation-building after independence may be understandable in the 1960s. Some success over time may make ASEAN’s balancing act as a nationalist, regionalist and globalist player more achievable and sustainable. The ASEAN Secretariat has graduated somewhat from “postoffice box” functions to drive-and-steer initiatives. Except for Indonesia which must still find itself, even the new members of Cambodia, Laos, Myanmar and Vietnam (CLMV) are pulling their weight. From the Institute of Southeast Asian Studies (ISEAS) Concept Paper to McKinsey and Company’s ASEAN Competitiveness Study, there must be enough blueprints, mappings or roadmaps to pave the way, all with good intentions. ASEAN regional development cooperation programmes typically include the harmonization of policies to create a consistent regional legislative framework and of the institutional mechanism to implement a consistent regional management regime. Capacity-building, especially in the public sector, comprises relevant key and supporting sectors to initiate the necessary institutional changes to achieve the harmonization. The state apparatus prevails with the succession of governments and leaders, and have been as peaceful and smooth as any political transition. Such stability is not a small blessing, notwithstanding the security concerns posed by Al Qaeda, Jemmiah Islamiyah or Abu Sayyef since 11 September 2001 (9/11).

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Over time, state-led, government-to-government crafted schemes and dialogues have responded to another reality: the ASEAN private sector. Be it foreign or indigenous, business entrepreneurs and young minds educated at home and abroad, form a critical intellectual mass. The demographic factor of the various ASEAN members, from post-war babies’ spending to new generational needs and demands, is a force to be reckoned with. The private sector as an engine of growth needs grooming and space. Direct foreign investment (DFI) and multinational corporations (MNCs) are as crucial as state-owned enterprises (SOEs), government-linked companies (GLCs), small, medium-sized enterprises (SMEs) or industries (SMIs) as cottage industries to integrate rural development into urban industrialization in any typical ASEAN dualistic economy. As a hybrid, public-private partnerships (PPPs) are more than joint ventures between state and private sector and do not detract from ASEAN’s need to build and develop links and synergies with DFI and MNCs for technology and markets. Instead, intrinsic strengths of the public and private sectors are combined to minimize their respective individual weaknesses. State-market ideological divide is passé, as China and Russian perestroika and glasnost have shown. Economic reforms are imperative. With the private sector in the PPP harness, a twin engine as “developmental intervention” is part of “Reality 101”. As one voice, ASEAN’s lobbying tactic and bargaining power have projected its image and identity. Contributions to international organizations include submissions on emergency safeguard measures (ESM) to GATS6 and the Cairns group of agricultural producers. However, a remaining conundrum is for ASEAN to engage in the process of change as a truly regional construct. Regional issues need regional and not national solutions by definition. Private sector and international competitiveness involving bottomline metrics as in economies of size and scope are also needed. With more knowledge and maturity now, there should be less political and bureaucratic formulation for equal costs and benefits of ASEAN schemes but more realistic private sector-driven advisory in initiatives. If an ASEAN project is thrown into any corporate den, whether the blueprint would be of a different hue is not merely an intellectual poser. Japan Inc., Korea Inc., Singapore Inc. and Malaysia Inc. have operated exactly that way (that is, taken the corporate route), with results.7 Diverse as ASEAN states are in geography, size and other spatial aspects, in history, culture, religion and social values, their economic transformation and industrialization paths seem invariant, relying on DFI and MNCs.

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Increasingly however, over and above the traditional Japanese “flying geese” model, some differentiation is demonstrated in leveraging external technology and expertise with indigenous developmental resources and capabilities such as in electronics. While still tiered by development and growth stages, the common destination among ASEAN member states seems to be a knowledge-based economy (KBE). Singapore’s KBE is driven by its lack of raw resources other than its macro-economic management and micro organizational skills to harness foreign talents. Malaysia’s 2020 vision is not just a competitive reaction but a proactive strategy in its own right. The Philippines has realized its ICT resources and potential. It is a matter of time before Thailand with its successful dualistic model in agriculture and manufacturing, realizes it cannot be a laggard even though English is a language barrier for its masses. These internal challenges as both push and pull factors cannot be divorced from external challenges, more so if the consensus is that political will and commitment constitute the missing internal glue. If small, nimble and soft powers like Singapore — in terms of their credibility and reputation in achieving overall success — and hungry and emerging new CLMV members are not motivation enough, it has to be the reality of regionalism and globalization, as shown in the next section. ASEAN’s extra-regional interdependence more than intra-ASEAN for overall growth, guarantees its outward and forward trajectory. However, if laggard, blind-sighted older members remain caught in their own socio-political miasma, not even a dual track ASEAN, for all its wisdom and brilliance, can help much longer. The only consolation — a sad one — is if ASEAN “succeeds” by default, that is, from other regional blocs’ failure. Perhaps regions blessed with abundant natural resources, population and market size from rising per capita income revert to an unproven but much observed thesis that only those less wellendowed succeed out of sheer drive for survival. Paradoxically, ASEAN’s growth momentum seemed faster from a zero base of poverty, crises and external threats. How well ASEAN as a grouping has handled and resolved the 1997 Asian crisis remains debatable. Despite generating ever more conferences and publications, the Asian crisis as a case study to test all of its paper deliberations and designs on ASEAN integration, can be taken to task. Indeed, internal challenges, being domestic, seem to distract ASEAN rather than strengthen its determination and efforts. The reality is that as internal domestic challenges are identified and solved, new ones inevitably occur, be it an aging population and mature industrial structure in Singapore, or the continuing problems in Indonesia. After more than three decades, ASEAN is not exactly at the poverty levels of

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the 1960s, even if some may still fall in the “a-dollar-a-day” straits due to poor and ineffective income distribution more than lack of growth and prosperity. Education and human resources development may be the standard keys, but corruption and immoral interests are jamming the locks. Nonetheless, ASEAN cannot fall back on a policy of “wait-and-see”, “clean up from the inside first”, or “more of the same”. Thus, one conclusion in this section is that ASEAN’s internal wherewithal and challenges are secondary to the external forces, more so at this mature stage. The first implication is that internal challenges have gained some momentum with growth and time, and should drive, not divide ASEAN integration as they did in the early days. The second implication is that external challenges have become imperative with ICT-driven globalization, along with China and India as changing actors and scenes. If external challenges can do no more or better than internal push and pull factors, wishful optimism about ASEAN’s internal dynamics muddling through as the next best alternative is just wishful, as it always has been. CHALLENGES FROM WITHOUT Whether it is global or regional (Japan, Korea, China, Taiwan) complementarity or competition (China, India), the dominating external ASEAN challenge is ICT as an overlayer to the shrinking, inter-dependent world as a result of globalization. In a nutshell, ICT-driven globalization is more powerful, potent and disruptive than the technology waves of yore — from coal power, steam engine, Fordism to nanotechnology. The older technology waves were also buffered by the Cold War plus colonial alliances, before the rise of Japan, and now of China and India. Not only is it time for technological and structural adjustment, with severe implications on the future of work as a new kind of Luddism mutates, the demographics of aging labour force and young job entrants bedevil the transition. While longevity is celebrated with better nutrition and rising living standards are commensurate with working longer, missing or inadequate social security safety nets among ASEAN countries contrast with Western welfare states. Under the same demographic siege on top of their public finance mires, protectionism has returned, from the United States to the European Union. Domestic politics and national interest always prevail over global considerations in any two-level game. Mature industrial welfare states’ protectionism may outweigh any ICT-driven liberalization and deregulation, as unleashed by the telecommunications industry. ASEAN products destined for these welfare states suffer from both their trade barriers and diminished purchasing power.

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It is patently clear that much as ASEAN has the advantage of location in three senses — one, in terms of resources, purchasing power and market size; two, in its proximity to East Asia and the Indian sub-continent; and three, as a geo-political East-West bypass to balance Sino-American tensions — its hegemony and monopoly is challenged. From the “flying geese” trade and investment model to today’s geo-economics and geo-politics, the changes and nuances come not only from China but increasingly from other challengers or strategic partners from the Indian sub-continent, to far-flung Latin America or the Middle East. ASEAN’s locational and buffer values as Southeast Asia may remain but cannot be taken for granted. China and India as a duo, the promise of a new Asia, Japan back on its second wind however defined, are all scenarios awaiting political economy decisions. From Korea to Hong Kong (like Singapore as city-state), Australia and New Zealand, the rest of Asia as the interstices and supporting cast, is as much a matter of geoeconomics as geo-politics. Equally clear is that ASEAN has taken reactive and even proactive steps through many ASEAN-plus partnerships such as its Comprehensive Economic Cooperation Agreement (CECA) with Japan, Free Trade Agreements (FTAs) with both China and India and Closer Economic Partnership (CEP) with Australia-New Zealand Closer Economic Relations Trade Agreement (CER). The Japan-Thailand FTA may have turned tricky as Japan wants Thailand to open its steel and car sectors in ten years, diametrically opposite to Thai’s ten-year moratorium on steel tariffs. But the Japan-Malaysia FTA was concluded with Malaysia to reduce tariffs on cars for ten years, even if it is less than a true model of free trade. The Japanese FTAs with the Philippines, Korea, Indonesia are works-in-progress, having signed also with Singapore and Mexico, all of which signal Japan’s own changing paradigm. Australia is not far behind, in the Australia-Malaysia FTA and AustraliaChina FTA. Australia wants so badly to be in the new East Asian community to embrace security and economic cooperation for Australia’s long-term destiny, that it agreed to sign on the ASEAN Treaty of Amity and Cooperation (TAC).8 Australia-Indonesia in a framework partnership agreement and a separate security pact may reflect more specific Australian interest. Of particular interest is the ASEAN-China Free Trade Area (ACFTA), as reflected by the tariffs shown in Tables 3.1 and 3.2 respectively for the Early Harvest Programme (live animals, meat and edible meal offal, fish, dairy produce, other animal products, live trees, edible vegetables and edible fruits and nuts, as well as other specified products) and Trade in Goods Agreement (all other products listed under the Normal Track).9

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Table 3.1 Early Harvest Programme ACFTA Tariffs ACFTA Tariff Rate % China’s (MFN) Applied Tariff Rates: Greater than 15% Between 5% (inclusive) and 15% (inclusive) Less than 5%

2005

2006

5 0 0

0 0 0

Source: .

Table 3.2 Trade in Goods Agreement ACFTA Tariffs ACFTA Tariff Rate % China’s (MFN) Applied Tariff Rates: Greater than or equal to 20% Between 15% (inclusive) and 20% Between 10% (inclusive) and 15% Between 5% and 10% Less than and equal to 5%

2005

2007

20 15 10 5 Standstill

12 8 8 5

Source: .

Unlike the “flying geese” model where ASEAN’s raw materials were exchanged for Japan’s DFI and MNCs transferring technology and expertise in mutual comparative gains, ASEAN may have to be more guarded given that China’s developmental stage is more competitive than complementary. ASEAN and China woo the same DFI-MNC drivers. Whether there is any choice but to work with China is itself a moot question. ASEAN and China find mutual relevance as China balances its new, nuanced versus historic-political relationship with Japan, as well as for sustainable regional-global supply chain networks.10 The issue is how ASEAN balances the cooperation-competition (cooptition) as a group or as individual states, given the diversity, stage of development, and growth. The ASEANChina FTA does not seem to preclude bilateral relationships such as that between the Philippines and China in many business agreements, investment accords, but not an FTA. The APEC reigned in the 1990s. Its eclipse may be as much due to the United States’ own growing preoccupation in the North American Free Trade

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Agreement (NAFTA), the Free Trade Area of the Americas (FTAA) and the Central America Free Trade Agreement (CAFTA) including Costa Rica, as in an Asian identity coming of age in the East Asia Summit (EAS) in 2005. APEC meetings seem notionally realigned to support the Doha Development Agenda (DDA) and seek best practices for RTAs and FTAs through its pathfinder initiatives. The prostrate WTO is not exactly guileless in the emergence of RTAs and bilateral FTAs as a raison d’etre for Pacific Rim leaders to help forge a WTO breakthrough or be some alternative. All — from the WTO to the World Bank and APEC — see the writing on the wall. The EAS is another grouping whose time has come. The EAS is a loose structure to boost trade and security. More than the APT, the membership of sixteen in the EAS is testimony to an implicit pact that size and coverage are vital even if, like the APT, the EAS claims to be fundamentally ASEANdriven. The powers fuelling the EAS’ pace and momentum are the bigger Asian constituents which may be less politically aligned, but they know that the EAS as counter-APEC is useful, desirable and timely. How well ASEAN performs in the putative driver’s seat may be unimportant so long as the Three plus India, even with Australasia in the EAS equation, keep the checks-and-balances and fuel the momentum. More developed industrial giants and consumers, purveyors of DFI, technology and spillovers will be finessed by EAS’ combined financial reserves, a spaghetti bowl of FTAs, notwithstanding. It is all the more interesting that Russia is an observer, and the United States is not a guest at EAS meetings, be it about oil, security or plain geo-economics. The United States is as noticeably absent from the EAS as China is omnipresent, marking the latter’s first step in its long-term ambition to build a new regional power structure. Coincidentally, a British Broadcasting Corporation (BBC) World Service Poll of twenty-two countries found that nearly half the respondents saw Beijing’s influence as positive compared to 38 per cent who said the same for the United States, a clear rise of China’s soft power, at America’s expense.11 In parts of Asia, Africa and Latin America, the so-called “Beijing consensus”12 on authoritarian government plus a market economy has become more popular than its precedent “Washington consensus” of market economics with democratic government. Even ASEAN is not oblivious to China’s reinforcement of this attraction through economic aid, access to its growing market and adjusted diplomacy. China has reinforced its peaceful rise, of which further testimony is that even the Great Wall symbolizes China as the invaded, not the invader. Its membership in international organizations including the WTO, hosting of

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the six-party talks on North Korea and settlement of territorial disputes with its neighbours, constitute its arsenal of new diplomacy. Like China, ASEAN and the rest of East Asia share another denominator in their dollar-based foreign reserves from high savings and balance-ofpayments surplus. Though collateral damage is notably tied to the dollar, aiding and abetting U.S. consumption and indebtedness, China led with its yuan appreciation in 2005, breaking its currency peg and moving to a basket of currencies while Asia as a whole is still uncertain on the next choice of a common basket peg. Any cessation of such open-ended lending is good for Asia itself13 and good for the United States to correct deficits, barring any collateral damage if the United States stops being the “importer-of-last resort”, thereby fuelling Asian growth. But it would be a de facto secession of Asia from the International Monetary Fund (IMF), whether or not the aborted Asian Monetary Fund (AMF) is resurrected.14 While neither ASEAN nor EAS want any formal monetary union as noted, the work for the EAS cannot escape such issues any more than how China and India can sit together comfortably in “cooptition”. Notwithstanding the historic-political barrier, a neat dichotomy seems to have China as the factory of the world and India the ICT outsourcing hub. But wage costs are still lower in India with skilled workers, particularly at the executive level equipped with its colonial legacies from the English language to legal norms. Yet, India recognizes and realizes China’s omnipresence and in fact recommends that ASEAN, China, Japan and Korea, from the Himalayas to the Pacific Ocean form an economic community like the EU or NAFTA. ASEAN would be better off not having to choose between the two populous Asian giants. South Asian cooperation itself may not be a credible brand. The South Asian Association for Regional Cooperation (SAARC) 2006 schedule for the effective implementation of the South Asian Free Trade Area (SAFTA)15 has faltered again. If South Asia appears to have limited experience and success in FTAs, both geo-economics and geo-politics may make India in particular a buffer in the Indian Ocean just like ASEAN is in the APEC, APT or EAS. The Indian Ocean challenge to the Pacific Ocean is witnessed in the BIMSTEC FTA signed in 2004, enlarged to comprise Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka and Thailand. What started as Brazil, Russia, India and China (BRIC) has Korea (BRICK) in the fold. There is already Japan, ASEAN, China, India and Korea (JACIK) in a fourteen-strong alliance. The Bangkok Agreement expanded to include Mongolia and has its

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FTA model to be pan-Asia as in an Asia-Pacific FTA, which may add up with SAPTA to be the Economic and Social Commission for Asia-Pacific (ESCAP) FTA.16 Noteworthy is the Japan-India FTA which may have Indian iron ore for Japan in return for Japan’s help to build India’s infrastructure. With the oil-rich Middle East teaming up with South Asian migrant workers, businessmen and investors, the Gulf Cooperation Council (GCC)17 is in FTA negotiation with India and Pakistan.18 ASEAN members have also turned to South Asia, such as in the MalaysiaPakistan FTA for 239 products, most with zero per cent tariff while others are reduced to 5 per cent in an early harvest programme to take effect from January 2006, and to conclude the FTA by mid-2006; and the ThailandPakistan FTA. Others may be beyond economics such as the India-Thailand FTA plans to include isobutylbenzene, a key ibuprofen ingredient in Thailand, where security of its supply is crucial. Thailand may threaten India’s automotive sector as the intended FTA would halve the Indian import duty including that for aluminum alloy from Thailand, which worried Hyundai Motor India and Japanese rivals Honda and Toyota, as it would be cheaper to move press lines which mold steel into automotive body parts to Thailand. India’s 30 per cent steel duty reduced to 5 per cent makes it the same as in Thailand, even as Hyundai increased its investment in Chennai. Singapore was the first with its CECA with India in 2005. All these new regional approaches, even if they include ASEAN, must be considered as ASEAN’s external challenges. They may disrupt or gel ASEAN. They all reflect national commitments to reform, even if not at one go, but through greater transparency and benchmarks. New age FTAs, CECAs and partnerships from non-traditional trade areas to investment, technical cooperation, labour migration, security and technology transfer, as well as modalities like fast track and early harvest, are in the mix as pragmatic rather than purist FTA gains and costs. In particular, Singapore has stirred the ASEAN pot19 by its fast and furious FTAs with Australia, New Zealand, European Free Trade Area (EFTA), the United States, Jordan, India, Japan, Korea, Trans-Pacific Strategic Economic Partnership Agreement (Trans-Pacific SEP, Brunei, New Zealand, Chile and Singapore) as well as ongoing ASEAN FTAs including AFTA, ASEAN-China, ASEAN-Australia and New Zealand FTA, ASEAN-India FTA, ASEAN-Japan Comprehensive Economic Partnership (AJCEP), ASEAN-Korea FTA, and bilateral ones with Bahrain, Canada, Egypt, Mexico, Pakistan, Panama, Peru, Sri Lanka, Kuwait, Qatar and the UAE. Singapore was the exception rather than the rule since the late 1980s, but by the 1990s, individual ASEAN

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member states and ASEAN as a group have become part of the FTA movement, the difference being in timing and geometry of partners. One scenario as an external challenge combines ASEAN’s oil resources, Singapore as the world’s third largest oil refiner and the Middle East. Whereas the Gulf states, in particular the GCC, seem to have done better with their oil revenue from oil booms, ASEAN oil producers seem less distinguished. As 2005 witnessed yet another oil boom since the dizzy heights of 1974 and again in 1981 when revenues almost doubled, the complete maturity not only in economic and social conditions in the Middle East, but also in thinking patterns and dealing with the oil revenues according to the development needs of the oil producing countries, is noted. Dire need in the 1970s led the GCC states in the early phase of their development to siphon oil gains to develop their infrastructure, including roads, schools, hospitals and public utilities. By the second boom, the oil exporting countries’ oil revenues exceeded their development requirements including their infrastructure needs. “Petrodollar recycling” took place as cash surpluses from oil exports resulted in an investment capital outflow to the United States and elsewhere. The second boom was short-lived, followed by a sharp decline that brought crude oil prices to less than US$10 per barrel in 1982 which led to government deficits. Belt tightening policy prevailed until the mid-1990s, crude oil prices generally stabilized, till the boom since 2004. Having completed most of their infrastructure facilities and partially departing from the investment of their petrodollars to avoid the risks that could be faced by such overseas investments following the 9/11 events, GCC states pursued financial policies designed to steer such earnings to their domestic markets to launch more projects aimed at diversifying the sources of national income in many multibillion dollar projects throughout the six GCC states, without exception. This group is led by the United Arab Emirates (UAE), which witnessed significant growth in more than one area, from the real estate boom and expansion of infrastructure to a partnership for the creation of industrial organizations in collaboration with reputed international companies. The new Vice President, Prime Minister and Ruler of Dubai, Sheikh Mohammed bin Rashid am Maktoum, has promised to do for the rest of UAE what his ruling family has done for Dubai. The financial and banking sector’s growth has implications in both raising capital and significant debt reduction, including for Saudi Arabia which has also joined the UAE company Emaar.20 Such significant financial development has considerable implications for UAE’s growth.21

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The remaining four GCC states witnessed a similar boom especially in Bahrain and Qatar, as the latter is seeking to become a new point of attraction in the Gulf region by taking advantage of the huge potentials arising from the Qatar gas and oil industry. Yet another point that characterizes the current oil boom is the availability of numerous Gulf joint-venture projects and interaction of interests among the GCC citizens, as the GCC Unified Economic Agreement and the subsequent laws and regulations have contributed to promoting this trend that will convert the GCC states into the most vital regional market in the Middle East with all the major positive implications for all the GCC states. Tie in these trends with the global shortage of refined and downstream oil and gas products, and ASEAN oil producers and refiners should be stirred. For instance, Singapore’s Hin Leong Trading has broken ground as one of the world’s largest independent petroleum terminals, reinforcing the city-state’s position as a key oil trans-shipment and trading centre in a S$750 million facility in Jurong Island Petrochemical Park. Fully operational by the end of 2007, it will be the single largest independent petroleum logistics terminal in the region. The new terminal will further enhance Singapore’s position as the world’s third-largest oil trading hub and a leading global oil trans-shipment centre. Being only the second facility with a jetty for very large crude carriers (VLCCs), it will provide a very crucial and much needed facility for VLCCs in the region to tap the growth of the Chinese and the wider Asia-Pacific markets in the petroleum terminal and storage business.22 The rest of the plot in this external ASEAN challenge is best left to corporate boards. The potential is beyond energy, from crude oil and gas to downstream petrochemicals, finance and real estate, health, education, housing and ICT services. The Middle East and the GCC in particular, is a force to be reckoned with, whether China or Japan remains as ASEAN’s headwind. That said, energy, resources and time expended have to be commensurate with the reality of what is nearest and dearest, be it the Middle East or EAS. Even ASEAN on its own is an option, when the choice is between consolidating from inside or going outside. Whatever, the ASEAN core is still missing. The conclusion in this section follows from the first, that if ASEAN’s internal nationalist wherewithal and challenges are secondary to the external forces, more so at this mature stage, ASEAN has to tap harder to internalize its regional buffer role or take that role to within its innards for AFTA-AEC to succeed, in the first instance. The policy implication is that ASEAN needs to marshal its external challenges identified in this section, both to resolve its internal challenges, and more importantly, as the “Reality 101”

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of geo-economics and geo-politics sink in. This twin strategy or twopronged approach, feeding and reinforcing each other, would have ASEAN play an even more potent and relevant buffer and leadership role in the wider EAS or any other regional context. Following this logic and sequence, ASEAN’s globalist dimension will be fulfilled, all in a concentric, mutually beneficial and reinforcing way. CONCLUSION AND POLICY IMPLICATIONS ASEAN’s future is in free trade, be it regional or global. In the early ASEAN days, driven by politics, security, communist threat, the Cold War and resultant non-alignment movement (NAM), and no less nationalism in nationbuilding, ASEAN may be forgiven for muddling through, successfully as it was deemed, relative to other more fumbling developing countries’ groupings. But if after three decades, the excuses remain despite extraneous force majeure events and circumstances, its complacency must now be pitted against the possibility of it being marginalized or overtaken by new surprises. ASEAN has internal strength in all three senses of location, as well as wealth and advancement attained with decades of growth and development as a monopoly and hegemony in Southeast Asia before the rise of China and India. The balance sheet with respect to ASEAN’s internal challenges is still blessed with growth momentum from resources to population, socio-political stability with successful political transition, except perhaps in the case of Indonesia. The external score is fair, but compared to China’s aggressive globalization, both ASEAN (except for Singapore, out of necessity) and South Asia pale by comparison. Globalization and ICT-mediated democratization can be harnessed to generate more economic resources and ambitions. Overall, ASEAN’s internal challenges can be met with three decades’ headstart, but these are fast becoming secondary in priority to the external challenges. These external challenges will be more potent as ASEAN becomes more, not less outward-oriented by DFI, MNC and technology needs and networks, and thus they will not, and cannot be postponed or dismissed summarily as in other ASEAN deadlines and schedules. As in most human and organizational life-cycles, ASEAN may be in its middle age, not quite prematurely, by ICT dating. But there is modern “medicine” in science and technology and ICT if properly administered in the globalized environment of KBE, deregulation and hyper competition. While China’s socialism with Chinese characteristics has lessened the communist threat, ASEAN’s opportunity as a buffer to all politically fractious super powers remains an invaluable external force to harness. So far, ASEAN

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has gained even Australia’s compromise despite its initial discomfit with TAC as the EAS beckons. A diminished United States and lost colonial EU legacy may also have South-South cooperation looking up, from Latin America to Africa and the Middle East. Meanwhile, Islamic economics, with its ethical and moral social handle relative to an all-materialistic, self-interest approach, can identify well with communitarian Asian family and societal values. Whether or not Islamic economics can be an alternative to capitalism or socialism is not the concern. But with new products in Islamic banking and finance, the GCC looking East, with oil, petrodollars and acquisition of refineries, and downstream petrochemicals thrown into the equation, it is a tantalizing scenario. If even China is going in that oil direction, it pays for ASEAN oil producers to forge other related links and associations. The oil boom and liquidity may not be indefinite, but Asian oil demand, in addition to China’s and Japan’s, has multiplier effects beyond energy to investment and finance, as petrodollars may well be recycled in the East including ASEAN, de jure and de facto. The AEC roadmap, both in terms of the eleven priority sectors and the longer term, still has the same issue of a lack of political will and commitment, no matter how creative and innovative it has been as in the ASEAN-minusX or two-plus-X formulations. It is not the fault of pro-ASEAN academics to be sceptical. They must have wished they had more constructive political economy results to write about. ASEAN literature is not short of innovative acronyms, formulas or mechanisms which seem to grow with the beat of time and an idling ASEAN engine, it is just short of results measured against these ideas. The infrastructure exists for various ASEAN contraptions or building blocs, but more of the same from more roundtables and summits is unlikely to add to real action, except to the provenance as in any work of art. If ASEAN prevails through the tests of crises and the rise of India and China in terms of globalization, it may be all the political commitment the near middle-aged grouping can muster. It may not just be an issue of AEC failing or of ASEAN being left behind, but how AEC may morph at the risk of its ASEAN identity, as real geoeconomics and geo-politics of the EAS or a South Asian flavour enters the regional scenarios. All trade and investment cooperation efforts, be they informal CECA and alliances or formal trade pacts, are notionally good. Even if the U.S. supremacy and leadership in APEC is supplanted by the rise of EAS, APEC’s continuing efforts in intellectual property rights (IPR), digital economy, to crisis management from natural health pandemic and catastrophes to man-made ones as in economics and finance, cannot hurt ASEAN. More

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communication, not cross-talk, may help to even nurse the WTO along into some semblance as the mother of all FTAs. In the final analysis, if size matters as ASEAN, APT and now AEC suggest, any desired consensual roadmap to integration must be creatively nuanced. If diversity and complementation also matter, adding more Asian juggernauts (the likes of India and China) or developed industrialized countries (Japan and Korea) and even Australasia and Russia as peripheral regional allies, would still need a more cohesive ASEAN core. The regional geometry or permutations may generate more trade and investment volumes, but the reality is that a prosperous and stable ASEAN is a “comforter-of-the-lastresort” to both ASEAN and non-ASEAN constituents. ASEAN’s role is as patent and scripted as each individual ASEAN state wants it to be. The conclusion is that ASEAN’s external challenges must, and can take precedence over its internal challenges, and that has a few policy implications. First, time and mature industrial structures have yielded per capita income and rising standards, with remaining shortcomings in income distribution requiring either more human resource development or dealing with corruption, the two being not mutually exclusive. Second, external challenges, from ICTdriven globalization to the rise of China and India, can neither wait nor be put in the ASEAN queue of projects. Third, ASEAN’s strength and opportunity as a geo-economic and geo-political buffer to all super powers and ancient Asian adversaries torn by history and politics, cannot be taken for granted in perpetuity. Last, but not least, ASEAN leaders and policymakers should see that ASEAN as a nationalist, regionalist and globalist are not in conflict, but in concentricity which constitutes a singular potent force for internal and external challenges to be met in one fell swoop. NOTES 1. Among the recent publications, Roadmap to an ASEAN Economic Community, edited by Denis Hew (Singapore: Institute of Southeast Asian Studies, 2005) and Low, Linda, Association of Southeast Asian Nations Economic Cooperation and Challenges in Southeast Asia Background Series, no. 3 (Singapore: Institute of Southeast Asian Studies, 2004) set the internal context, and East Asia Integrates: A Trade Policy Agenda for Shared Growth, edited by Kathy Krumm and Homi Kharas (Washington, D.C.: World Bank Publications, 2004), provides the external environment of trade groupings and trade policy. 2. This is beyond traditional price and non-price competition as in time-to-market and quality attributes, as the global crisis since 11 September 2001 and pandemic from the severe acute respiratory syndrome (SARS) to bird flu push competition

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3. 4.

5. 6.

7.

8.

9.

10.

11.

12. 13.

into security and safety dimensions. Location is not just driven by demandsupply or market-cost. Location must connote reliable access and continuity of the global supply-chain, crisis recovery and crisis management, from technical to human. Re-engineering means a fundamental re-thinking and radical re-design, not more of the same, to bring about dramatic result and improved performance. In what was seen as moving ahead to achieve the liberalization target four years in advance of 2008, Singapore, Thailand and Brunei signed an air services agreement for unlimited number of services on any routes between the three as part of an ASEAN full air services liberalization pact. The three have a similar pact on unlimited cargo and Cambodia have since joined in. The air pact is based on a “Two-plus-X” approach conceived by Thailand and Singapore, accepted by the rest of ASEAN in 2003. See Hew Denis, ed., op. cit. for relevant chapters. After a decade and stalemate, ESM demandeurs (ASEAN, now minus Singapore, supported by others, including Brazil and China) call for conclusion of negotiations as per the mandate. Opponents (a group of developed and developing countries) argue that ESM supporters have yet to adequately demonstrate desirability (willingness) and technical feasibility (legal and economic means) of issuing safeguards. Low, Linda, The Political Economy East Asia: A Business Model (New York: Nova Science, 2004) and Low, Linda, ed., Developmental States: Relevancy, Redundancy or Reconfiguration? (New York: Nova Science, 2004). This is a non-aggression act thought by Australia to interfere with its defence agreements with allies like the United States, but Australia must have weighed its national interests even as the United States was left out in the 2005 East Asia Summit. For a complete list of products, visit . For the details of the rules of origin, visit . ASEAN 40 per cent local content requirement prevails and refers to both single country and cumulative content. Both the SARS in China and earthquake in Taiwan as the global chip supplier have proved a Southeast location as invaluable complement and supplement, not necessarily an alternative or substitute. The United States seems focused on the rise of China’s economic and military power, with far less attention paid to the rise of China’s soft power in a global information age, where soft sources of power such as culture, political values, and diplomacy are part of what makes a great power. Using the same, Singapore has advanced itself as a small, soft power. “The Rise of China’s Soft Power”, Joseph S. Nye, Jr, 29 December 2005 (mimeo). China is estimated to be responsible for 15 per cent of foreign purchases of dollar assets, with uncertainty about both the nature of its plans for its US$800 billion of reserves, 75 per cent of which is estimated to be held in dollar assets, and the

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14.

15. 16.

17. 18.

19. 20.

21.

22.

49

potential impact of any shift in strategy (Financial Times, 7–8 January 2006, p. 2). How the rest of Asia follows suit, adds to the uncertainty. The U.S. current account deficit at 6 per cent of GDP requires a daily capital import of US$2 billion. China’s relation with the United States is different from Japan’s and China is set to overtake Japan as the largest holder of dollar reserves. Diversification makes sense for individual countries, but may be problematic for all if a number of them try to do so at once, namely, both the domino effect and contagion brew may result. This was mooted by Japan during the Asian crisis. But while Japan may have deferred to U.S. opposition, the eventual internationalization of the yuan, coupled to the yen and other Asian currencies, is of another persuasion, another paradigm, another time. SAARC and SAFTA comprise India, Bangladesh, Nepal, Pakistan, Sri Lanka, Maldives and Bhutan. Originally seven countries, namely, Bangladesh, India, Laos, Korea, Sri Lanka, the Philippines and Thailand, met in Bangkok in 1975 and agreed to a list of products for mutual tariff reduction in the First Agreement on Trade Negotiations Among Developing Member Countries of ESCAP, known as the Bangkok Agreement. The Agreement was ratified in 1978 by five countries, excluding the Philippines and Thailand. China joined in 2000. All ESCAP economies are theoretically eligible to join the Bangkok Agreement. The GCC comprises Bahrain, Kuwait, Saudi Arabia, Oman, Qatar and the United Arab Emirates (UAE). The GCC is in FTA negotiation also with China and the long-standing FTA, with the EU. As the GCC decides on a unified trade policy at its latest 2005 summit, a moratorium may be imposed on all bilateral FTA efforts, including the UAE’s with Singapore and Thailand. As an observation, Malaysia is active in the Middle East scene, but not yet Indonesia. Equally, Singapore initiated the Asian-EU Summit Meeting (ASEM) and Forum for East Asia-Latin America Cooperation (FEALAC). Owned by the Dubai Government, Emaar is reputed to be among the world’s largest, fastest-growing real estate developer as witnessed in the amazing architectural skylines of Dubai. Under-developed as statistics are, real gross domestic product (GDP) growth in the UAE is reported as 11.8 per cent in 2003 and 7.4 per cent in 2004 (versus 17.7 per cent nominal) and projected to be 11.9 per cent (nominal) for 2005. The firm is looking for good Chinese partners, as well as others, including the UAE, for the terminal.

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4

Developing Stronger Business Networks between ASEAN and China Sarasin Viraphol

THE EVOLUTION OF BUSINESS ENTERPRISES IN CHINA Business dynamics determines the pace of connectivity of and impacts on the relative wealth and influence of the state. Multinational corporations (MNCs) are major transaction agents of the global business process. For the past decade or so, MNCs have figured prominently in China’s remarkable transformation as a global business force influencing the course of world economic development. The history of China’s opening to international commerce is brief but dramatic. The tipping point was the fateful step taken by former leader Deng Xiaoping in 1978 to open up China to foreign investment and trade with the initial commissioning of Special Economic Zones (SEZs) for the purpose. Besides foreign capital, the Chinese leader was hoping for his country to absorb foreign business acumen. In the beginning, the foreign business response to Deng’s call came mainly via overseas compatriots in Hong Kong, Taiwan and Southeast Asia. Their efforts initially were in property development and small-scale merchandising.

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Nevertheless it was a symbolic first step in involving the vital overseas Chinese commitment to helping realize Deng’s vision. During those fledgling times, only a few global MNCs invested in the contract service and outsourcing business with typical foreign direct investment (FDI) sizes in the million RMB range — with a few exceptions being joint ventures with Chinese state-owned enterprises (SOEs) in a few areas such as the automotive industry. Nevertheless the appearance of such early foreign investors on the scene bolstered the Chinese leadership’s new market-driven experiment. With the mainstream world economy set on the course of globalization in the 1990s as symbolized by the advent of the World Trade Organization (WTO), the Chinese government allowed for further access by foreign investment into China by decentralizing decision making for its approval at the provincial level and opening more areas to foreign investment. By the early 2000s, four-fifths of the Fortune 500 corporations, along with hundreds of other MNCs had been convinced to include China in their global business networks. Today the expanding list of such well-known MNC’s as Nokia, Ericsson, Siemens, Microsoft, GM, VW, Toyota, KFC, McDonald’s, Wal-Mart, Sony, Toshiba and Samsung attests not only to the amount of FDI sunk into the China market (over US$60 billion which is the lion’s share of the global FDI), but also to the widths and depths of FDI-funded businesses that are increasingly vertically and horizontally integrated. These global MNCs have been attracted by the dual function performed by China, namely as an export manufacturing base with its cheap labor costs and low price structure, and as potentially the world’s largest consumer market of over 1.4 billion customers and clients. In addition to globally-sourced capital, these MNCs bring with them technology, management and operation know-how, marketing skills and international networking. They essentially set the international business stage for the Chinese performance. The opening of China to foreign business has spurred the development of home-grown entrepreneurship. Persistent with the implementation of the official “socialist market” experiment, public listings mechanisms came into play with the opening of the Shenzhen and Shanghai stock exchanges. SOEs were “corporatized” and the diverse business of state-owned conglomerates like Shougang, Baogang, Zhongshihua (SinoChem) rationalized, and yet permitting state administrative control over transactions deemed vital to national security interests including defense, energy and minerals, and public utilities. Next came a new wave of hybrid, publiclylisted and collectively-capitalized, staff-employing and professionally managed Jitiqiye
 ! (“collective enterprises”) dominant in

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manufacturing and IT businesses. The performances by Haier, TCL, Huawei and Lianxiang (Lenovo) both in China and abroad during the past few years is a testimony of China’s remarkable experimentation with publiclyowned and -listed big business. Meanwhile in cities, townships and counties across the country, numerous small- and medium-sized, self-employed private business units, the Getihu
 (individual entities), have sprung up and have since held sway over the populace’s day-to-day business activities. The seven million such entities are dominant in the service sector businesses which include neighbourhood stores, restaurants, beauty parlours, bookshops, repair shops. In terms of commercial assets holdings, those belonging to the new small- and medium enterprises (SMEs) are already bigger (twelve trillion RMB) than the SOEs which are valued at ten million RMB — and declining.1 All in all, the private sector already makes up for over 70 per cent of the country’s GDP and 75 per cent of the national workforce. Observers are quick to point out that the trend is already set for laying the foundation for China’s emerging middle class.2 ASEAN BUSINESS CONTRIBUTION TO CHINA’s ECONOMIC TRANSFORMATION As a part of the Hongkong-Macao-Taiwan-Southeast Asia overseas compatriot consortium that helped set China’s reform and opening in motion, ASEAN business may be credited for its contribution to the Chinese economic transformation of the previous twenty-eight years. Hongkong-Macao has been the conduit for business transactions with Southern China, particularly the Pearl River Delta area encompassing Shenzhen and Zhuhai SEZs and other manufacturing centres of Guangdong with substantial Taiwanese and Overseas Chinese investment. These Taiwanese investors are well plugged in to the global commercial networks, and are major investors in the outsourcing activities in the Pearl River Delta as they are also in the Lower Yangtze Delta near Shanghai. ASEAN investors have traditionally done business through their own linguistic groupings and ancestral villages such as Shantou (for Chaozhou speakers), Haikou (for Hainanese speakers) and Xiamen (for Fukienese speakers). For the past ten years, ASEAN investment has diverged to other eastern coastal areas notably Shanghai, Beijing/Tianjin and Shenyang like other foreign business in keeping with the growth in consumption and with the increase in business volumes between ASEAN and China as part of the expanding global competition and cooperation.

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CHAROEN POKPHAND AND CHINA — A CASE OF COMPREHENSIVE CONNECTIVITY Thailand’s Charoen Pokphand Group (CP) has played the role as the first, and still the only, ASEAN company to become substantially involved in the reform of China’s rural sector since 1979. Known in China as Zhengda Jituan
 ! (in Putonghua) or Chia Tai (as pronounced in Chaozhou dialect), this 85-year-old Thai MNC has been holding a seemingly diverse range of business interests in the country’s agricultural, retailing, manufacturing, property, motorcycle assembly, pharmaceuticals, banking and finance, as well as media entertainment sectors. Nevertheless, in its twenty-eight years in China, CP has distinguished itself primarily in agribusiness, and more recently, in big, organized retail business. The challenge for CP has been how to work effectively in creating synergy with the average Chinese people as clients and consumers, and with the state and its officials as regulators, and at the same time produce profit on its investment in a sector which normally promises plentiful risks but low returns on investment. The CP business experience and model are frequently cited as meeting the common interests of all stakeholders, namely the state, the farmer, the consumer, and the company.3 CP grew out of the typical Overseas Chinese capital mobilization tradition which has evolved into a modern-day MNC listed in Thailand, Hong Kong, Taiwan, and Indonesia. As an Asian MNC, CP maintains extensive networks of manufacturing facilities and operations in the agricultural sector across Asia, Europe and North America, with China as one of its principal overseas bases. CP’s business activities in China are comprehensive in scope, ranging from agriculture to manufacturing and to service. Its factories, farms, sales agencies, and R&D facilities geographically cove the length and breadth of the country. CP’s workforce in China exceeds 50,000 which represents roughly a third of the company’s total workforce worldwide. CP’s agri-business and retail business are noteworthy for their vertical and horizontal integration features. As was the case with other foreign MNCs in China, the start of CP’s business came by way of the opportunity which became present in the agricultural sector. Thus CP responded in a timely fashion to the country’s attempt to move away from the collective system deemed inadequate for an increasingly restive rural population. By investing in China’s first modern animal feed operation in a joint venture with the U.S. feed manufacturer Continental Grain in 1979 in the newly-commissioned Shenzhen SEZ, CP

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in effect introduced to China foreign capital, modern technology and management, etc. to start the company’s eventual venture into industrial livestock farming and food processing. In essence, what CP offered was exactly consistent with the official thinking with respect to increasing agricultural productivity and raising rural income. The CP business venture was therefore enthusiastically embraced by the authorities at all levels. At the time when the commune system was officially abandoned in 1984, CP was poised to partake in the further liberalization of the agricultural sector. By the mid-1990s, the Thai MNC already had more than a hundred feed operations straddling practically all the provinces, autonomous regions and special administrative cities. As the joint venture partner of several government-owned feed companies, CP had become the single largest feed producer of the country as the field of competition was essentially in its favour. The fragmented nature of the China feed market meant that, as the single largest investor, CP was capturing a mere ten percent of the total national feed output. The situation was therefore favourable for the emergence of China’s first privately-owned feed venture, the Xiwang
 (Hope) Group in the 1980s which portended the rise of aggressive participation by the Chinese private sector in agribusiness. Today the venture is a close second of CP in feed production in the country, its founders — the Liu Brothers from Sichuan — having become China’s richest entrepreneurs. Feed manufacturing represents the first step of the challenging livestock integration process which leads ultimately to the production of food for human consumption. Armed with experiences from previous operations in Thailand, Taiwan and Indonesia, CP ventured into industrial poultry farming in China in the 1990s initially for the purpose of exporting processed chicken meat to Japan and South Korea. This meant considerable increases in commitment in financial and human capital and risks. Livestock integration is an elaborate business requiring a multitude of integrated tasks and steps as well as a multitude of workers at the various stages of the integrated production chain. The process begins with growing field crops such as corn and soybean, two basic ingredients of animal feed, feedmilling, stock breeding farm, dayold chick hatchery, grow-out farm for broiler and layer chickens, slaughter plant, further processing facilities, cold storage, transportation and logistics, marketing outlets including store and eatery, and so forth. The attached schematic presentation of industry-style poultry integration business (Figure 4.1) shows the multiplier effect on job creation in diverse but related fields.4 CP’s poultry integration business has already produced such a multiplier impact in China. The De Ta CP company, a joint venture with a major

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Figure 4.1 Modern Factory Style Poultry Production (Employment Multiplier Effect)

state-owned agribusiness enterprise in De Ta
 City in Jilin provides employment — both directly and indirectly, half of its 500,000 inhabitants. Its processed meat products are shipped by a specially-built rail line connected to the port of Dalian for export to Japan and South Korea. The relaxation of restrictions on direct marketing in the countryside by foreigners has provided an impetus for CP to expand its network of sale agents to directly engage clients and customers in the country’s hundreds of thousands of villages in marketing a variety of farm products including processed chicken meat, eggs, day-old chicks, feed, vitamins, and vaccines. As other liberalizing measures are eventually put in place, these agents’ task could be extended to handling farm produce by the farmers thus helping to foster more trade in the rural areas.

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The urgency to address the deteriorating rural situation growing out of redundant labour and the widening income gap between the urban and rural sectors is receiving topmost attention by China’s political leadership. The original intention behind Deng Xiaoping’s reform and opening was to rescue the rural sector from eventual destitution. For a while it seemed to work as intended. The situation today is, however, a complete reversal and a detriment, as borne out by the movement of even larger groups of unemployed rural folks (the unwelcome “floating population”) roaming urban centres looking for temporary work and by the assembly of disenfranchised farmers camping out in Beijing petitioning the central government for the redress of their grievances. In recent months the public debate has been focusing on the so-called Sannong
 question. Sannong refers to the three related aspects of the rural sector, namely, nongmin
 (the farmer), nongcun
 (the village) and nongye
 (agriculture). At the National People’s Congress’ tenth plenum in Beijing in March 2006, the central government tabled a first series of concrete measures aimed at stimulating rural growth. They consisted of the elimination of all existing agricultural taxes in the amount of 100 billion RMB, the injection annually of 100 billion RMB for all “compulsory activities” including compulsory basic education. The government also promised providing a 200 billion RMB accumulative budget to support compulsory village education. Some 20 billion RMB would be earmarked for upgrading rural health facilities at the village and county levels.5 The expected outcome would be the short-term relief for the 800 million farmers’ burdensome taxes payable to the state, the improvement of health services and the generation of employment and business opportunities related to the public health infrastructure. It is anticipated that such initial measures would provide enough incentive for the farmers to improve their own physical environment, leading to further projects such as renewable energy, environmental protection, improvement of communication (for example, building of feeder roads to facilitate the production process), and the general upgrading of living conditions. Such activities would no doubt boost the entrepreneurial spirit leading to new business opportunities in the locality and ameliorating the condition whereby the unemployed take to the city in search of temporary work. The implication for private sector companies’ involvement in the state’s massive stimulus package for the rural sector is obvious. In addition to the man-made problems, the farming sector is also facing a serious public health threat brought on by the spread of avian influenza (AI) during the past few years at an enormous cost in human/animal life and losses of

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economic opportunities. It is apparent a massive investment needs to be made over a long period of time to improve the conditions and traditional practices of keeping livestock in close proximity to humans. In this context, the recent announcement that the government would support the further development of China’s Central Region is noteworthy for companies looking for new business opportunities in the agricultural sector. The region (comprising Shaanxi, Henan, Hunan, Jiangxi, and Anhui) is historically an important livestock rearing area where one-third of its 360 million population works in the field. It is important also to note that this region is still relatively unaffected by the massive inflow of FDI in spite of its economic potential particularly in industrial livestock integration business with logistical lines of communication linking the country’s more prosperous Eastern Region and the less developed Western Region.6 At its livestock demonstration farm in the Yangling Hi-tech Agricultural Demonstration Center (Yang-ling Gaokeji Nongye Shifan Zhongxin
 !"#$%
 ) at Yangling City in Shaanxi, CP is exhibiting the extent industrial and scientific livestock farming could mean for China’s rural sector in terms of economic and health potentials. CP AND ORGANIZED RETAIL CP’s experience with integrated, value-added food production has led the company to focus on organized retail in keeping with the rise in consumption demand and change in consumption pattern for food and general merchandise amidst the dizzying urban growth. The entry of CP into the hypermarket business in China closely resembled its entry into the agricultural sector decades earlier: CP teamed up with Wal-Mart, the foreign expert partner in large-scale organized retail, to set up the first Wal-Mart supercentre, popularly referred to in Chinese as damaicang
 or, “big trading market”, in Shenzhen in the mid-1990s. From this brief association with the world’s largest superstore operator, CP learned about the enormous potential as well as challenge in large-scale retailing in the world’s biggest consumer market. The decade following CP’s first organized retail venture in Shanghai in 1996 would witness the company’s 50 billion RMB investment in some seventy Lotus (Yichulianhua

) supercentre chain stores in first- and second-tier cities in the country’s Eastern, Southern, Northern and Western regions. Plans for the coming decade call for even faster expansion in the number of stores through synergic relationships with other strategic partners, land developers and venture capital, to keep pace with China’s explosive urban growth.

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The various changes in urban living brought on by governmental policy redirection and increases in personal income have led to massive demands in housing, office, food, education, and leisure. In short, the urban center is now driving the pace of national transformation under the rubric of the official socialist market experiment which is more and more about “market” than “socialist” in economic manifestation. To survive in a fiercely competitive and already crowded market dominated by the presence of the world’s best known and well-capitalized retail MNCs (such as Wal-Mart, Carrefour, Itoyokado and Metro), CP’s Lotus must maintain comparable operating standards, quality merchandise and topnotch service. The recent governmental move to liberalize the retail sector means that the field will be even more crowded with new entries and the competition even more fierce. Nevertheless all this development would invariably benefit Chinese consumers who stand to enjoy more quality merchandise and service for less. In keeping with the multiplier impact of the agricultural integration business model, CP’s large-scale organized retail business in the urban area has spurred the employment of thousands of hard-working youths from the rural sector. It has also forged vital links with thousands of SMEs which supply to CP’s Lotus stores. This enables the suppliers to learn about modern trade and management in addition to crucial support in securing credit and financing. Thus the symbiotic linkages of modern retailing underline the significant impact this particular branch of business on China’s economic transformation. CHINESE BUSINESS AND ASEAN In the annual survey of competitiveness among Asian MNCs for 2004 conducted by Yazhou Zoukan
 ! the Hongkong weekly magazine, it was found that Chinese MNCs lagged significantly behind their Japanese and South Korean counterparts in practically all fields of competitiveness.7 Nevertheless, the Chinese MNCs seem to have “come a long way” since then. In close succession, the Chinese MNCs concluded two major international deals in 2005 which shattered the traditional popular perception toward Chinese MNCs as unsophisticated upstarts. The first involved the takeover of the personal computer division of IBM by Lenovo. The second was the buyout of the French Thompson electronics group by Shenzhen-based TCL. In 2005, the world was also informed about the drama of the attempted bid by CNOOC, the state-owned offshore oil group, for the California-based oil and gas company UNOCAL. These cases involving Chinese MNCs acquiring significant overseas assets have direct bearings on ASEAN as some of the

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bought-out business already had operations in Southeast Asia in their respective fields, thus providing a ready foothold to gain access into ASEAN markets. That ASEAN is an extension of China’s business interests has become more apparent than ever. Politically, ASEAN is an important “asset” in the international arena and a close friend and ally. Strategically, Southeast Asia is China’s “backyard” with vital lines of communication. Southeast Asia is the source of natural resources such as minerals and oil/gas, palm oil and rubber, wood, rice and agricultural products, and food and intermediate goods such as electronic and IC components. Furthermore the region has a sizeable market of 500 million consumers. In addition, as a diverse market in various stages of economic development, ASEAN offers varying business opportunities for different kinds and dimensions of Chinese business. The existence of the Overseas Chinese business communities in all ASEAN countries translates into convenience in business networking. Since 2001 China has been negotiating with ASEAN to conclude a free trade agreement (FTA). The ASEAN-China FTA (ACFTA) will purportedly encompass the largest numbers of people — just under two billion — when it comes into effect in 2010. In the meantime, advance agreement on the elimination of tariffs on agricultural products is already in place, which has spurred the bilateral trade in fruits and vegetables. ASEAN states sharing common borders with China are traditionally granted exemption from agricultural taxes. This proposal for a comprehensive, “win-win” trading relationship has been a diplomatic coup for China, but its substantive significance is not lost on both sides as it serves to further draw the two sides economically together to minimize “hollowing out effects” and maximize “symbiotic arrangements” in the ASEAN-China relationship in the midst of global competitiveness. Under official encouragement, Chinese enterprises are going abroad in search of new business and investment opportunities. It is happening at a time when China’s foreign reserves are at a record high (over US$850 billion) and its export-led business strategy is generating backlash and retaliatory moves by other nations, while labour shortage and rising production costs at home are creating problems in export manufacturing. Under such circumstances, Chinese companies are moving overseas to stake out new business bases. ASEAN, with its continuing infrastructural expansion requirements and a market well suited for Chinese products, is therefore an important candidate for the strategic move. Another traditional avenue of business transaction is also regaining importance, namely, countertrade or barter trade. Thailand regularly resorts to barter trade in infrastructural projects and arms deals, conventionally trading through

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Thai private companies agricultural commodities for Chinese goods and services rendered. Notwithstanding their brief existence as MNCs, Chinese companies are quick learners and are surprisingly adept at doing business on the global scale. They are exhibiting greater awareness about the importance of networking and alliance of business, global strategy and competition, global branding and global marketing. At the same time, they are seeing Asia and ASEAN as a part of the global marketplace. A number of such MNCs are registering in Singapore to benefit from the latter’s position as the region’s global financial and international business service hub. Chinese energy and construction companies are poised to play active roles in a number of engineering and public works projects focusing on oil refining, port and rail handling, road and dam construction. Thailand is being seen as the regional centre for household electronics such as television sets, microwave ovens, washing machines, etc., where Chinese MNCs Haier and TCL are joining force with local distributors. The Chinese automaker which produces the popular “Chery” or “Qirui” brand small car is negotiating with Malaysia’s Proton to assemble and market it in Southeast Asia and locate the Malaysian production in China.8 In brief, Chinese companies are seizing opportunities to participate in the development of ASEAN’s “hardware” side of the business. Nevertheless, following the acquisition of Thompson Electronics and IBM’s personal computer business by TCL and Lenovo respectively, a two-fold Chinese strategy for competing overseas in the greater value-added dimension of business involving “software” development is emerging, namely, “going global with direct marketing with known global brands” and “going from ‘Made in China’ to ‘Designed in China’.” Aware of the increasing importance of branding and other nonproduction, “knowledge products”, the Chinese government has announced its readiness to support Chinese MNCs with funds from China’s trade surpluses for research and development to sharpen China’s global competitiveness.9 This move stems partially from an awareness that global business for outsourced lowcost manufacturing would constantly look for the most cost-effective venue, and that it is increasingly apparent rising labour shortage and cost in China compel MNCs to increasingly look to neighbouring Vietnam as an alternative production site for lower-end manufacturing. The development of closer economic ties between China and ASEAN has encouraged a host of Chinese private sector SMEs, particularly those from Zhejiang province, to “look southward” to ASEAN. The Zhejiang Wahaha beverage company has teamed up with an Indonesia partner to produce the branded mineral water in Indonesia. A number of Wenzhou, the

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home of private SMEs entrepreneurs have gone to Cambodia for garment manufacturing. According to the Kunming-based Wenzhou chamber of commerce, the 60,000-strong Wenzhou merchant grouping in Yunnan is studying the possibility of making Thailand its “beach-head” to launch their commercial activities in ASEAN. In addition, a major property development company in Kunming, the Jinmayuan
 Group, has founded the ASEAN Products City (Dongmeng Shangcangcheng
 !") in Kunming with support from the Yunnan provincial government. It is designed as a multi-function centre for exhibitions, conferences and trade fairs aimed at promoting Kunming as the hub for ASEAN-China business connections in the run-up to the ASEAN-China free trade agreement in 2010.10 With the further development of water, air and land links between Yunnan and Myanmar, Laos and Vietnam, and given the position of the province as the advocate and prime mover of the Greater Mekong Sub-region (GMS) cooperation scheme, increasing numbers of SMEs as well as the provincial enterprises are actively engaged in commercial activities particularly along the border areas. CHALLENGES FOR ASEAN BUSINESS At the risk of sounding rhetorical, one might say that the “rise” of China is long past being the “talk of the town”. It is already the “action in town”. The ubiquitous “Made in China” label on products one consumes on a daily basis, the noticeable presence of Chinese business people and tourists, the crowded flights to Chinese cities such as Shanghai and Beijing, the popularity of Chinese language learning, and the periodic reporting of yet more “spectacular” achievements by China on the economic front in the world serve as constant reminders. The popular feeling for China among ASEAN, in contrast with what one hears and reads about in some other quarters in the world, is strangely benign and even positive despite the growing concerns about the “hollowing out” of ASEAN — to borrow the expression that has previously been popularized in Japan. Perhaps this seeming dichotomy in the ASEAN thinking has to do with the inclination towards the belief in China as a benign power as well as the existence of ASEAN-China “synergy”. Nevertheless, it is important for ASEAN to grasp the meaning of the new China “situation” particularly in the context of the challenge and opportunity it presents. What follows is a “checklist” of the tasks before ASEAN as it prepares to face China squarely both as a formidable competitor and an important collaborator in business.

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Grasp the Significance of China in the Context of Global Business Development Business is gaining momentum as a driving force of global change and innovation. Through increased connectivity and networking, old barriers are being broken down but new problems are emerging. The idea of the “public and private partnership” involving stakeholders from government and business should be positively pursued. To deal with a globalizing China, ASEAN business must be sufficiently armed with capital, human resource, knowledge management, technological innovation, and information. ASEAN and China are facing each other increasingly as globalizing business players often competing for the same export markets. China is presently a versatile exporter of both well-made low-end and middle-range products. Concerns by ASEAN companies about meeting the “hollowing out” challenge from Chinese competitors should be accompanied by expectations of collaboration in the expanding “global economic pie”. Globalization allows ASEAN and China to cooperate and collaborate, and it seems ASEAN and Chinese counterparts should find it possible to forge such a mutually beneficial arrangement. It should not be that ASEAN is inevitably reduced to the role of serving China’s insatiable demand for primary resources to feed its giant export machine or its internal development. Through dialogue and networking, ASEAN and China can complement one another in their export strategies. Additionally, ASEAN is well positioned to support the internal development of China. The steps to be taken by ASEAN are many. First, one must systematically grasp the significance of China as a global manufacturing base, as trading partners and competitors at the same time. Second, one must consciously develop trade and investment conditions that are conducive to fostering close ASEAN-China economic relations. Third, ASEAN must forge business partnerships with China by applying the “win-win” Chinese advocacy in the context of the emerging ACFTA, specifically in re-examining the ASEAN role as China’s supplier of commodities and intermediate goods. Fourth, ASEAN business need to develop competitive, cooperative arrangements with Chinese MNCs and SMEs, while expanding business ties with companies from Taiwan, Hongkong, Japan, South Korea, the United States and EU, Russia and the CIS in exploiting new business opportunities as they evolve in the constantly changing urban and rural landscapes of China. Fifth, ASEAN must redouble its effort to strengthen cooperation among ASEAN business, which can become an important part of the ASEAN economic integration process. While Singapore and Malaysia are most active in terms of trade and

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service investment in China, ASEAN as a whole should develop collective resources and strategies in doing business with China. ASEAN companies should share information and, wherever possible, cooperate, and ASEAN governments should find it possible to render appropriate support in such an endeavour. Thus far the drive for business cooperation has come more from the Chinese side. The launching of the annual Nanning ASEAN trade fair is a good illustration. And, as already mentioned, China’s Yunnan province has assumed leadership in pushing for the realization of vital infrastructure GMS projects. At the recommendation of the top Chinese leadership, the ChinaASEAN Eminent Persons’ Group (EPG) comprising ranking public personalities and private sector representatives from both sides met to chart the course of China-ASEAN cooperation in the coming fifteen years. They subsequently submitted a detailed report to the ASEAN-China leaders’ summit in Kuala Lumpur in 2005 with a comprehensive plan for action. Among the recommendations tabled was the setting up of facilities in China and ASEAN to provide information to and support ASEAN and Chinese companies in doing business.11 Partner with Chinese Business How to start a relationship or partner with Chinese business in China, Southeast Asia or even in third countries, is a challenge for ASEAN business. It seems that the automotive industry offers a good prospect for such cooperative efforts. Both China and ASEAN could produce passenger subcompacts for their respective markets. Thailand, dubbed the “Detroit of Southeast Asia”, could partner with China to produce one-ton trucks — which it exports — for the China market. A major Thai parts supplier, Thai Rung, is already partnering with China’s Changchun Automotive in a truck body stamping venture in Changchun. Both China and ASEAN business could join forces to research, develop and market compact engines which runs on clean, renewable fuels such as biodiesel, and Malaysia and Indonesia are the logical suppliers of palm oil, the source of biodiesel. Food processing is another promising candidate for major cooperation between ASEAN and Chinese companies, as ASEAN (particularly Thailand and Vietnam) and China are already major producers, exporters and consumers of food items ranging from commodities (agro and aqua products) to value-added, processed foods. Finally, as the movement of people and goods between ASEAN and China increases exponentially owing to the explosive expansion in tourism and commerce, cooperation in developing low-cost airline business could become especially meaningful when more ASEAN and Chinese airlines fly to

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more destinations and in greater frequencies as the governments of both sides further liberalize air travel. Expand the Scope ASEAN Business in China Pioneer ASEAN MNC’s in China such as Thailand’s CP Group and Malaysia’s Shangri-la Hotel and Property Group have good reasons to expand their investment in China. Other ASEAN companies are finding out that investing in China is no longer a matter of choice. In facing the challenge of “going out” to China, ASEAN companies would well consider varying business opportunities in a fragmented marketplace. In fact, they could discover that in the absence of a “unified” market, regional differences require different planning strategies. It may be relevant for ASEAN business to pay closer attention to newly emerging areas such as the Central Region with its 360 million potential customers contributing a total of 28 per cent of the national GDP. The Southwest Region bordering ASEAN, particularly the GMS, is a point of convergence which given adequate transportation and communications facilities, could prove vital for business networking particularly among MNCs of both sides. In this respect, the CP Group is already “on the ground” with its agri-business operations in the Central and Southwest regions. ASEAN business can become well positioned for the expanding pattern of Chinese consumption. Beauty and health products and services, ornaments, food and food service, home furnishings (especially wood products) and tourism could be considered. ASEAN companies are well advised to prepare a “mental list” of factors determining the success of doing business in China, which should at least include the following: language competency; comprehension of local customs and practices as well as fully appreciation for interpersonal relationships in business; knowledge of laws and regulations as well as channels and means of dispute settlement, their inadequacies such as universality in application; awareness of China as a highly competitive market; suitable partner(s) and knowledge of competitors; appropriate “guanxi” (relationship) with the authorities; right products; constant attention and vigilance; risks from fraud and other unexpected losses; adequate risk management measures; perseverance, appreciation of demanding consumption behaviour due to variable choice. In short, the challenge for ASEAN business is to fully appreciate the extraordinary business environment existing in China, where global business intersects with Chinese business thus requiring added comprehension and appreciation on the part of ASEAN business to operate in a “mix-and-match” mode.

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CONCLUSION Nearly four decades ago, Japanese corporations under official guidance and with government support went to Southeast Asia in search of business and investment opportunities. It was part of the Japanese strategy to establish a commercial and production base in the region. For Southeast Asian nations, Japanese trading activities helped the export of their primary products, while Japanese investment was crucial to their import substitution and industrialization efforts. However, the ensuing economic relationship between both sides had been lopsided in favour of Japan. The “flying geese” (a term coined by the late Professor Seizaburo Okita) effects notwithstanding, few Southeast Asian commodities, with the exception of energy and minerals, found great demand in Japan, while Japanese industrial goods and electronic products dominated the Southeast Asian markets. It was only after the Plaza Accord of 1986 that the situation turned around, when Japanese factories relocated to lower-cost Southeast Asia bases to continue their production for export to third countries and, for the first time, for re-export back to Japan. The present commercial relationship between ASEAN and China is different. It is taking place in a globalizing environment marked simultaneously by competition and cooperation. There is a greater “complementarity” in structure between their respective economies. Both sides do have a great deal more to offer one another in trade and investment. Bilateral trade has reached the trillion US dollar mark and is consistently in ASEAN’s favour. ASEAN investment in China is at least ten times in value as China’s in ASEAN. ASEAN and China pursue export-led strategies, but both are relatively open to each other in trade and investment. ASEAN and China remain by and large developing economies in spite of remarkable development in certain areas within their economies. However, it is the unevenness in their economic development which creates synergy between them. The economic relationship between ASEAN and China is advancing towards the formation of the world’s largest free trade area in less than five years’ time. If this unique South-South relationship would continue to evolve by following the course as outlined in the ASEAN-China EPG Report, it would invariably become a significant “win-win” undertaking indeed. NOTES 1. Zhongguo weilai huangjin shinian, pp. 39–40. The official classifications of SOE [Guoyou qiye
 !], Collective Enterprise [Jitiqiye
 !], and

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2. 3.

4. 5. 6. 7. 8. 9. 10. 11.

Individual Unit [Getihu
 ] are based on their turnovers, that is, 52 million, 24 million and 340,000 RMB respectively. CSLA, China’s Capitalists, p. 3. The “Three Benefits”, namely benefit to the host country, benefit to the farmer, and benefit to the company, is the operating philosophy of CP’s business in the developing country. The idea resembles the Chinese Shuang Ying
 (“winwin”) policy. Over the past ten years, Harvard Business School has produced three case studies on CP in which this principle is highlighted. The attached schematic representation is drawn up from extensive discussions. Yazhou Zoukan, 19 March 2006, pp. 25–30. Shijie Ribao, 13 April 2005, p. A4. Yazou Zoukan, 5 December 2005. Zhongguo weilai huangjin shinian, pp. 192–97; Shijie Ribao, 31 March 2005, p. A13. Shijie Ribao, 4 April 2005, p. A5. Shijie Ribao, 2 March 2005, p. A6. Report of the Eminent Persons’ Group, October 2005.

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5

ASEAN-China Trade Relations: Origins, Progress and Prospect Chen Wen

INTRODUCTION The advance of industrialization in China and its continuously high economic growth have attracted worldwide attention. The entry into the WTO in 2001 has brought China into a new era of development. As a large country in East Asia, China has played an increasingly important role in the region’s economic development and cooperation. Since the signing of the “Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China” in November 2002, the economic relationship between China and ASEAN has become closer and closer, where trade relations is the focus. Therefore, this chapter intends to present a survey on the trade relationship between China and ASEAN. The origin of the trade relations between China and ASEAN will be addressed first, followed by the development process of China-ASEAN trade relations, and finally its prospects. ORIGIN Because of history, geo-politics, and past migration in the region, Southeast Asian polities play important roles in China’s surrounding environment, economic development, external economic relations and foreign policy commitment.

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Trade Relations in Ancient Times Trade relations between China and Southeast Asian countries1 can be traced back to early ancient times, about the third century B.C., when the so-called “maritime Silk Road” went by way of present Southeast Asia from the Chinese southeastern coast.2 Many coastal cities and ports of the Philippines, Indonesia, Malaysia, Vietnam and Thailand were on the Silk Road. According to historical records, China had established tributary relations with some Southeast Asia polities by the Sung dynasty (960–1280),3 and the mission under the tribute system was actually a “cloak for trade”.4 So, it is commonly described as “tribute trade”, which is an official trade relationship.5 Especially in the fifteenth century, the Ming dynasty sent many eunuch-led voyages to what we now know as Southeast Asia, among which the Zheng He voyages were very famous. The desire to control maritime trade to the south, to display the might of the Great Emperor, and to collect treasures for the court were the main purposes for the voyages. But these were mainly the formal and regulated tribute trade system. In the late fifteenth century, though private shipping was not formally allowed by the Ming dynasty, maritime private trade with Southeast Asia in Ming China’s southern provinces seemed to have increased. Gradually, the maritime private trade took the place of tribute trade. Since the middle of the eighteenth century, the large number of Chinese emigrants to Southeast Asia further stimulated the trade relations. Anyway, the trade relationship between China and Southeast Asia was close while its value was quite limited. Trade Relations during the 1950s to 1970s Right after the founding of New China, the trade value between China and Southeast Asian countries reached US$76.93 million in 1950, with China’s import standing at US$73.4 million. New China needed to import some basic materials for economic reconstruction, such as rubber, petroleum, nonferrous metals and others. But within two years, the trade value dropped sharply to US$6.91 million since New China was perceived as a threat to some of the Southeast Asian countries. But the attendance of Chinese Premier Zhou at the Bandung Conference revitalized the relationship between China and Southeast Asian countries, which rejuvenated the trade relations in the following several years. According to Shao’s paper, China began to export industrial products to Southeast Asia in 1954. Its trade relations with Southeast Asia was to import essential materials from Southeast Asian countries for its national construction, to propagandize its industrial progress, to show its

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ability for economic construction to the world, and to promote closer relations with the Southeast Asian countries.6 The Chinese Government paid attention to establishing good economic relations with its neighbours, which can be illustrated by the “First Five-Year Plan”.7 But owing to the Cold War and China’s ideology of self-dependence, the trade volume with Southeast Asia was quite small during the 1950s and 1960s. The trade relationship for the period was full of twists and turns due to complex political and ideological factors,8 as depicted in Table 5.1.9 A feature that we need to pay attention to is that there existed indirect trade between China and Southeast Asia and most of the indirect trade was via Hong Kong. In addition, there was a significant amount of unrecorded trade called border trade between China and the economies of the Greater Mekong Sub-region (GMS).10 After China’s admission into the UN in 1971 and Nixon’s visit to Beijing in 1972, the trade value between China and Southeast Asia increased by 76.01 per cent, from US$454.43 million in 1972 to US$799.85 million in 1973. It stayed gently up and down in the next several years. It was in the middle of the 1970s that the trade relations began to improve with the successive establishing of formal bilateral relations between China and some of the Southeast Asian countries and with the opening up and reform policies adopted by the Chinese Government. Encouraged by the policy, the trade volume increased by 49.59 per cent in 1980 compared to the previous year. Though the trade value increased substantially from US$76.93 million in 1950 to US$1,903.86 million in 1980, the share in China’s total foreign trade actually dropped from 6.8 per cent to 5.0 per cent. A possible reason for the decrease is that China became more oriented to the West after the opening up policy, which can be further demonstrated by the shares in the next several years. PROGRESS ASEAN-China trade has achieved high growth rates since 1990. China resumed its diplomatic relations with Indonesia and Singapore respectively in 1990, and established diplomatic ties with Brunei in the following year. It was in 1991 that China established or resumed foreign relations with all Southeast Asian countries. The growth rates of ASEAN-China11 trade in 1991, 1993, 1994 and 1995 were 20.64, 28.21, 23.07 and 42.14 per cent respectively. ASEAN-China trade increased tremendously in the twenty-first century, stimulated by China’s accession to the WTO and deepening process

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Table 5.1 Trade Value between China and Southeast Asia Countries, 1950–83 (US$10,000) Year

Brunei

Indonesia

Malaysia

Philippines

Singapore

Thailand

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

– – – – – – – – 0.04 0.1 0.1 0.1 0.1 2 7 16 31 52 47 39 53 65 75 180 147 131 155 176 261 278 313 361 398 326

426 45 1 1 738 2,220 5,530 4,875 9,114 12,906 7,401 8,346 6,883 9,148 10,957 10,885 1,672 – – – – – – – – – – 2 64 2 3,485 4,732 3,312 2,583

6,318 3,734 374 574 1,313 2,033 3,418 5,994 1,770 674 758 916 525 1,297 1,922 2,198 2,362 2,859 3,075 3,230 3,284 2,780 4,437 12,621 15,917 15,961 13,641 19,974 27,434 36,051 42,440 28,929 30,731 34,670

70 5 0.6 0.2 3 5 73 5 5 3 4 3 3 0.04 3 – – – – – – 265 529 5,298 4,893 6,530 8,062 9,367 14,345 18,188 32,819 32,895 27,633 15,156

– – – – – – – – 7,078 6,999 5,144 3,402 3,977 5,668 5,256 6,629 11,659 14,477 16,020 19,636 14,628 14,588 16,538 33,201 34,234 27,269 25,390 27,811 29,417 40,115 61,076 56,856 79,656 82,518

556 46 82 132 58 57 408 732 995 20 11 8 8 – – – – – – – – – – – 339 2,462 10,563 6,156 14,407 29,528 45,110 37,953 46,862 28,507

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Table 5.1 — cont’d

Vietnam

Cambodia

Myanmar

S.E. Asia

10 62 127 352 1,744 4,602 4,792 7,024 5,606 6,087 8,331 7,700 5,893 5,633 7,478 15,037 15,109 13,477 15,846 15,340 13,516 23,109 21,320 26,379 30,468 24,243 14,136 7,944 5,701 – – – – –

– – – – – – 7 469 529 948 983 602 1,521 1,419 1,772 1,919 1,766 1,395 1,383 714 477 – – 40 49 3,202 3,603 7,979 8,363 0.8 – 21 – 54

313 879 106 364 89 2,797 4,032 2,042 1,523 1,134 2,499 6,059 4,653 3,894 4,662 4,225 2,391 2,109 141 0.4 448 1,780 2,544 2,266 5,554 3,123 2,695 2,934 4,229 3,113 5,143 4,848 4,901 3,608

7,693 4,771 690.6 1,423.2 3,945 11,714 18,260 21,141 26,620.04 28,771.1 25,131.1 27,036.1 23,463.1 27,061.04 32,057 40,909 34,990 34,369 36,512 38,959.4 32,406 42,587 45,443 79,985 91,601 82,921 78,245 82,343 104,221 127,275.8 190,386 166,595 193,493 167,422

% of China’s total % of S.E.Asia’s total 6.81 2.43 0.36 0.60 1.62 3.73 5.69 4.98 5.09 4.74 4.81 7.33 7.14 7.77 8.09 8.51 6.78 7.54 8.28 8.96 7.07 8.67 6.95 7.22 6.15 5.31 5.75 5.61 4.94 4.35 5.00 3.78 4.65 3.84

1.14 0.48 0.09 0.19 0.54 1.43 2.13 2.35 3.39 3.38 2.72 2.82 2.63 2.91 3.42 4.12 3.40 3.16 3.10 2.95 2.25 2.69 2.43 2.75 1.92 1.74 1.41 1.24 1.34 1.23 1.38 1.12 1.30 1.11

Note: The figures of Malaysia for 1950–57 include the trade values between China and Singapore. Here, Southeast Asia excludes Lao PDR due to unavailable data. Source: Compiled by Almanac of China’s Foreign Economic Relations and Trade and UNCTAD database, various issues.

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of mutual economic cooperation and integration. In 2000, former Chinese Premier Zhu Rongji proposed to strengthen economic cooperation and integration and to form a free trade area between China and ASEAN, and in 2001, the leaders endorsed the proposal at the Brunei meeting. The signing of the “Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China” laid the groundwork for the eventual establishment of the ASEAN-China Free Trade Area (ACFTA) by 2010 for the older ASEAN members and 2015 for the newer members. The implementation of “Early Harvest” for certain agricultural products in 2004 and the all-round execution of the ASEAN-China Free Trade Area in July 2005 further strengthened the bilateral trade. The bilateral trade increased at an average annual growth rate of 26.96 per cent from 2000 to 2005. During the period from 1990 to 2005, ChinaASEAN trade grew at an average annual rate of 21.47 per cent compared to 18.22 per cent for China’s overall international trade. Southeast Asia has been China’s fifth largest trading partner since 1993 and China was ASEAN’s fourth largest partner except ASEAN itself. As presented in Table 5.2, China-ASEAN trade totalled US$130.37 billion in 2005, with US$55.37 billion for China’s export to ASEAN and US$75.0 billion for China’s import from ASEAN. Except for the year 1998, the bilateral trade value has been increasing during the period. Even in 2001, China-ASEAN trade registered a 5.29 per cent growth rate compared to a 4.01 per cent12 decrease in world trade. The development of China-ASEAN trade can be characterized by the following: Firstly, ASEAN’s position in China’s import has been on the rise. The proportion of ASEAN in China’s total import increased from 5.75 per cent in 1990 to 11.36 per cent in 2005. ASEAN was China’s fifth biggest import source in 2001, and became the fourth and the third largest import source in 2002 and 2005 respectively. From Table 5.2, we can see that China was in deficit for the trade with ASEAN in 1993,13 and the deficit expanded tremendously from US$965.2 million in 1993 to US$20.07 billion in 2004, or 18.96 per cent of the bilateral trade volume. But the deficit fell slightly to US$19.63 billion in 2005. Actually, China’s role as an export outlet is more important than that as an import source for ASEAN now.14 And the import dependence of China on ASEAN was 3.81 per cent in 2004, compared to 2.59 per cent in export dependence. In 2003, China was the first leading market for Indonesia’s wood (HS 4409), uncoated paper for writing, printing, etc. (HS 4802) and paper and paperboard, coated with kaolin or other inorganic substances (HS 4810),

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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

1/

397,658 445,617 466,854 533,938 716,102 1,047,352 1,031,014 1,269,955 1,103,480 1,217,046 1,734,132 1,838,541 2,356,845 3,092,547 4,290,212 5,537,112

Year

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306,900 394,381 441,305 630,458 716,967 989,544 1,084,861 1,245,634 1,206,920 1,487,121 2,218,095 2,322,931 3,119,745 4,732,688 6,297,766 7,499,894 5.75 6.18 5.48 6.06 6.20 7.49 7.81 8.75 9.00 8.97 9.85 9.54 10.57 11.46 11.22 11.36

China’s import from Southeast Asia Share of Value China’s (10,000 total (US$) import (%) Balance (10,000 US$)

704,558 90,758 849,998 51,236 908,159 25,549 1,164,396 –96,520 1,433,069 –865 2,036,896 57,808 2,115,875 –53,847 2,515,589 24,321 2,310,400 –157,440 2,704,167 –270,075 3,952,227 –483,963 4,161,472 –484,390 5,476,590 –762,900 7,825,235 –1,640,141 10,587,978 –2,007,554 13,037,006 –1,962,782

Total (10,000 US$)

1.38 1.21 1.04 0.95 0.91 1.02 0.98 1.04 1.19 1.19 1.22 1.26 1.31 1.34 1.28

Trade intensity index15

1.12 1.18 1.12 1.24 1.32 1.50 1.26 1.41 1.17 1.23 1.61 1.59 1.90 2.19 2.59 2.492/

China’s export16 (%) 0.87 1.05 1.06 1.46 1.32 1.41 1.33 1.39 1.33 1.50 2.05 2.00 2.52 3.35 3.81 3.372/

China’s import17 (%)

Trade dependence

1.86 1.97 2.13 2.46 2.61 2.71 2.92 3.01 3.19 3.18 3.73 6.801/

Share of S.E. Asia export (%)

S.E. Asia’s export to China

2.36 3.04 2.87 2.60 2.82 3.10 3.08 3.69 4.29 4.67 4.80 6.401/

Share of S.E. Asia import (%)

S.E. Asia’s import from China

Note:

2/

Southeast Asia countries only includes Cambodia, Myanmar and ASEAN-6, data are from ASEAN Statistical Yearbook 2003, p. 74. RMB exchange rate is estimated at 8.19 yuan per US dollar. Source: China’s export and import values of 1990–2002 come from Yearbook of China’s Foreign Economic Relations and Trade various issues, values of 2003 and 2004 come from China Commerce Yearbook 2004 and 2005 issues, while values of 2005 come from . Southeast Asia countries’ trade values with China come from IMF, Direction of Trade Statistics, Washington D.C.: International Monetary Fund, various issues. Southeast Asia countries’ total import values and the world import values come from WTO statistics database.

6.40 6.20 5.50 5.82 5.92 7.04 6.82 6.95 6.01 6.24 6.96 6.91 7.24 7.05 7.23 7.27

China’s export to Southeast Asia Share of Value China’s (10,000 total (US$) export (%)

Table 5.2 Bilateral Trade Indices between China and the Southeast Asia

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Malaysia’s palm oil and its fractions (HS 1511), animal or vegetable fats, oils (HS 1516) and natural rubber (HS 4001), Philippine refined copper and copper alloys, unwrought (HS 7403), and Thailand’s crude petroleum oils (HS 2709) and natural rubber (HS 4001). And China was the second leading market for Indonesia’s palm oil and its fractions (HS 1511), Philippine bananas and plantains (HS 0803), and Thailand’s petroleum oils, not crude (HS 2710).18 Secondly, the structure of ASEAN-China bilateral trade has shifted significantly. With their intention of stepping up their industrialization programmes and pushing ahead into the territory of high technology and capital-intensive industries, the past two decades have seen substantial changing patterns in merchandise trade between China and ASEAN. The bilateral trade between China and the five original ASEAN members focused on manufactured goods (SITC19 5-8) in 2003 instead of concentrating on primary goods and goods not classified by kind (SITC 0-4, 9) in 1985. The share of the former goods increased dramatically to 81.0 per cent in 2003 compared to 25.0 per cent in 1985, and the share of the latter goods declined to 19.0 per cent in 2003 compared to 75.0 per cent in 1985.20 Given that trade value between China and ASEAN-621 accounts for more than 90 per cent of trade between China and ASEAN-10 and that there is unavailable data for the other four new members of ASEAN, we will just consider the structural change between China and ASEAN-6. As shown in Table 5.3, in 1993 the top five ASEAN-6 exports to China were mineral products, wood and wood articles, machinery and electrical appliances, vegetable fats and oils, and base metal and metal article, with 32.43, 22.64, 12.41, 8.38 and 5.32 per cent of ASEAN-6’s total export to China respectively. But in 2003, the order of importance changed: machinery and electrical appliance became the first category among ASEAN-6’s exports to China, amounting to 40.68 per cent, and plastic turned out to be ASEAN-6’s third largest export category to China. As for ASEAN-6’s import from China, the share of machinery and electrical appliances in ASEAN-6’s imports jumped from 20.78 per cent in 1993 to 54.41 per cent in 2003, and textiles and apparel dropped from 14.39 per cent in 1993 to 6.72 per cent in 2003. Thirdly, with the deepening economic integration of China with ASEAN countries, the extent of intra-industry trade for manufactured goods in ASEAN-China trade grew in the past years. As shown in Table 5.4, the intraindustry trade index22 for overall manufactured goods increased from 0.43 in 1993 to 0.69 in 2003. And among 67 categories of manufactured goods, there were 48 kinds of goods with a higher intra-industry index in 2003 than

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Table 5.3 Commodity Structure of the Bilateral Trade between China and ASEAN-6 by HS (Percentages) Export

Chapter (HS)

Section

1–5 6–14 15 16–24 25–27 28–38 39–40 41–43 44–46 47–49 50–63 64–67 68–70 71 72–83 84–85 86–89 90–92 93 94–96 97–98 Others Total

Live Animal Vegetable Products Fats and Oils Prepared Foodstuffs Mineral Products Chemicals Plastics Hides and Leather Wood and Wood Articles Pulp and Paper Textiles and Apparel Footwear Stone/Cement/Ceramics Gems Base Metal and Metal Articles Machinery and Electrical Appliances Vehicles Optical, Precision & Musical Instruments Arms Miscellaneous Manufactured Articles Antiques and Works of Art Other All

Import

1993

2003

1993

2003

0.22 0.25 8.38 0.95 32.43 3.77 4.39 0.06 22.64 0.55 1.26 0.01 0.27 0.02 5.32 12.41 4.11 0.64 0.00 0.20 2.12 0.00 100.0

0.84 1.45 5.62 0.56 13.42 9.25 10.64 0.34 3.16 2.86 1.77 0.04 0.74 0.13 4.40 40.68 0.78 2.45 0.00 0.19 0.54 0.15 100.0

0.61 11.64 0.10 7.76 10.50 8.80 1.58 0.46 0.39 1.13 14.39 1.29 1.65 0.12 10.61 20.78 3.49 1.35 0.01 2.75 0.60 0.00 100.0

0.44 4.32 0.05 1.65 6.46 5.82 2.36 0.48 0.31 0.74 6.72 0.95 1.35 0.51 5.89 54.41 1.70 2.67 0.06 2.31 0.77 0.03 100.0

Note: HS is the Harmonized Commodity Description and Coding System, which is commonly used by customs. “Export” and “import” here refer to ASEAN-6’s export to China and ASEAN-6’s import from China. The trade data are based on the report by ASEAN. Source: Calculated according to the trade data downloaded from ASEAN ASCU database.

in 1993. There were 26 kinds of products with intra-industry index higher than 0.5 in 2003 compared to 21 kinds of products in 1993. Among 63 items of higher trade value in 2003, 31 items were mainly contributed by the growth of intra-industry trade.23 Tanning/dyeing extracts/ink (HS 32), miscellaneous chemical products (HS 38), man-made staple fibres (HS 55), glass and glassware (HS 70), iron and steel (HS 72), machinery and mechanical appliances (HS 84), electrical machinery and equipment (HS 85), and optical/ medical instruments (HS 90) were those with comparatively high intraindustry index24 in 2003, especially machinery and mechanical appliances,

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28 Inorganic Chemicals 29 Organic Chemicals 30 Pharmaceutical Products 31 Fertilizers 32 Tanning/Dyeing Extracts/Ink 33 Cosmetics 34 Soap, Waxes, Pastes 35 Albuminoidal Substance, Glues 36 Explosives 37 Photographic Goods 38 Misc. Chemical Products 39 Plastics and Articles Thereof 40 Rubbers and Articles Thereof 41 Raw Hides & Skins 42 Articles of Leather 43 Furskins and Artificial Fur 44 Wood and Articles of Wood 45 Cork and Articles of Cork

HS

76

0.06 0.73 0.17 0.63 0.88 0.20 0.59 0.95 0.16 0.33 0.72 0.40 0.76 0.67 0.03 0.00 0.02 0.10

1993 0.14 0.39 0.71 0.03 0.84 0.54 0.69 0.56 0.16 0.76 1.00 0.48 0.21 0.72 0.04 0.03 0.18 0.11

2003

GLi 2.62 10.52 1.93 1.25 4.86 4.39 3.78 26.71 2.28 44.33 10.24 10.72 15.44 36.60 3.45 4.01 –0.10 2.58

tti 2.16 6.75 0.01 1.81 0.80 1.67 1.06 12.28 1.91 10.25 –0.24 5.55 12.74 10.04 3.30 3.85 –0.24 2.28

Cnti 0.46 3.77 1.92 –0.56 4.06 2.73 2.71 14.44 0.38 34.08 10.49 5.17 2.69 26.56 0.15 0.16 0.13 0.30

Ciiti 62 Apparel, not Knitted 63 Other Textile Articles 64 Footwear, Gaiters and the Like 65 Headgear and Parts Thereof 66 Umbrellas, Walking Sticks 67 Prepared Feathers 68 Stone/Plaster/Cement 69 Ceramic Products 70 Glass and Glassware 71 Jewelry 72 Iron and Steel 73 Articles of Iron or Steel 74 Copper and Articles Thereof 75 Nickel and Articles Thereof 76 Aluminum and articles Thereof 78 Lead and Articles Thereof 79 Zinc and Articles Thereof 80 Tin and Articles Thereof

HS

0.03 0.02 0.01 0.06 0.08 0.00 0.14 0.04 0.72 0.35 0.92 0.30 0.13 0.03 0.95 0.01 0.00 0.62 0.04 0.04 0.07 0.19 0.01 0.09 0.39 0.08 0.91 0.40 0.95 0.32 0.32 0.73 0.76 0.15 0.14 0.62

2002

GLi 1996

Table 5.4 Intra-Industry Trade Indices and Contribution of the Bilateral Trade between China and ASEAN-6 at HS 2-Digit Level

5.40 0.34 5.87 1.44 0.71 –0.23 1.59 4.99 11.13 28.47 3.32 2.25 4.17 286.01 13.29 1.65 –0.19 1.12

tti 5.19 0.29 5.39 1.04 0.77 –0.29 0.72 4.53 0.80 16.92 0.14 1.53 2.67 75.83 3.35 1.25 –0.30 0.43

Cnti

0.21 0.04 0.48 0.41 –0.06 0.06 0.87 0.46 10.33 11.55 3.19 0.72 1.50 209.82 9.94 0.40 0.11 0.70

Ciiti

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0.01 0.04 0.64 0.57 0.00 0.53 0.03 0.09 0.85 0.31 0.02 0.17 0.11 0.27 0.14 0.04

tti Cnti

0.52 0.56 –0.24 0.02 176.82 173.54 0.70 6.85 1.99 0.61 4.23 1.63 0.04 –0.46 –0.48 0.35 2.07 1.53 0.45 1.35 0.33 0.43 2.26 0.97 0.98 5.99 0.02 0.78 1.34 –0.17 0.47 3.28 1.31 0.32 1.40 0.81 0.20 4.87 3.79 0.59 10.40 3.90 0.14 10.40 8.92 0.06 11.13 10.41

2003

GLi 1993 0.81 3.29 4.86 2.60 0.02 0.54 1.03 1.30 5.96 1.52 1.97 0.59 1.08 6.50 1.48 0.72

Ciiti HS

81 Other Base Metals, Cermets 82 Tools, Implements, Cutlery 83 Miscellaneous Articles of Base Metal 84 Machinery and Mechanical Appliances 85 Electrical Machinery and Equipment 86 Railway or Tramway 87 Vehicles Other Than Railway/Tramway 88 Aircraft, Spacecraft, and Parts Thereof 89 Ships, Boats and Floating Structures 90 Optical/Medical Instruments 91 Clocks and Watches and Parts Thereof 92 Musical Instruments 93 Arms & Ammunition 94 Furniture, Bedding, Mattresses 95 Toys, Games and Sports Requisites Total manufactured goods

Source: Calculated according to the trade data downloaded from ASEAN ASCU database.

46 Manufactures of Straw 47 Pulp of Wood 48 Paper and Paperboard 49 Printed Books, Newspapers, Printings 50 Silk 51 Wool 52 Cotton 53 Other Vegetable Textile Fibres 54 Man-Made Filaments 55 Man-Made Staple Fibers 56 Wadding, Felt and Nonwovens 57 Carpets and Other Textile Floor Coverings 58 Special Woven Fabrics 59 Laminated Textile Fabrics 60 Knitted or Crocheted Fabrics 61 Apparel, Knitted

HS

Table 5.4 — cont’d

0.03 0.15 0.27 0.82 0.72 0.15 0.79 0.15 0.76 0.78 0.04 0.09 0.02 0.37 0.07 0.43 0.62 0.44 0.24 0.81 0.87 0.13 0.66 0.58 0.24 0.99 0.51 0.10 0.00 0.29 0.05 0.69

2002

GLi 1996 33.47 3.19 2.24 15.87 17.75 4.66 2.78 0.14 0.13 15.83 11.70 7.04 32.81 7.21 3.75 7.17

tti 12.27 1.48 1.72 3.07 2.16 4.05 1.05 –0.37 0.62 –0.05 5.28 6.35 32.67 5.19 3.57

Cnti

21.20 1.70 0.52 12.80 15.59 0.62 1.72 0.51 –0.48 15.87 6.43 0.69 0.14 2.02 0.18

Ciiti

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and electrical machinery and equipment accounted for the majority of the intra-industry trade. PROSPECT China and ASEAN have made progress in the implementation of the Framework Agreement on Comprehensive Economic Cooperation. Under the Plan of Tariff Reduction in ASEAN-China Free Trade Area launched in July 2005, products from China and ASEAN could enter into each other’s market at preferential tariff, and the scale and level of ASEANChina Trade and Economic Cooperation would be further expanded. The execution of the Plan of Tariff Reduction in fact signalled the ASEANChina Free Trade Area’s entry into an overall substantive phase. Currently, China and ASEAN are working closely to conclude agreements in the service sector and in the area of investment under the framework agreement. With the rapid progress in the establishment of the Free Trade Area, further trade liberalization and investment facilitation, there is great potential for ASEAN-China bilateral trade. Advantages for ASEAN-China Trade Relations Apart from the direct benefit brought by the progress of ASEAN-China Free Trade Area, there are some other advantages for the development of ChinaASEAN trade. Firstly, with the deeper integration into the world economy and the ongoing economic growth, there is great potential for China’s import, particularly in raw materials and intermediate inputs where there is shortage. According to Chinese statistics, the import of China’s primary goods (SITC 1-4) grew at 47.7, 61.2 and 26.0 per cent higher than the 39.9, 36.0 and 17.6 per cent for its overall imports in 2003, 2004 and 2005 respectively.25 This will benefit the ASEAN countries which are rich in natural resources and which export large amounts of electrical and electronic products. China has made remarkable economic growth and this will keep growing. It needs to import natural resources to sustain its high economic growth, and ASEAN countries have some resources that it needs. As pointed out by Chirathivat, “China would look increasingly at ASEAN as an alternative source of inputs for natural resource-based or intermediate products”.26 Secondly, stimulated by the lower tariffs and removal of barriers for the bilateral trade, there comes a new round of regional industrial restructure and new opportunity for enterprises to invest in each other’s potential

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market. Besides, the progress of ASEAN-China FTA will attract more and more FDI from the outside, which would stimulate the construction of regional production networks. A good case in point is the car regional production network in the region mainly attributed to Japanese car companies via FDI in ASEAN and China. The relatively high intra-industry trade indices for machinery and mechanical appliances, and electrical machinery and equipment are a reflection of MNCs’ investment in China and ASEAN members. Furthermore, the “going out” strategy advocated by the Chinese Government encourages Chinese enterprises to make direct investments in the world. Thus Chinese outward direct investment has started to become a new source of foreign investment in Asia and beyond.27 ASEAN countries, especially its new members, will benefit due to their geographic proximity and closer cultural linkages. Though it is quite limited, the value of Chinese foreign direct investment has increased quite significantly recently. According to the Chinese Ministry of Commerce, up to November 2005, Chinese direct investment in ASEAN was US$1.14 billion,28 while ASEAN’s direct investment in China reached US$38.22. This will undoubtedly bring about more mutual trade in the region. Thirdly, there exist some different comparative advantages between ASEAN and China. For food items, China and ASEAN have their own endowments, such as tropical resources in Southeast Asia — palm oil, natural rubber and timber resource; crops and fruit of temperate zone in China — maize, oil cake from rape seeds, colza seeds, pear and apple. In addition, tropical fruit and vegetable products such as Philippine banana, coconut and pineapple, Thai civet durian and tapioca and its products, Vietnamese guava and Laotian locus beans are the products that China imports in great quantities; while Chinese cereals, vegetables, and mineral products such as zinc, lead, etc. are what ASEAN countries need.29 With the reduction of tariffs, there is room for expanding this kind of bilateral trade. As for manufacturing products, although electrical and electronics products are major export products of China and ASEAN-5,30 China’s advantages differ from ASEAN’s to some extent. According to the ASEANChina Expert Group on Economic Cooperation, what China exports to ASEAN are mostly those for general or special use while what it imports from ASEAN are mainly electronic components and devices. In addition, China has advantages in metal and metal articles, textile and apparel, while ASEAN has advantages in mineral products (including mineral fuels), plastics/rubber, wood and wood articles, pulp and paper.31 If China and ASEAN endeavour to promote their existing advantages, the future for bilateral trade in these categories would be bright.

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Malaysia Philippines Singapore Thailand Brunei Vietnam Cambodia China

100

38.9 10.5 4.9 19.6 3.9 61.0 17.2 15.2 28.5 0.1

100

44.1 13.6

5.6 17.8 7.1 55.5 6.2

31.5

17.9 0.4 54.6 1.5

15.3

2.4 11.6 1.1 75.4 5.6

23.1 8.0

100

57.7 3.1

14.6

1.2 6.4 3.6 80.2 7.9

16.7 5.5

100

74.8 0.4

13.9

0.6 1.6 1.7 89.8 1.1

9.9 6.0

100

68.2 0.2

13.3

1.0 10.1 2.3 79.4 7.9

20.4 7.0

100

61.0 3.6

10.7

0.3 9.7 1.2 83.4 11.6

13.0 1.8

100

58.6 1.3

14.2

0.3 15.0 1.3 79.2 6.4

19.5 2.9

100

43.5 2.0

20.8

2.7 12.0 3.3 75.1 10.8

22.9 4.9

100

5.3 0.2

6.6

0.0 87.7 0.1 12.0 0.1

87.8 0.0

100

35.4 0.5

36.9

0.3 1.0 1.0 79.6 7.3

19.9 17.6

100

7.9 0.7

40.4

2.3 21.2 0.5 49.9 1.5

49.4 25.4

100

28.9 0.9

32.5

3.1 11.0 2.8 76.1 14.6

23.1 6.2

100

0.5 0.1

96.5

1.8 0.0 0.0 97.1 0.1

2.9 1.1

100

13.9 0.9

58.8

2.4 9.8 0.3 78.7 6.0

20.3 7.8

100

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for Vietnam are for the year of 2002.

fuels: SITC 3 resource-based commodities: SITC 0 to 4-27-28+68 machinery and transport equipment: SITC 7

43.8 2.8

24.5

4.6 2.7 1.0 74.8 6.5

22.4 14.1

100

45.2 0.2

41.8

0.5 2.4 1.9 91.4 4.4

8.3 3.5

100

45.1 0.3

19.7

3.7 8.6 7.3 76.3 11.5

23.4 3.8

100

export import export import export import export import export import Export import export import export import export import

Indonesia

Note: a: The commodity composition is as follows: all food items: SITC 0+1+22+4; agricultural raw material: SITC 2-22-27-28; ores and metals: SITC 27+28+68; manufactured goods: SITC 5 to 8-68; chemical products: SITC 5; light manufactured goods: SITC 6+8-68; unallocated goods: SITC 9 Figures for the Philippines, Thailand and Brunei are for the year of 2003, figures Source: UNCTAD Handbook of Statistics 2005.

All products Resource-based commodities All food items Agricultural raw material Fuels Ores and metals Manufactured goods Chemical products Light manufactured goods Machinery and transport equipment Unallocated goods

Commodity Groupa

Table 5.5 Commodity Structure of China and ASEAN Countries, 2004 (Percentages)

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33.57 34.78 43.49 48.09 45.08 40.93 37.16 34.40 25.61 48.83 58.49 65.58

1984–1986 1989–1991 1994–1996 1999–2001 1984–1986 1989–1991 1994–1996 1999–2001 1984–1986 1989–1991 1994–1996 1999–2001

All products (0~9)

Resource-based commodities (0~4 plus 68)

Manufactured goods (5~8 less 68)

25.08 35.61 40.34 46.02

39.77 33.01 31.00 29.45

34.10 32.93 37.63 43.22

Malaysia

21.72 47.02 48.59 36.46

15.43 27.68 33.15 37.04

14.99 34.81 37.61 36.68

Philippines

31.38 35.66 38.57 43.50

22.69 21.89 29.28 27.31

25.98 31.51 36.70 40.98

Singapore

35.92 54.26 63.06 60.82

25.87 32.60 38.25 48.07

29.73 46.02 56.11 54.75

Thailand

Source: Calculated according to the trade data from UNCTAD Handbook of Statistics Database, from Chen and Liao (2005).

Indonesia

Year

Commodity

Table 5.6 Export Similarity Index between China and ASEAN-5 Countries

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Disadvantages for China-ASEAN Trade Relations Though the bilateral trade has a bright future, there are some disadvantages that China and ASEAN should pay attention to. China and ASEAN members are all developing countries. China is roughly at a similar stage of economic development as ASEAN-4.32 With the upgrading of their industrial structures, China and ASEAN are facing more competition from each other. As shown in Table 5.5 and Table 5.6, China and ASEAN possess similar economic structures and comparative advantages in some sectors, especially in textile and apparel, and electrical and electronics products. By Table 5.6, we find that for overall product and manufactured goods, the export similarity indices33 between China and ASEAN-5 increased during 1984 and 2001 except that China and the Philippines experienced a reduction in export similarity for the period of 1999 to 2001. If China and ASEAN cannot promote regional integration and accelerate the regional production network, the similarity in export structures would hinder bilateral trade relations. Secondly, political issues would also hurt the bilateral trade relations. The territorial disputes, the Taiwan issue, the interests of the United States and Japan in the Asia-Pacific region and how they will influence regional cooperation and conflicts, will affect the relationship between China and ASEAN, which of course will have an effect on the process of the ASEANChina Free Trade Area and trade relations. Thirdly, whether the AFTA itself will be finally established will also have an effect on the establishment of the ASEAN-China Free Trade Area, which will further have an impact on ASEAN-China trade relations. In addition, the economic and social conditions in China and the ASEAN member countries will definitely affect the bilateral trade relationship. In conclusion, though some disadvantages exist, the prospect of ChinaASEAN trade relations is encouraging. NOTES 1. In ancient times, Southeast Asia was called Nangyang or “South Seas” or even Fan. 2. Shao Yunzhen and Fu Yiqiang, “On the Rise of ASEAN and the Re-construction of Sino-ASEAN Relations”, Around Southeast Asia, no. 9 (2005). 3. Wong, J., The Political Economy of China’s Changing Relations with Southeast Asia (London: Macmillan Press, 1984). 4. Refer to Fairbank, J.K., “Tributary Trade and China’s Relations with the West”, Far East Quarterly, Vol. 1, 1942, Wade, G., Ming China and Southeast Asia in the 15th Century: A Reappraisal, Asia Research Institute Working Paper no. 28, 2004

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6. 7.

8. 9.

10.

11. 12. 13.

83

and Zhuang Guotu, “On the Illusiveness of Tributary System: A case of the Tributary Relations between Ancient China and Southeast Asia”, Southeast Asian Affairs, no. 3 (2005). The tributary relations was actually a diplomatic device used by Imperial China to pursue relations with the non-Chinese societies under the concept of “Chinese world order” based on the Confucianist framework, which was not a real political and economic dominance. Refer to Wong, J., op. cit., p. 2. Shao Chuanleng, “Communist China’s Economic Relations with Southeast Asia”, Far Eastern Survey 28, no. 1 (1959). We can find the message of “in keeping with our peaceful foreign policy, and in accordance with the principle of equality and mutual benefit, we should expand trade with the countries of Southeast Asia” in the First Five-Year Plan for Development of the National Economy of the People’s Republic of China in 1953– 1957. Chen Wen and Liao Shaolian, China-ASEAN Trade Relations: A Discussion on Complementarity and Competition (Singapore: ISEAS, 2005). In Table 5.1, we find that there was no trade between China and Indonesia for 1967–76, between China and Thailand for 1963–73, and between China and the Philippines for 1965–70. Wattanapruttipaisan, T., “ASEAN-China Free Trade Area: Advantages, Challenges, and Implications for the Newer ASEAN Member Countries”, ASEAN Economic Bulletin 20, no. 1 (2003): 32. Although ASEAN became an associate with all ten Southeast Asian countries in 1997, the trade figure here includes all ASEAN members. Calculations based on figures from UNCTAD Handbook of Statistics 2005. Trade intensity index measures the bilateral trade relations between two countries. It is the share of one country’s export with another country as a proportion of the latter’s share of the world import. If the index is over 1, the trade relations is comparatively closer. The higher the index, the closer trade relations is. I ij =

X ij Xi

/

Mj Mw – Mi

Xij refers to the export of country i to country j Xi, refers to the total export of country i Mi, Mj, Mw refer to the total import of country i, country j and the world respectively See Drysdale and Garnaut (1982). 14. Refer to Chen Wen, “Bilateral Trade Relations between China and ASEAN”, Contemporary Asia-Pacific Studies 8 (2003b), Chen Wen and Liao Shaolian, China-ASEAN Trade Relations: A Discussion on Complementarity and Competition (Singapore: ISEAS, 2005) and John Wong and S. Chan, “China-ASEAN Free

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15.

16. 17. 18. 19. 20. 21. 22.

Trade Agreement: Shaping Future Economic Relations”, Asian Survey 43, no. 3 (2003). Trade dependence measures the contribution of one country’s trade to its GDP. The export dependence here is the ratio of China’s export to the Southeast Asia to China’s GDP. The import dependence here is the ratio of China’s import from the Southeast Asia to China’s GDP. With the exception of 1995 and 1997. The figures come from . SITC is the abbreviation of Standard International Trade Classification System Chen and Liao, op. cit. ASEAN-6 refers to Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. Please see the details in Grubel, H.G., and D.J. Lloyd, Intra-Industry Trade: the Theory and Measurement of International Trade in Differentiated Products (London: MacMillan, 1975); Tharakan, P.K.M., “The Economics of Inter-Industry Trade: a Survey”, in Intra-Industry Trade: Empirical and Methodological Aspects, edited by P.K.M.Tharakan (Amsterdam: Elsevier Science Publishers B.V., 1983); and Havrylyshyn, O. and E. Civan, “Intra-Industry Trade among Developing Countries”, Journal of Development Economics 18 (1985) for the discussion on intra-industry trade. Here, the Grubel and Lloyd index (GL) is used to measure intra-industry trade between China and ASEAN. For one product, the equation

(

)

is GL i = 1 – X ij – M ij / X ij + M ij , where Xij is the export of commodity j by country i to another country, and Mij is the import of commodity j by country i from another country. For all products, the equation is   X +M ij ij  GL i = ∑ GLij  n j =1 ∑ X + M ij  j =1 ij  n

(

)

    . The limitation of the paper is not to be able to   

analyse at more disaggregate level due to unavailable data. 23. The contribution of intra-industry (Ciiti) and net trade (Cnti) to the growth of bilateral trade (tti) is as: tti=Cnti+Ciiti, where Cnti=(1-GLi)nti, Ciiti=GLiiiti. GLi refers to the intra-industry trade index of commodity i at the beginning of the period. Please see the details in Menon (1996). 24. Products with more than 0.8 intra-industry index are considered as high intraindustry trade product. 25. The figures come from . 26. Chirathivat, S., “ASEAN-China Economic Partnership in an Integrating World Economy”, Chulalongkorn Review 14 (2002).

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27. Refer to John Wong and S. Chan, “China-ASEAN Free Trade Agreement: Shaping Future Economic Relations”, Asian Survey 43, no. 3 (2003), Vatikiotis, M., “Outward Bound”, Far Eastern Economic Review, 5 February 2004, and Frost, S., Chinese Outward Direct Investment in Southeast Asia: How Much and What are the Regional Implications?, SEARC Working Papers Series no. 67, 2004. 28. The figure here is registered by the Ministry of Commerce, China. As pointed out by Wong and Chan (2003), actual Chinese investment should be significantly higher than the official figures. 29. Chen and Liao, op. cit. 30. ASEAN-5 comprises Indonesia, Malaysia, the Philippines, Singapore and Thailand. 31. ASEAN Secretariat, Forging Closer ASEAN-China Economic Relations in the Twenty-first Century, report submitted by the ASEAN-China Expert Group on Economic Cooperation (2001). 32. ASEAN-4 includes Indonesia, Malaysia, the Philippines and Thailand. 33. Finger and Kreinin index and export data at SITC 3-digit level are used to examine the extent of export similarity. Please see the details on Finger and Kreinin index in Finger, J.M. and M.E. Kreinin, “A Measure of ‘Export Similarity’ and Its Possible Uses”, The Economic Journal 89 (1979); Pomfret, R., “The Impact of EEC Enlargement on Non-member Mediterranean Countries’ Exports to EEC”, The Economic Journal 91 (1981); and Australian Productivity Commission, Removing Tariffs on Goods Originating from Least Developed Countries, Research Report (Canberra: The Productivity Commission, 2002).

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6

ASEAN-China Free Trade Agreement: Negotiation, Implementation and Prospect Lu Bo

FTA is the abbreviation for Free Trade Agreement or Free Trade Area when it is referred to regional cooperation, and it is more popularly used than PTA (preferential trade agreement) or RTA (regional trading agreement). FTA can be seen as a part of the WTO system for free trade and comprehensive economic cooperation; it is rule-based and member-driven. All decisions should be made by consensus and the agreements are the outcome of negotiations between or among members.1 The one-vote-down principle of WTO decisions is also applied to FTAs. This makes the negotiation slow but it allows for different ideas and protects the interests of the small or weak economies. As an FTA is much smaller with fewer members, it is much easier to make a decision than at the WTO. ASEAN-CHINA FTA: FROM PROPOSAL TO FRAMEWORK Relatively speaking, Asia paid attention to FTA later than other areas in the world, especially Europe and America. In 1990, the Prime Minister of Malaysia, Mahathir Mohamad proposed to establish a regional cooperation group named “East Asia Economic Group” (EAEG) consisting of ASEAN,

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China, Japan and Korea (South Korea, or Republic of Korea), but the proposal was not accepted mainly because it was opposed by the United States of America, one of the initiators of APEC.2 However, the situation changed a year later after the United States initiated in 1991 to establish the North America Free Trade Area (NAFTA) with Canada and Mexico. ASEAN quickly responded by establishing the ASEAN Free Trade Area (AFTA) in 1992 as a qualitative leap in the history of ASEAN economic cooperation. In 1992, Singapore, the most active free trade promoter, successfully encouraged Thailand to initiate the AFTA3 at the ASEAN summit held in Singapore. This is the first FTA in Asia. Through careful negotiations, ASEAN completed most negotiations on trade and investment in the 1990s, especially on tariff and non-tariff arrangements. Four years later, ASEAN successfully initiated the Asia-Europe Meeting (ASEM) inauguration in March 1996 with the establishment of the Asia-Europe Foundation (ASEF) and the Asia-Europe Business Forum. Soon after, ASEAN carried out the ASEAN-Mekong Basin Development Cooperation in June 1996 with the support of ADB and other donors. A rail link from Singapore to Kunming, passing through Malaysia, Thailand, Cambodia, Laos, Myanmar and Vietnam, was among the proposed projects. Professor Donald E. Weatherbee of the University of South Carolina had the following comments on AFTA: No matter the demonstrable lack of sustainable real regionalized policy achievements or how inner-conflicted the region might be, a Southeast Asian region exists because leaders have a minimum, lower-denominator consensus on what regional interests are, and some degree of collective expectations of how they should act in pursuit of these interests.4

Proposal of ASEAN-China FTA At the meeting of ASEAN’s economic ministers in Chiang Mai in October 2000, Thailand’s Deputy Prime Minister and Commerce Minister, Supachai Panitchpakdi5 called for the creation of a regional mechanism through which China and ASEAN could negotiate mutual tariff concessions to help less developed economies. Supachai said a formalized system of tariff concession would be needed to safeguard Southeast Asia’s weaker economies from a flood of cheap exports once China joins the WTO.6 As Australia and New Zealand had initiated a similar FTA proposal with ASEAN early in 1999, China’s Premier Zhu Rongji proposed a feasibility study on establishing an ASEAN-China FTA (ACFTA) as its reply to Supachai’s call at the ASEAN-China Summit in December 2000. In his speech, he said, “It might be advisable in the long run for China and ASEAN countries to explore the establishment of a free trade relationship between

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them.”7 The expert group joined by researchers from both sides completed the feasibility study report and found that ACFTA would benefit both ASEAN and China. According to the report and the statistics of China’s customs, trade in goods between China and ASEAN increased about 20 per cent per year from the late 1980s to early 2000s. During the 1990s, China and ASEAN member states had many economic cooperations and significantly reduced their tariff rates on many products respectively. The Greater Mekong Subregion development programme (GMS) since 1992, and financial cooperation after 1997 under the system of ASEAN+3 Framework8 are among the most important economic cooperations. From 1991 to 2001, China’s exports to ASEAN increased from US$4.1 billion to over US$18.4 billion; China’s imports increased from US$3.8 billion to US$23.2 billion. The share of exports and imports increased their shares of the total, respectively from 5.7 per cent to 6.9 per cent and from 6 per cent to 9.5 per cent. Trade between the two sides in 2000 increased 45.3 per cent to US$39.5 billion. Exports of five ASEAN member states9 to China increased by six times from 1990 to 2001 while their exports during the same period to Japan, Europe and the United States increased by only 2.5 times. Even in the weakness of the world economy in 2001, trade in goods between China and ASEAN still increased by 5.3 per cent. ASEAN-China trade increased continuously while ASEAN’s trade with other partners reduced greatly after the 1997 crisis. From 2000 to 2001, Malaysia’s exports to China increased by 26.2 per cent while its exports to the United States of America, Singapore and Japan declined during the period. ASEAN-China political relations were also greatly enhanced in the late 1990s. China maintained good bilateral relations with all ASEAN member states. China was active in communications and discussions on regional affairs such as the dialogue channels of the ASEAN Regional Forum, the ASEAN-China Senior Officials Consultation (SOM, deputy-foreign-ministerlevel, since 1995, to discuss political and security issues), the Joint Cooperation Committee Meeting, ASEAN-China Business Council Meeting, and so on. It became ASEAN’s dialogue partner (in 1996) instead of a consultative partner (from 1991). The ASEAN-China Summit meetings also played a very important role in the regional cooperations. Since an FTA cannot be established with the Ten+3 framework, and with China’s WTO membership negotiations almost completed, the Chinese Government decided to establish an FTA with ASEAN. All ASEAN member states were happy to do so. According to a Japanese researcher, ASEAN was keen to consider establishing an FTA with China, Japan and South Korea.

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Figure 6.1 China’s Trade with ASEAN (1991–2001) 45 40

US$ Million

35 30 25 20 15 10 5 0 1991

1992

1993

1994

1995

1996

China's Export

1997

1998

1999

2000

2001

China's Import

Source: Ministry of Commerce, China.

China welcomed the other two but suggested starting negotiations with ASEAN first.10 At the ASEAN-China Summit in November 2001, Chinese Premier Zhu Rongji and the ASEAN leaders agreed to establish the Free Trade Area in ten years. In his speech, Premier Zhu said “the Expert Group for ASEAN-China Economic Co-operation has submitted a report suggesting that China and ASEAN states establish a free trade area within 10 years… [The] Chinese government gives it full support.”11 The leaders stressed that the ACFTA would not disturb the existing regional economic and political architecture. The ACFTA, Ten+3, APEC and ASEF should complement and supplement each other. Ten+3 could serve as the main channel for regional cooperation through which a framework could be established for regional financial, trade and investment cooperation, and to realize still greater regional economic integration step-by-step. While many tried to get a better understanding of the establishment of ACFTA, there were worries about the negative influence of China’s competition with ASEAN under ACFTA. Some were even worried about the possible conflicts between China’s challenge to the existing powers of the area, especially the United States and Japan.

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Alice D. BA said,12 There appears to be a growing sense that economic co-operation with China may be the only way for ASEAN to remain economically competitive and attractive to potential investors and businesses. …At the same time, while China has an interest in improved relations with Japan and Korea, as well as ASEAN, it has been easier to work with ASEAN first.

Wang Jiang Yu had the following comments on China: … all its major trading partners and most of its neighbours were involved in RTAs,…forming alliance with ASEAN is obviously the most rational choice, given firstly that the two other important players in the region, Japan and Korea, are not willing to be engaged in a FTA for various political and economic reasons.13

To ASEAN, China is both a competitor and a partner, both a “promised land” and “turbulent sea”. The proposal of ACFTA “offers important opportunities and an additional motor for Southeast Asia growth, even at the same time that it represents an immense economic challenge”.14 Singapore is a very strong supporter of ACFTA although it is clear about China’s challenge. Former Prime Minister, Goh Chok Tong’s saying “ride on China’s growth” was frequently quoted after his 2002 National Day Speech. In his 2001 National Day Speech, Goh said, Our biggest challenge is therefore to secure a niche for ourselves as China swamps the world with her high quality but cheaper products.…As China develops and exports more, its imports will grow too. There will be many opportunities for other countries to trade with China, and for foreign companies to invest in China. We must grasp these opportunities.

One year later, he said in his speech again, So how should we respond to the China challenge? My response is: See China as an opportunity, not a threat. If we view China as a threat, we will be immobilised by fear. But if we see it as an opportunity, we will come up with creative ideas to ride on China’s growth.

From the Singapore Government’s view, China’s proposal was a “positive strategic determination”, and the establishment of ACFTA could promote other countries to strengthen their cooperation with ASEAN. Negotiation on ACFTA Framework Early in February 2002, the Chinese Government sent a delegation to visit some ASEAN member states and the ASEAN Secretariat in Jakarta to exchange

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ideas on the coming negotiation. In the same month, senior officials of ASEAN states held a meeting to discuss and coordinate their attitude towards the negotiation. Senior officials of China and ASEAN states also held a meeting in February 2002 during their attendance at the APEC conference in Mexico to discuss the timetable of the framework negotiation. The two sides made a decision to start formal negotiations on the ACFTA Framework Agreement in April 2002 in Kunming, China. ASEAN organized the delegation for the negotiations. Kanissorn Navanugraha, Commercial Permanent Secretary of Thailand, was the first representative of ASEAN. Other members were representatives from member states and the ASEAN Secretariat. China’s delegation came from many different ministries or departments of the central government and some provincial governments. The ASEAN-China Trade Negotiation Committee (TNC) was established during the meeting held from 14–16 May 2002 in Beijing. Through several rounds of negotiations, the draft of the Framework Agreement was completed in time before the ASEAN-China Summit Meeting in November 2002. At the time of negotiations of the Framework Agreement, the average tariff of China was higher than that of ASEAN, especially on some agricultural products. China’s tariff on one-third of the products, including fruits and vegetables, was over 20 per cent. Non-tariff measures including import quota and licensing were obstacles to importing more products.15 So requiring tariff reduction or elimination from China was no easy task. However, China’s offer made the negotiation much easier. As a Japanese researcher said, China’s three offers were very important factors in the Framework Agreement. They were: (i) The Early Harvest Programme on agricultural products, (ii) Greater Mekong Basin development, and (iii) Special treatment for the poorer ASEAN member states.16 The Framework Agreement ASEAN, or some of its member states such as Singapore, Thailand and Malaysia, were very active in establishing FTAs. They signed many free trade agreements with the economies in and out of Asia. The ACFTA is a regional FTA. “Regionalism” was defined by WTO as “actions by governments to liberalize or facilitate trade on a regional basis through detailed negotiations”.17 The measures usually include minimizing barriers and deepen economic linkages, lowering costs, increasing intra-regional trade and investment, increasing economic efficiency, creating a larger market with greater opportunities and larger economies of scale for the businesses of the parties; and enhancing the attractiveness of the parties to capital and talent.

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On 4 November 2002, at the Eighth ASEAN-China Summit in Phnom Penh, Cambodia, leaders of China and ASEAN-10 member states signed “the Framework Agreement on Comprehensive Economic Cooperation between the People’s Republic of China and the Association of South East Asian Nations” (hereafter refers to as “the Framework Agreement” or sometimes as “FA”). The Framework Agreement is the basis of ACFTA, but the cooperation is much more than establishing a Free Trade Area. The Framework Agreement came into force on 1 July 2003. Reading the contents of the Framework Agreement, we can see the following characteristics: Firstly, China made great concessions to the demand of ASEAN in opening its agricultural market, especially in the negotiation on the Early Harvest Programme (EHP). Agriculture is the most sensitive and difficult sector in the multilateral trade liberalization. One of the most important reasons that Japan and Korea did not join the ASEAN+3 FTA, in contrast, was that they would not offer such opportunities as China did. More importantly, in the agricultural sector, most ASEAN member states (except Singapore and Brunei) had some advantages over China, and they could get more opportunities to export their products to China, especially those poorer agricultural-based countries including the ASEAN-4 newer member states. Opening the market had a negative influence on or even risk to China’s agriculture, but China agreed to do so. Secondly, many articles of the Framework Agreement were specially tailored for the ASEAN-4 newer member states. China “is to accord MostFavoured Nation (MFN) Treatment consistent with WTO rules and disciplines to all the non-WTO ASEAN Member States” (FA, Article 9). The most important tariff reduction and elimination schedule gave more time to the four newer ASEAN member states in both the Early Harvest Programme and the products beyond EHP. China and the ASEAN-6 older member states committed to reduce their tariffs to zero in ten years (2010), and the four newer member states had another five years (2015). China stressed the cooperation in the Greater Mekong Basin development, which included China, Thailand and all the four newer ASEAN member states. As the traditional donor country to some ASEAN member states, especially the newer ASEAN-4, China agreed to contribute more in agriculture under the Early Harvest Programme (EHP), and in the Greater Mekong Sub-region (GMS) cooperations. Thirdly, many priority cooperative sectors were listed without a planned or proposed timetable. The priority listed in the agreement are: Services like banking, finance, tourism, transport, telecommunications, intellectual property rights, cooperation in small and medium enterprises (SMEs), environment,

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bio-technology, fishery, forestry and forestry products, mining, energy and sub-regional development (Article 7.2). The parties shall not only continue to build upon existing programmes set out in the Framework Agreement, but also develop new economic cooperation programmes and conclude agreements on the various areas of economic cooperation (FA, Article 8.4). All the five priority sectors in the future cooperation listed by Premier Zhu Rongji at the Fifth Summit in November 200118 were wholly accepted in the Framework Agreement. They were: (a) agriculture, (b) information and communications technology, (c) human resources development, (d) investment, and (e) the Mekong River Basin development. (FA, Article 7). Fourthly, the Framework Agreement designed the timetable of tariff reduction or elimination. Most of the other commitments are more like a rough draft than a well-designed framework. So it is still like an ideas-collection or discussion stage. The measures “for promotion and facilitation of trade in goods and services, and investment” are listed as (i) standards and conformity assessment; (ii) technical barriers to trade/non-tariff measures; and (iii) customs co-operation. Other measures mentioned in the Framework Agreement are: “Increasing the competitiveness of SMEs; promotion of electronic commerce; capacity building; and technology transfer” (FA, Article 7.3). NEGOTIATION ON TRADE IN GOODS Early Harvest Programme On 6 October 2003, at the Ninth ASEAN-China Summit in Bali, Indonesia, the Protocol (the Protocol to Amend the Framework Agreement on Comprehensive Economic Cooperation between the Association of Southeast Asian Nations and the People’s Republic of China) was signed on implementation of the Early Harvest Programme, and some provisions in the Framework Agreement were amended. According to the Framework Agreement, a party shall enjoy the tariff concessions of all the other parties for a product covered so long as the same product of that party remains in the Early Harvest Programme (FA, Article 6, 3.b). The Protocol indicated that the Early Harvest Programme covered about 600 agricultural products.19 As ASEAN has advantages on most of them, China gave unilateral concessions to ASEAN member states on most of them. ASEAN agreed to cut tariffs on meat, fish, fruit, vegetables and milk from China. The Early Harvest Programme is so generous that many observers wondered at “China’s motivation behind”. Some researchers spent time trying to find “the real (political or strategic) intentions”. Here I would like to share my understanding with the following comments:

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a. The establishment of ACFTA is helpful to China’s market expansion for sustainable development. As ACFTA initiator and a big country, China is ready to offer more concessions, like all other initiators in the European Union (EU) or NAFTA, in order to promote the advancement of the work. b. As the donor country for those less developed ASEAN member states, China is willing to import more agricultural products from the neighbouring countries to support their development. It is very important for sustainable growth and even to political harmony and regional stability. c. China’s food market is very big, and the negative influence of EHP to China’s agriculture, especially to the tropical area, is predictable but limited. So the Chinese Government is confident of controlling the possible risk arising from the EHP. d. Considering the progress of the WTO agricultural negotiation, opening China’s agricultural market to ASEAN is a good test before its opening to the world. Economically, it is important for China to take one step out into its neighbouring countries and make sure it is safe before it moves forward to the whole world. e. ASEAN should be a better food provider to China than others far away. The Arrangement of the EHP Annex 3 of the Protocol included two parts. One is the Product Categories (Product Categories for Tariff Reduction and Elimination Under Article 6(3) (b)(i)), and the other is the Implementation Time-frames (Implementation Time-frames Under Article 6(3)(b)(i)). All the 600 products were divided into three categories. Category 1: MFN tariff rates higher than 15 per cent for China and ASEAN-6; 30 per cent or higher for the newer ASEAN member states. Category 2: MFN tariff rates between 5 per cent and 15 per cent (exclusive) for China and ASEAN-6; between 15 per cent (inclusive) and 30 per cent (exclusive) for newer ASEAN member states. Category 3: MFN tariff rates lower than 5 per cent for China and ASEAN-6; lower than 15 per cent for the newer ASEAN member states. The three categories (for tariff reduction and elimination) were agreed in 2003 after the signing of the Framework Agreement. It was applied in both the Early Harvest Programme (formally implemented from 1 January 2004) and the rest of the goods covered by the Agreement on Trade in Goods signed later in November 2004. The Early Harvest Programme is aimed at materializing the results of immediate concessions offered by the parties,

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mainly by China and ASEAN-6, to eliminate the tariffs on about 600 tariff lines over three years: To 10 per cent before 2004, 5 per cent before 2005, and zero tariffs not later than 1 January 2006. The newer ASEAN-4 should eliminate their tariffs on the products not later than 2010. Some of them should reduce their tariffs to zero earlier. According to the Framework Agreement, China agreed to extend concessions on 130 specific manufactured goods beyond the EHP list to ASEAN countries. Some ASEAN states like Indonesia and Thailand agreed to join. Singapore and Brunei were allowed to enjoy these concessions not only from China but from Malaysia, Thailand and Indonesia as well. A list of the additional 130 goods can be found in Annex 2.20 But the Specific List attached to the Framework Agreement (2002 FA, Annex 2, Specific Products Covered by the Early Harvest Programme Under Article 6(3)(a)(iii)) was substituted by a new one (2003 Protocol) later. Some ASEAN states had no specific list. The Framework Agreement allows any party to have exclusion lists for protection (exempted for that Party from reducing or eliminating the tariff ). This led to the bilateral negotiation. The Exclusion List of A Party for Products Excluded from the Early Harvest Programme Under Article 6(3)(a) (i)21 (FA, Annex 1) was amended in 2003 (the Protocol). Some ASEAN states, like Indonesia, Myanmar, Singapore and Thailand, had no exclusion of any product. As China and Thailand signed “the Agreement on Accelerated Tariff Elimination under the Early Harvest Programme”, the Protocol had an amendment to insert a new article (Article 12A) into the Framework Agreement after the existing Article 12. It said: Nothing in this Agreement shall prevent or prohibit any individual ASEAN member state from entering into any bilateral or pluralateral agreement with China and/or the rest of the ASEAN member states relating to trade in goods, trade in services, investment, and/or other areas of economic cooperation outside the ambit of this Agreement. The provisions of this Agreement shall not apply to any such bilateral or pluralateral agreement.

Rules of Origin According to the Framework Agreement, “the Interim Rules of Origin applicable to the products covered under the Early Harvest Programme shall be negotiated and completed by July 2003”, and the negotiations on the Rules of Origin for trade in goods “shall be completed no later than December 2003” (FA, Article 11). After negotiation, the Rules of Origin was agreed on

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and signed in October 2003 as an attachment of the Protocol (Appendix 1 of the Protocol, extra annex as Annex 5 of the Framework Agreement, Rules of Origin for the ASEAN-China Free Trade Area.) During the negotiation, China accepted the origin criteria of AFTA (provision Rule 2). The products with “not less than 40 per cent of its content originates from any Party”, or part of the total value of the materials originating from outside “does not exceed 60 per cent of the Free on Board (FOB) value of the product” provided that the final process of the manufacture is performed within the territory of the party. The aggregate content (that is, full cumulation, applicable among all parties) on the final product not less than 40 per cent of the working or processing of the finished product “shall be considered as products originating in the territory of the Party” (Rule 5). “Products which have undergone sufficient transformation in a Party shall be treated as originating goods of that Party” (Rule 6). The Rules of Origin was later attached to the Agreement on Trade in Goods signed in 2004. The government authority of the exporting country is responsible for issuing the Certificate of Origin to all the exporting products. According to the order announced by the General Administration of China Customs in December 2003, the Rules of Origin is not applied to the products imported from ASEAN for re-export processing. Negotiation on Trade in Goods beyond the EHP The negotiation on trade in goods started in early 2003 but did not finish as scheduled by June 2004 (FA, Article 8). The Agreement on Trade in Goods (under the Framework Agreement on Comprehensive Economic Cooperation between China and ASEAN) was signed in November 2004 in Kunming, China, at the Tenth ASEAN-China Summit after several rounds of negotiations. The Agreement on Trade in Goods came into force on 1 January 2005 together with the Dispute Settlement Mechanism (DSM) signed on the same date. As with the Early Harvest Programme, those sensitive products were listed into the Sensitive Track, and all the other tariff lines were listed in the Normal Track. Tariff reduction or elimination had been arranged as the following timetables show. (Annex 1 of the Agreement on Trade in Goods is the Modality for Tariff Reduction and Elimination for Tariff Lines Placed in the Normal Track.) According to the arrangement, for China and ASEAN-6, only 150 tariff lines in the Normal Track can be kept for two more years until 2012 (Annex 1–6 of the Agreement on Trade on Goods). For the newer ASEAN-4, there are still about 50 per cent of their products can be kept out of the Normal

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Track until 2010. Vietnam’s tariff lines cannot exceed 250 to 1 January 2015, and all the tariffs are to be eliminated before 2018. According to the Framework Agreement (2002) and the Agreement on Trade in Goods (2004), each ASEAN member state should hold bilateral negotiation with China on the Sensitive Track, and tariff of the products in the Sensitive Track will be reduced or eliminated to the mutually agreed end rates and the agreed end dates” (FA, Article 3(4)(b)). China and ASEAN-6 could place less than 400 tariff lines at the Harmonised System (HS) 6-digit level and no more than 10 per cent of the total import value, based on 2001 trade statistics; Cambodia, Laos, Myanmar and Vietnam could place 500 tariff lines at the HS 6-digit level. The newer ASEAN-4 will still keep about 50 per cent of their products out of the Normal Track up till 2010. The Highly Sensitive List of China and ASEAN-6 would have less than 40 per cent of their tariff lines in the Sensitive Track or 100 tariff lines at the HS 6-digit level, whichever is lower. The Highly Sensitive List of Cambodia, Laos, Myanmar and Vietnam would have no more than 40 per cent of their tariff lines in the Sensitive Track or 150 tariff lines at the HS 6-digit level, whichever is lower (Annex 2). ASEAN-6 and China should reduce the applied MFN tariff rates on the products listed in the Sensitive Lists to 20 per cent not later than 1 January 2012, and to 0–5 per cent not later than 1 January 2018. Cambodia, Laos and Myanmar should reduce the same range two years later. Vietnam should reduce the tariff rates on the products placed in its Sensitive Lists to 20 per cent not later than 1 January 2015, and to the rate of 0–5 per cent not later than 1 January 2020. Tariff rates of the Highly Sensitive Lists will be reduced to not more than 50 per cent not later than 1 January 2015 for ASEAN-6 and China, and 1 January 2018 for the newer ASEAN Member States. The products listed in the Sensitive Track will be reviewed in 2008 to improve the market access condition (Article 17). According to the Framework Agreement, the WTO provisions should be applicable to ACFTA. All parties agreed to “abide by the provisions of the WTO disciplines on non-tariff measures, technical barriers to trade, sanitary and phyto-sanitary measures, subsidies and countervailing measures, antidumping measures and intellectual property rights (Article 7). The timetable for eliminating the non-tariff barriers “shall be mutually agreed upon by all Parties” (Article 8). More negotiations were needed on these during the implementation on tariff reduction or elimination. One of the most important provisions in the Agreement on Trade in Goods is ASEAN’s recognition of China’s Market Economy Status. Each of

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the ten ASEAN member states agreed to recognize China as a full market economy in relation to the trade between each other (Article 14). AGREEMENT IMPLEMENTATION AND ASEAN-CHINA TRADE IN GOODS Early Harvest Programme Implementation The Early Harvest Programme was planned to be implemented from 1 January 2004 to 1 January 2006. China and Thailand implemented earlier from 1 October 2003 according to their bilateral agreement. On 29 April 2003, Premier Wen Jiabao of China and Prime Minister Thaksin Shinawatra of Thailand agreed in Bangkok to undertake the elimination of tariffs on vegetable and fruit products between the two countries as soon as possible. After negotiation, China and Thailand signed a bilateral agreement “on Accelerated Tariff Elimination under the Early Harvest Programme” (Accelerated Tariff Elimination) on 18 June 2003. The parties committed to “eliminate tariffs on all vegetable and fruit products subject to HS22 Chapters 07 and 08 under the Early Harvest Programme of the Framework Agreement as soon as possible, and in any case, no later than 1 October 2003”. HS Chapter 07 and 08 covered 188 tariff lines of vegetables (108) and fruits (80). On 3 June 2004, ministers of China, Thailand and Singapore signed an agreement in Chile when they attended the APEC meeting. Singapore joined in the “zero tariffs” arrangement between China and Thailand on fruits and vegetables. Statistics show that Thailand’s export to China increased by 20.6 per cent in the fourth quarter of 2003 compared to the 5 per cent increase of the third quarter. Fruits and vegetables exported from Thailand to China was about US$347 million (80 per cent increase); imports from China to Thailand during the same period increased by 222 per cent, amounting to US$153 million.23 In October 2003, Thailand’s export of vegetables to China was US$3.4 million, US$1 million more than the value of US$2.4 million in September. It increased to US$6.5 million in November and US$22.6 million in December, almost ten times the export in September.24 During the period from October 2003 to September 2004, China’s fruit and vegetable trade with Thailand increased significantly. Thailand’s export of fruits and vegetables to Yunnan Province of China in the first nine months of 2004 (US$4 million) increased by ten times over the same period in 2003. The value of Thailand’s export to China was twice its import from China (US$0.73 million). During the period, the fruits and vegetables trade of Guangdong Province (mainly imports from Thailand) increased by 180 per

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cent (valued US$160 million) from the previous year. Guangdong’s import was much more than its export (US$13 million).25 In the first half of 2004, China’s Tianjin Customs imported fruits and vegetables valued at US$788 million from Thailand, and exported fruits and vegetables to Thailand valued at only US$716,500. Thailand’s import from China also significantly increased by 32.8 per cent in 2001/02, 23.1 per cent in 2002/03, and 34.9 per cent in 2003/04. In 2004, bilateral trade between China and Thailand was increased to US$17.34 billion, a 37 per cent increase over 2003. Thailand’s surplus was US$5.74 billion. Its exports to China and imports were respectively increased by 30.8 per cent and 51.5 per cent.26 From 1 January 2004, tariff reduction or elimination on products under EHP commenced between China and all ASEAN-10 member states. In 2004, trade between China and ASEAN was over US$100 billion, over twice the figure of 2000. Tariff Reduction or Elimination on Goods in Normal Track The arrangement of tariff reduction or elimination on goods in the Normal Track should apply from 1 July 2005 as planned. The actual starting date is 20 July 2005. In June 2005, the China-ASEAN Trade Negotiation Committee (TNC) held its nineteenth meeting in Beijing and announced the start of the tariff reduction or elimination on all the products (7,445 tariff lines beyond those under EHP) in the Normal Track on 20 July 2005 after technical examination and custom system adjusting for twenty days from 1 July 2005. China and Brunei, Indonesia, Malaysia, Myanmar, Singapore and Thailand commenced the new tariff rate on 20 July 2005 in time. Cambodia, Laos, the Philippines and Vietnam can join the new tariff rate after they complete the approval procedure. On 20 May 2006, the Philippines became the seventh ASEAN member state to join the new tariff rate. After the signing of the Framework Agreement and the Protocol on EHP, some ASEAN member states found that they had difficulties implementing the tariff reduction or elimination plan. In order to protect its agricultural sector, the Philippines set up a committee in August 2003 to review its 5,700 tariff lines to validate the compatibility of the Philippine products under ACFTA framework. After the first review of 1,292 tariff lines of products in October 2003, the Philippines decided to raise 2–5 per cent of the tariffs on 464 products from 16 November 2003 to the end of 2007.27 China-ASEAN trade in goods in 2003 was US$78.3 billion, of which China’s exports to ASEAN was US$30.9 billion, and its imports from ASEAN was US$47.3 billion; China’s deficit was US$16.4 billion. Total exports to

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ASEAN from China in 2004 was US$42.9 billion, a 38.7 per cent increase from 2003, accounting for 7.2 per cent of China’s total exports to the world; total imports from ASEAN to China in 2004 was US$63.0 billion, a 33.1 per cent increase from 2003, accounting for 11.2 per cent of China’s total imports; China’s deficit was US$ 20.1 billion. The increase of China’s imports from ASEAN was lower than China’s export to ASEAN, but higher than China’s imports from the rest of the world. In 2005, China’s imports from ASEAN was US$75 billion, an increase of 19.1 per cent from 2004; Chin’s exports to ASEAN was US$55.4 billion, an increase of US$29.1 billion; China’s deficit was US$19.6 billion. The increase of China’s imports from ASEAN in 2003 was much higher than the increase of its imports from the rest of the world. From Table 6.1 and Figure 6.2, we can see that China had some trade surplus with the ASEAN-4 newer member states although the trade deficit with ASEAN as a whole was very large. Table 6.1 shows that China’s exports to ASEAN accounts for 7.1 per cent of China’s total export in 2003, 7.2 per cent in 2004, and 7.3 per cent in 2005 while China’s imports from ASEAN shared almost the same percentage as China’s total imports from the world, 11.5 per cent in 2003, 11.2 per cent in 2004 and 11.4 per cent in 2005. Figure 6.3 shows that China’s trade with ASEAN is almost 90 per cent of its trade with the world. DSM, SERVICES AND INVESTMENT Dispute Settlement Mechanism According to the Framework Agreement, the negotiation on dispute settlement procedures and mechanism should be completed before 1 July 2004 (FA, Article 11). After several rounds of negotiations, China and ASEAN signed the ASEAN-China Protocol on Enhanced Dispute Settlement Mechanism (DSM) in November 2004 on the same date of signing the Agreement on Trade in Goods at the Tenth China-ASEAN Summit. The Protocol applies to all disputes on trade and economic cooperation between the two sides. If the parties concerned are unable to agree on the chair of the arbitral tribunal in time, they have to request the WTO to appoint the chair (Article 7). Negotiation on Trade in Services According to the Framework Agreement, “liberalisation of trade in services with substantial sectoral coverage” is one of the measures for comprehensive cooperation (FA, Article 2), and “the Parties agree to enter into negotiations

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7.1 34.6 8,868.5 27 6,141.2 23.5 3,828.2 29.4 3,093.8 51.5 4,480.8 30.8 33.9 61.2 3,178.5 47.9 907.7 25.2 294.7 17.1 98.2 80.9

39.9 10,483.8 48.5 13,986.7 50.5 8,827.0 57.6 6,306.3 96 5,748.3 27.5 312.3 29.1 1,455.8 30.5 169.5 23.8 26.0 5.9 11.2 16.1

30,930 31.1

Export

11.5

47,330 51.7

Source: Ministry of Commerce, PRC.

ASEAN Change (%) Share in China’s total (%) Change of China to the World (%) Singapore Change (%) Malaysia Change (%) Thailand Change (%) Philippines Change (%) Indonesia Change (%) Brunei Change (%) Vietnam Change (%) Myanmar Change (%) Cambodia Change (%) Laos Change (%)

Import

2003

– –1,614.6 – –7,845.5 – –4,998.8 – –3,212.5 – –1,267.6 – –278.4 – 1,722.7 – 738.2 – 265.6 – 87.0 –

–

–16,400 –

Balance

36.0 13,996.6 33.5 18,174.4 29.9 11,541.6 30.8 9,058.9 43.6 7,223.6 25.7 251.1 –19.6 2,482.0 70.4 206.9 22.1 29.9 15.1 12.7 13.0

11.2

62,980 33.1

Import

35.4 12,687.3 43.1 8,086.8 31.7 5,801.6 51.6 4,268.9 38.0 6,256.9 39.6 47.9 41.3 4,260.8 33.9 938.6 3.1 452.5 53.6 100.9 2.7

7.2

42,900 38.7

Export

2004

Table 6.1 China’s Trade with ASEAN (US$ millions)

– –1,309.3 – –10,087.6 – –5,740.1 – –4,790.0 – –966.8 – –203.2 – 1,778.9 – 731.7 – 422.6 – 88.2 –

–

–20,080 –

Balance

23.2 16,516.4 18.0 20,096.2 10.6 13,991.9 21.2 12,870.0 42.1 8,437.5 16.9 207.7 –17.3 2,551.9 2.8 274.4 32.6 27.3 –8.8 25.6 101.9

11.4

75,000 19.1

Import

28.4 16,632.6 31.1 10,606.9 31.2 7,820.5 34.8 4,687.9 9.8 8,351.4 33.5 53.1 11.0 5,644.5 32.5 934.9 –0.4 536.0 18.6 103.4 2.5

7.3

55,370 29.1

Export

2005

– 116.2 – –9,489.3 – –6,171.4 – –8,181.2 – –86.1 – –154.6 – 3,092.6 – 660.5 – 508.7 – 77.8 –

–

–19,630 –

Balance

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US$ Million

IM

Brunei

Singapore

2003

EX IM

Vietnam

Malaysia

Balance

Source: Ministry of Commerce, China.

- 40000

- 20000

0

20000

40000

60000

80000

IM

Cambodia

Philippines

Balance

Myanmar

Thailand

2004

EX

Figure 6.2 China’s Trade with ASEAN (2003–05)

Balance

Laos

Indonesia

2005

EX

102

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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Ministry of Commerce, China.

China's Trade with ASEAN

-10

-100

China's Trade Volume

30 10

50

500

300

70

700

100

90

110

1100

900

150 130

1500

1300

Figure 6.3 China’s Trade with World and with ASEAN (US$ billions)

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to progressively liberalise trade in services with substantial sectoral coverage” (FA, Article 4). The negotiations on services seek to eliminate discriminatory measures. The agreements shall include time-frames for the implementation of the commitments therein. “The Parties will explore the feasibility of an early harvest programme for trade in services in early 2003, activities set out “shall be undertaken or implemented on an accelerated basis”. In 2003, China signed two Close Economic Partnership Agreement (CEPA) with its Hong Kong and Macau respectively. The Mainland-Hong Kong CEPA was signed on 29 June 2003, which was the first RTA for both sides. Three months later, on 17 October 2003, the Chinese Government concluded a similar agreement with Macau. The two CEPAs covered trade in goods, but mainly on trade in services. CEPA covered service types including, among others, management consulting, conventions and exhibitions, advertising, accounting, banking, securities, insurance, logistics, movies, construction, shipping and value-added telecommunications services. CEPA gives Hong Kong and Macau a “first move” advantage. Providers of Hong Kong and Macau can enjoy preferential treatment ahead of China’s WTO time-table in the listed sectors. For example, in management consulting, Hong Kong services providers can establish wholly foreign-owned enterprises (WFOE) over two years earlier than other WTO members. In banking services, the minimum asset requirement for an overseas financial institution to set up a branch in China is US$20 billion, to set up a subsidiary it is US$10 billion. But the minimum asset requirement for a Hong Kong entity is only US$6 billion. In legal services, China gives little concession to other WTO members, but Hong Kong law firms are allowed to establish representative offices in China to operate in association with mainland law firms, although the association may not take the form of a partnership. In 2005, China and ASEAN started the negotiation on finance and insurance.28 As the demands of the ten ASEAN member states are quite different, some of them chose to negotiate with China on their issues of greatest concern. Singapore is more interested in the service sectors while the less developed ASEAN-4 are more interested in export opportunities and infrastructures. Negotiation on Investment ACFTA will also create a “liberal, facilitative, transparent and competitive” investment regime (FA, Article 1 and 2, Article 5). After the Agreement on Trade in Goods was signed, more attention had been focused on the negotiations on trade in services and investment.29 Negotiations on these are comparatively slow, but many cooperation agreements were reached in bilateral

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negotiations between China and some ASEAN member states. Since 2003, the two sides held many rounds of negotiations on investment. During the Trade Negotiation Committee Working Group (TNC-WG) meeting, it was agreed that the Framework Agreement on ASEAN Investment (AIA)30 was to be used as a template for the negotiation of ACFTA.31 ASEAN Foreign Direct Investment (FDI) outflows to China mainly came from Singapore, Thailand, Malaysia and Indonesia. China’s total investment to ASEAN is only about US$1 billion, less than 1 per cent of the total FDI inflows to ASEAN or less than US$100 million per year. As one of the biggest FDI recipient in the world (up to 2001, 56 per cent of FDI to China was from Hong Kong, Macau and Taiwan while 90 per cent of the FDI to ASEAN was from the United States, EU, and Japan) but only a potential outward investor, China prefers to do more in project cooperation instead of quarrelling over the paperwork before the agreement is reached. Greater Mekong Sub-region Development The Greater Mekong Sub-region (GMS) programme proposed by the Asian Development Bank (ADB) in 1992, much earlier than the proposal of the ACFTA, is a very important part in the cooperation between China and ASEAN-5, Thailand and the newer ASEAN-4, which had received China’s official assistance for a long time, and much of China’s limited foreign investment had gone into the sub-region in recent years. It is helpful for the establishment of the Free Trade Area. The GMS area is an important corridor linking China with Southeast Asia and South Asia. The GMS programme has achieved numerous tangible results on road transport, energy, environment and human resources development. It attracts the attention of the whole world as the GoldenTriangle of drugs is inside there. ASEAN carried out the ASEAN-Mekong Basin Development Cooperation in 1996, and the rail link from Singapore to Kunming, passing through Malaysia, Thailand, Cambodia, Laos, Myanmar and Vietnam, was among the proposed projects. The GMS Summit is held once every three years. At the first GMS Summit held in Cambodia in 2002, the programme attracted US$1 billion of investment for approximately 100 projects on transportation, energy, telecommunications, environment, tourism, human resources, trade and investment. Soon after the signing of the Agreement on Commercial Navigation on the Lancang (Mekong) River in 1999 with Thailand and the newer ASEAN-4, China invested US$5 million to dredge the upper Mekong River. With the support of ADB, Thailand and China decided to build

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within ten years an economic trade zone intended for Southeast Asian countries. The zone includes a commodity centre and a tax-free industrial centre.32 In September 2003, five GMS countries met in Dali, China for further border opening up.33 In March 2004, China exchanged letters with Laos and Myanmar, agreeing to provide aid to their power projects. China and Vietnam also agreed to set up closer working ties. China agreed to provide funds of nearly US$300 million for the highway within Laos. The road is part of the transnational road from Kunming to Bangkok. China’s southern provinces of Guangxi and Yunnan are very keen to strengthen the cooperation with Vietnam, Laos, and Myanmar. Such cooperations have taken place for over ten years. Guangxi Autonomous Region and Yunnan Province have injected huge funds for infrastructure. Even Sichuan, Guizhou and Shanxi, Zhejiang, Jiangsu, Shanghai, Fujian and Guangdong are paying more attention to the cooperation with ASEAN. The local governments have planned to cooperate with ASEAN in many sectors including electricity, agriculture, and environment. The four newer ASEAN member states are less developed countries and they are recipients of China’s official aid for many years. Geographically, they are located between China and the other ASEAN member states. They are positive to the establishment of ACFTA, as they can benefit from the special treatment and more opportunities. Vietnam is very active on cooperation in the area, and proposed the plan which covered China’s Yunnan, Guangxi and Hainan provinces with Vietnam, Cambodia, Laos and Myanmar. Vietnam’s proposal was described as the “One-circle and two-corridors Plan”, which connects China’s Yunnan (corridor one), Guangxi (the so-called two corridors and one circle), Guangdong and Hainan (which is in the circle but not in the corridor) with Vietnam, Laos, Cambodia and Thailand. At the ASEAN-China Summit in 2002 in Cambodia, Vietnamese Prime Minister Phan Van Khai put forth a proposal for setting up the ASEAN Centre of Contemporary Chinese Studies in Hanoi in November. The proposal was accepted by ASEAN and China; and the centre was established in November 2005. At the Second GMS Summit in Kunming in July 2005, leaders of the six GMS countries issued a declaration to reinforce infrastructure for development, to improve trade and investment environment, to strengthen social and environmental infrastructure, and to mobilize resources and deepen partnership. China will actively exchange information with relevant countries on economic development and power systems, and make contributions to the establishment of an information exchange platform on power cooperation.

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China had decided to unilaterally expand the range of products eligible for preferential tariff from Laos, Cambodia and Myanmar from 1 January 2006 with the aim of raising the level of intra-regional trade cooperation. Prospect of ACFTA in the Regional Integration and Globalization Comparing ASEAN and China, we find that China has some advantages in non-tropical agriculture and many labour-intensive manufacturing sectors like textiles, machineries and electronic products assembling because of its abundant cheaper labour supply, while ASEAN has advantages in tropical agriculture, raw materials (almost all ASEAN member states except Singapore), and services (especially Singapore). In fact, as the establishment of the AFTA is still on its way, the cooperation level between ASEAN and China depends on the cooperation level of ASEAN member states. The ten ASEAN member states are complementary in many sectors. When China and ASEAN started to establish ACFTA in 2002, Japan and South Korea would not join. They preferred to establish FTA with some of the ASEAN states members respectively. At the China-Japan-Korea breakfast meeting34 hosted by China during the Ten+3 Summit in November 2002, Chinese Premier Zhu Rongji proposed to form an FTA with Japan and South Korea. Their responses were not positive.35 Japan and South Korea worried about the political pressures of the agricultural products in their countries, as China and many ASEAN member states had advantages in agriculture. Even the United States failed to open up Japan’s food market. The Japan-Mexico negotiations for an FTA failed mainly because of the differences over agriculture. Just after China and ASEAN declared their intention to establish ACFTA in 2001, Japan proposed to establish the ASEAN-Japan Comprehensive Economic Partnership (AJCEP) with individual ASEAN member states. Japan started to negotiate the so-called Economic Partnership Agreement (EPA) with Singapore, Thailand, Malaysia and Indonesia in January 2002. In 2003, Japan signed the first Free Trade Agreement with Singapore which had no agricultural products to export, and have decided to start bilateral negotiations with the Philippines. South Korea was very active in promoting regional cooperation. It suggested establishing a dialogue channel with ASEAN in November 1989, even before Malaysia suggested establishing the “EAEG” in 1990. The negotiation on the Korea-Singapore Free Trade Agreement (KSFTA) started in November 2002 and concluded in November 2004. Except for tariff removal, Singapore will also have enhanced access to Korean education,

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logistics, and environmental services while Korea will gain access into Singapore’s construction, logistics, and professional services. In October 2003, Korea-ASEAN leaders held a meeting to establish an FTA. Experts from both sides held their first meeting in Jakarta in March 2004, discussed the content and procedure of the FTA at the meeting and the meetings that followed. The Experts’ Report was submitted to the Korea-ASEAN Summit in November 2004. According to the report, the Korea-ASEAN Free Trade Agreement (KAFTA) shall cover trade in goods, services, investment, and other cooperation. Eighty per cent of products will be tariff-free by 2009 while the remaining 20 per cent will be subject to negotiations in consideration of the new ASEAN members’ status. Negotiations on the KAFTA started in February 2005 and the agreement is expected to be signed before the end of 2006. According to IMF statistics, the percentage of intra-ASEAN trade in 2003 accounted only for 22.28 per cent while it accounted for 44.85 per cent in NAFTA and 66.07 per cent in the twenty-five European Union countries. The trade percentage among ASEAN, Japan, South Korea and the Greater China (mainland China plus Hong Kong, Macau and Taiwan) was 52.52 per cent. It is still lower than the EU, but higher than NAFTA.36 In October 2003, leaders of China, Japan and South Korea signed the Joint Declaration on the Promotion of Tripartite Cooperation. Leaders agreed to “continu[e] to study the issue of establishing a China-Japan-Korea Free Trade Area”. If this is true, then ACFTA will be a part of the Ten+3 FTA. But at present, nothing shows that Japan and South Korea will open their agricultural products market to some ASEAN states which have advantages in agriculture, not to mention to China. Before the negotiation of the Ten+3 FTA can be initiated, ACFTA will be the only regional FTA in East Asia. In the past few years, ASEAN signed the Free Trade Agreement with China and India while Singapore and some other ASEAN member states have signed bilateral free trade agreements with several developed countries. During the establishment of ACFTA, China also started negotiations for similar arrangements with Australia, New Zealand and the Mercosure countries, especially Chile. On 25 October 2003, in a state visit by Chinese President Hu Jintao to Australia, China and Australia signed a Trade and Economic Framework that is regarded as the first steps towards a free trade agreement worth billions of dollars. A few days later, President Hu reached consensus with the New Zealand leader to start negotiations for reaching a free trade deal between the two countries. The China-Pakistan FTA was signed in 2005 and tariff reduction started from 1 January 2006. China started negotiations on the FTA with Gulf Cooperation Council (GCC)37 in April 2005. During the period from 1999

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to 2004 China-GCC trade increased by 40 per cent annually. In 2005, China unilaterally eliminated tariffs on 190 products (HS 8-digit tariff lines of China) imported from twenty-five of the least developed countries in Africa and increased its official aid budget in 2005. The leaders of Ten+3 held the first East Asia Summit (EAS) in Kuala Lumpur in December 2005 to discuss the East Asia Community (EAC). India, Australia and New Zealand were invited. As the Malaysian foreign minister said, “ASEAN is still in the driver’s seat”. China supported ASEAN to play the leading role. The United States prefers to pay more attention to the NAFTA, but it has not left Southeast Asia behind. Just after China declared its intention in November 2001 to establish ACFTA, responded quickly by holding a meeting to discuss an FTA with ASEAN in April 2002, although it only signed the free trade agreement with Singapore and Thailand to date. Singapore is the most important promoter of free trade agreement and it is an excellent masterhand in keeping the balance between big powers. It can always freely “ride on the growth” wherever this exists in the East or in the West although it is very small in size. The platform on which Singapore can play is immeasurably bigger than where the small island is located. Singapore is the location of the APEC Secretariat and ASEF. It is “riding on” China’s fast growth now. As it has special relations with China, the small dragon is leading the big one in dancing. As ACFTA will benefit all participants, its prospect will be very inspiring. The goal set for China-ASEAN trade to 2010 is US$200 billion. As the rate of increase in trade between the two sides has been over 30 per cent these years, and the previous goal of US$100 billion in 2005 realized in advance in 2004 (over twice that of 2000), and the trade between the two sides increased by 23 per cent in 2005, the expected goal may hopefully be realized two years earlier in 2008. NOTES 1. . 2. In January 1989, Prime Minister Hawke of Australia proposed in South Korea to hold Asia-Pacific ministerial meetings for economic cooperation. In November of 1989, the first ministerial meeting was held in Canberra, Australia. ASEAN-6 member states, the United States of America, Canada, Japan, South Korea, New Zealand and Australia attended the meeting and APEC was formerly established. 3. Singapore suggested that ASEAN strengthen economic cooperation very early but often raised suspicions from other members because it was clear that Singapore could get more benefits from FTAs. In late 1980, ASEAN agreed to have more

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4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

20. 21. 22.

23. 24. 25. 26. 27. 28. 29.

economic cooperation among the members. In 1992, considering the business and diplomatic background of the Premier of Thailand, Lee Kuan Yew, Senior Minister of Singapore, advised Singapore’s Prime Minister Goh Chok Tong to encourage Thailand to initiate an ASEAN Free Trade Area (AFTA).
 !
 !I=
 !"#$ [Lee Kuan Yew’s Memoir], 16 September 2000, p. 376. Donald E. Weatherbee, International Relations in Southeast Asia (Rowman & Littlefield Publishing Group, Inc., 2005), p. 16. WTO Director-General, 2002–05. AFTA Monitor 8, no. 11 (15 November 2000). . China, Japan and Republic of Korea. Singapore, Malaysia, Indonesia, Thailand and the Philippines.
 !=K
 !"# [Yoshino Fumio, Foreign Affairs, September 2004]. . China and Southeast Asia — Global Changes and Regional Changes, edited by Ho Khai Leong and Samuel C.Y. Ku (Singapore: ISEAS, 2005), p. 52. Ibid., pp. 188–89. Ibid., p. 196. . Ibid., p. 4.
 !K
 !"# [Yoshino Fumio, Foreign Affairs, September 2004]. Rahul Sen, Free Trade Agreements in Southeast Asia (Singapore: ISEAS, 2004, p. 1).
 !"# [People’s Daily] (Beijing: 7 November 2001), p. 1. All in the chapter 01-08 at the 8/9 digit level (HS Code), which are described as: 01 Live Animals; 02 Meat and Edible Meat Offal; 03 Fish; 04 Dairy Produce; 05 Other Animals Products; 06 Live Trees; 07 Edible Vegetables; 08 Edible Fruits and Nuts. < h t t p : / / w w w. m t i . g ov. s g / p u b l i c / F TA / f r m _ F TA _ D e f a u l t . a s p ? s i d = 179&cid=1902>. Four annexes were on the Early Harvest Programme. HS, Harmonized Commodity Description and Coding System of World Customs Organization. It is regarded as the common language of international trade, being used for more than 95 per cent of all goods traded internationally. Customs of Thailand. Foreign Trade Department, Ministry of Commerce, Thailand. China Customs. Ibid. Executive Order No. 241, 2 October 2003. . The negotiation on investment should have been completed by end 2004 but did not. The Framework Agreement does not have a mandatory time-frame for negotiations on services.

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30. AIA 1998 was amended in 2001 with a Protocol, assuring the realization of free flow of investment by 2010 instead of 2020. 31. , 23 July 2004 32. Xinhua News Agency, 28 June 2002. 33. . 34. At the 1999 Summit, Japan suggested the breakfast meeting of the three countries. 35. Wall D. “East Asia FTA? Dream On”, Japan Times, 2 July 2003. 36. IMF Direction of Trade (DOTS) CD-Rom, April 2005; and CEIC. 37. GCC has six members: Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and the United Arab Emirates.

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7

ASEAN-China Free Trade Agreement: Legal and Institutional Aspects Wang Jiangyu

INTRODUCTION There have been, arguably, too many regional free trade agreements (hereinafter “FTAs” or “RTAs”) in Asia.1 The ASEAN-China Free Trade Agreement (“ACFTA”), albeit only half materialized, is certainly one of those that have caught most of the attention. There is a growing body of literature on the economic and geo-political dimensions of ACFTA, while the discussion on its legal aspects is still in the nascent stage. This chapter is an attempt to explore the various legal issues concerning ACFTA, including: (1) The tariff reduction arrangement under ACFTA; (2) Some contentious trade law issues in ACFTA, including rules of origin and contingency protection policies; (3) Dispute settlement under ACFTA; and (4) The legal nature of ACFTA and its impact on the legal relations concerning the rights and obligations of the parties under ACFTA. Why are these issues important? The chapter starts with an introduction to the negotiations and conclusion of the relevant ACFTA instruments. It

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proceeds to address the legal aspects of some essential — and, to some extent, contentious — issues in the free trade agreement, including the tariff arrangement, rules of origin, and trade remedy measures, followed by an examination of the dispute settlement regime of ACFTA. Based on the examination of the specific institutions of ACFTA, the chapter then begins to discuss the international legal nature of the agreement which concerns its legal status as an instrument under international law. At first glance, ACFTA is a bilateral agreement between China and The Association of Southeast Asian Nations (ASEAN). In fact, it is a multi-party agreement concluded by eleven sovereign nations, ASEAN not being allowed to appear as an independent party. This legal instrument will have a profound implication on the legal status of ACFTA, its dispute settlement mechanism, and its future negotiations. Finally the WTO consistency of ACFTA is analysed. Given that most signatories to ACFTA are WTO members and the rest are striving to join the WTO, it is important for ACFTA to comply with WTO disciplines. From the above analyses and examinations, the chapter draws some policy implications and recommendations with a view to making this free trade agreement mutually beneficial for China and WTO and a building block for the multilateral trading system. BACKGROUND: THE EMERGENCE OF ACFTA Almost coming as a surprise to his counterparts in the ASEAN countries, Chinese Premier Zhu Rongji proposed at the China-ASEAN Submit of November 2000 to form a “free trade agreement” between China and ASEAN. A China-ASEAN Exports’ Group on Economic Cooperation was established to study the feasibility of the proposed FTA, which issued its report in October 2001, recommending that China and ASEAN should adopt a comprehensive and forward-looking framework for economic cooperation, so as to forge closer economic relations in the twenty-first century. One year later, formal negotiations were launched. In November 2002, Chinese and ASEAN leaders signed the Framework Agreement on Comprehensive Economic Cooperation (hereinafter the Framework Agreement), which lays the groundwork for the eventual formation of an free trade agreement (ACFTA) by the year 2010 for China and the six older members of ASEAN (“ASEAN-6”, including Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand), and by 2015 for the newer ASEAN members states (the “CLMV” countries of Cambodia, Laos, Myanmar and Vietnam).2 The Framework Agreement was amended by a Protocol on 6 October 2003 by the contracting parties at their annual submit in Bali (hereinafter the “Protocol”).3

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The Framework Agreement establishes only preliminary measures for trade liberalization between China and ASEAN countries as well as agendas for further negotiations. The eleven countries has committed in the Framework Agreement to strengthen cooperation and to “progressively liberalise and promote trade in goods and services and services as well as create a transparent, liberal and facilitative investment regime”.4 This suggests that the proposed ACFTA will cover trade in goods and services, as well as trade and investment facilitation. Specifically, the contracting parties have undertaken to liberalize trade and investment among them in the following manner:5 (a) Progressive elimination of tariffs and non-tariff barriers in substantially all trade in goods; (b) Progressive liberalisation of trade in services with substantial sectoral coverage; (c) Establishment of an open and competitive investment regime that facilitates and promotes investment within the ASEAN-China FTA; (d) Provision of special and differential treatment and flexibility to the newer ASEAN member States; (e) Provision of flexibility to the Parties in the ASEAN-China FTA negotiations to address their sensitive areas in the goods, services and investment sectors with such flexibility to be negotiated and mutually agreed based on the principle of reciprocity and mutual benefits; (f ) Establishment of effective trade and investment facilitation measures, including, but not limited to, simplification of customs procedures and development of mutual recognition arrangements; (g) Expansion of economic cooperation in areas as may be mutually agreed between the Parties that will complement the deepening of trade and investment links between the Parties and formulation of action plans and programmes in order to implement the agreed sectors/areas of cooperation; and (h) Establishment of appropriate mechanisms for the purposes of effective implementation of this Agreement. The Framework Agreement also establishes an Early Harvest Programme (“EHP”) which has aimed to reach the immediate concessions offered by the parties, mainly China. The EHP will be further discussed in the next section. In the areas of trade in goods, and dispute settlement, the negotiations on the modalities for tariff reduction/elimination schedules for goods trade and dispute resolution were concluded in October 2004. On 29 November 2004, at the ASEAN + China summit in Vientiane, two historical agreements

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to implement the Framework Agreement were signed into treaty by ASEAN and Chinese leaders, namely the Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Cooperation (the “Trade in Goods Agreement” or “TIG Agreement”),6 and the Agreement on Dispute Settlement Mechanism of the Framework Agreement on Comprehensive Economic Cooperation (the “Dispute Settlement Mechanism Agreement” or “DSM Agreement”).7 The TIG Agreement represent the important, second, phase of strategy to form ACFTA. From July 2005, China and the “ASEAN-6” have begun to reduce tariffs of commodities trade. On 20 July 2005, tariffs on more than 7,000 items, accounting for over 90 per cent of all goods traded between China and ASEAN-6, were slashed to five per cent or less. The DSM Agreement represents another landmark achievement in ChinaASEAN bilateral trade relations. It provides, first of all, a formal, institutional, design for solving trade and investment disputes between China and an ASEAN member state. The significance of this agreement lies in its establishment of a rule-based setting for the resolution of economic disputes between the nations concerned, without which the governments are likely to resort to unilateral and retaliatory measures if they feel — sometimes rightly — that the multilateral trading system like the WTO does not provide for efficient and fair dispute settlement methods. TARIFF ARRANGEMENTS OF ACFTA Tariff Reduction and Elimination Programme The Framework Agreement and the TIG Agreements set up a “tariff reduction or elimination programme” for the contracting parties, requiring that “the applied MFN tariff rates on listed tariff lines to be gradually reduced and where applicable, eliminated, in accordance with [Article 3 of the TIG Agreement].”8 Obviously, in conducting liberalization in trade in goods, the eleven contracting parties have adopted a mixed approach which includes both negative listing and positive listing of products. With this, there are two levels of tariff arrangements. One is the normal arrangement which follows the negative listing approach, aiming to gradually slash the tariffs on goods, eventually reaching zero tariff rates by 2010 and 2015 respectively. The other is the positive listing based Early Harvest Programme (“EHP”), which has targeted to cut tariffs on agricultural goods ahead of the planned establishment of ACFTA in 2010. The two different arrangements are discussed in the following.

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Early Harvest Programme (EHP) The Framework Agreement establishes an Early Harvest Programme (“EHP”) which was implemented on 1 January 2004. The EHP aims to reap the immediate concessions offered by the parties, mainly by China. The EHP allows the reduction of tariffs on certain products before the onset of ACFTA. Initially, it aims to implement tariff reduction on these products over three years: To 10 per cent before 2004, to 5 per cent before 2005, and to zero tariffs no later than 1 January 2006.9 A key element of the EHP is that China has also given unilateral concessions to ASEAN members who feel they would not benefit as much from the EHP.10 This is because, for ASEAN’s exports to China, all the products in Chapters 1–8 of the Harmonized System (“HS”) are covered for preferential tariff rates, while for exports to ASEAN countries, not all of the products in Chapters 1–8 are covered. ASEAN countries are allowed to come up with exclusion lists indicating the items for which they would not grant tariff concessions to Chinese goods. In essence, the EHP “allows ASEAN products to be exported to China at significant concessionary rates so that ASEAN countries can actually benefit from the benefits of a free trade agreement even before the agreement itself is finalized.”11 In total, the EHP has targetted a host of some 600 products listed in Chapters 1–8 of the HS, mostly agricultural products which are to be unilaterally liberalized by China.12 Under the EHP, China has also agreed to grant tariff concessions to dozens of specific manufactured products to ASEAN countries, which are listed in Annex 2, Appendix 3 of the Protocol.13 In addition, China agrees to grant WTO benefits (mainly MFN treatment) to those ASEAN members which are not yet official WTO members.14 Initially the FA took a multilateral approach to tariff reduction. Namely, the tariff concessions under the HS approach shall be multilateralized to all parties (that is, all ASEAN members and China) provided that the same products are included in their EHP. But because the Philippines and China failed to establish an EHP scheme, other countries in the region were subsequently to consider that this would therefore allow the Philippines to “free ride”. In addition, fear that some ASEAN countries like Thailand have more efficient farm sectors that could suppress the growth of the agricultural sector in others has also deterred ASEAN members from implementing a multilateral approach under the EHP. Malaysia was amongst the first that negotiated a clause in 2003 allowing it to offer lower agriculture tariffs only to China in return for the latter’s concessions under the EHP.15 This practice has since been consolidated in the 2003 Protocol, which replaces the original

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Article 6(3)(b)(i) of the FA with a new provision. The new provision recognizes that a party may accelerate its tariff reduction and/or elimination under the EHP to the rest of the parties “on a unilateral basis”.16 Meanwhile, one or more ASEAN members are still allowed to conduct negotiations and enter into acceleration arrangements with China to fast-track their tariff reduction or elimination, which shall be done, however, only on a “bilateral or plurilateral” basis. In other words, no conditional or unconditional MFN status is granted under the EHP except to Brunei and Singapore.17 The Normal Liberalization Arrangement The TIG Agreement provides a tariff reduction and elimination programme for goods not covered by the EHP. Those tariff lines are categorised as two tracks. According to the tariff liberalization modality for ASEAN-6 and China, tariff lines placed by each party in the Normal Track on its own accord shall have tariff rates gradually reduced in four phases beginning July 2005 and eventually eliminated by 2010. For Vietnam, Cambodia, Laos and Myanmar, there will be eight phases of tariff reduction, with tariff rates slashed to zero only in 2015. Furthermore, for ASEAN-6 and China, each party to the TIG Agreement shall reduce tariffs to 0–5 per cent not later than 1 July 2005 for at least 40 per cent of their products placed in the Normal Track by 2005 and 60 per cent by 1 January 2007. Insofar as the parties should eliminate all tariffs placed on the Normal Track, extended timeframe for tariff elimination up to 2012 will be given to each party for not more than 150 tariff lines. Newer Asian members are given a longer time for up to 2018.18 The launch of the first batch of liberalization was postponed to 20 July 2005, for the original 1 July, because of administrative difficulties including ironing out new tariff structures and procedures cited by the parties.19 It is worth noting that the TIG generally adopts the negative listing approach. In Annex 1 of the TIG Agreement which prescribes the modality for Normal Track tariff concessions, the long list of products might confuse the readers by creating the impression that only those items on the list will be liberalized. In fact, those products which are not listed in Annex 1 and Annex 2 (which prescribes the Sensitive Track) are automatically covered, meaning that they are subject to the tariff reduction and elimination modality of the Normal Track. The tariff lines listed by the parties in Annex 1–Appendix 1 of the TIG Agreement are permitted exceptions, indicating that the listed products shall have their tariffs eliminated by 1 January 2012 (instead of 2010) for the ASEAN-6 and China, and by 1 January 2018 (instead of 2015) for the newer ASEAN members (CLMV countries).20

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The Sensitive Track provides a mechanism for the participating countries to protect a limited amount of traded goods which, according to their own perception, are sensitive for their economies. The number of sensitive tariff lines shall not exceed 400 (or 10 per cent of the total import value based on 2001 trade statistics) for ASEAN-6 and China, and 500 for the CLMV countries.21 Tariff lines placed by each party in the Sensitive Track are further divided into a Sensitive List (SL) and a Highly Sensitive List (HSL). ASEAN-6 and China can put not more than 40 per cent of the total goods or 100 tariff lines, whichever is lower. For the Cambodia, Laos and Myanmar, the number of tariff lines placed in the HSL can be 150. Tariffs on products in the SL of ASEAN-6 and China will be reduced to 20 per cent by 2012 and subsequently to 0–5 per cent by 2018. Cambodia, Las and Myanmar are however allowed to reach the 20 per cent level by 2015 and 0–5 per cent by 2020.22 Assessing the Tariff Liberalization Arrangements in the Global Context The modality on tariff reduction and elimination, including especially the EHP, is, thus far, undoubtedly the crown jewel of ACFTA. The EHP has given ASEAN exporters significant advantage over other WTO members in the trade of agricultural goods with China. If the first half year after the EHP was implemented, ASEAN exports of fruits and vegetables increased by 30 per cent.23 According to the statistics released by the government of Malaysia, Malaysia’s exports to China under the EHP reached RM514 million and RM540 million in 2004 and 2005 respectively. During the same period, it imported only RM14 million from China.24 Overall, China-ASEAN trade reached US$100 billion in 2004, and US$130 billion in 2005. The average annual growth of bilateral trade has maintained over 25 per cent in recent years. Having a surplus of US$19.6 billion, ASEAN is one of China’s largest suppliers of commodities.25 No doubt, tariff concessions have played a significant role in expanding the trade volume between China and ASEAN. In the global context, tariff reduction is still an unfinished business. Given the substantial tariff concessions (especially for industrial goods) during the past rounds of multilateral trade talks, an impression might be created that tariffs are no longer a major barrier to international trade. As noted in a WTO discussion paper, “However, notwithstanding the achievements of the [Uruguay Round] and previous rounds of negotiations, especially the increase in the proportion of tariff lines that are subject to bindings together with negotiated cuts in

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bound rates, tariffs remain an important obstacle to international trade and consequently a distortion to competition and thus economic development”.26

In this context, the WTO-plus tariff reduction in ACFTA is commendable. The modality of tariff reduction and elimination in ACFTA will lead to a tariff-free trade area for most goods by 2012. From the perspective of the multilateral trading system, there remains a concern that this preferential arrangement might erode the scope of application of MFN tariffs of the WTO.27 There is, however, little evidence that the tariff liberalization under ACFTA has had any trade diversion effect. Further, as will be discussed below, as both ASEAN countries and China have benefited tremendously from this liberalization, they are unlikely to be convinced to stop this liberalization movement on the grounds of protecting the integrity of the MFN principle. The negative listing approach of ACFTA, whereby all tariff lines are generally reduced and exceptions are spelled out in an annexed list, is preferable as it can bring broader liberalization of trade in goods and deeper integration. In contrast, other regional trade arrangements in Asia, such as the ASEANIndia, Singapore-Japan, and some other RTAs, follows a positive listing approach, whereby tariffs are reduced only for those goods stipulated on a list by each contracting party. QUANTITATIVE RESTRICTIONS AND NON-TARIFF TRADE BARRIERS Article 8 of the TIG Agreement prohibits the parties from using quantitative restrictions and other non-tariff measures to retard the cross-border free flow of goods. It reads: 1. Each Party undertakes not to maintain any quantitative restrictions at any time unless otherwise permitted under the WTO disciplines.28 2. The Parties shall identify non-tariff barriers (other than quantitative restrictions) for elimination as soon as possible after the entry into force of this Agreement. The time frame for elimination of these non-tariff barriers shall be mutually agreed upon by all Parties. 3. The Parties shall make information on their respective quantitative restrictions available and accessible upon implementation of this Agreement.

Insofar as quantitative restrictions are concerned, this provision is similar to Article XI of the General Agreement on Tariffs and Trade (“GATT”), paragraph 1 of which stipulates: No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other

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measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.

Given that most of the contracting parties to ACFTA are WTO members, and the rest are likely to join the WTO soon, it is a curious question why such a special provision is made in ACFTA. A possible explanation is that, the extra obligation of non-maintenance of quota measures and the elimination of non-tariff barriers undertaken by ACFTA signatories in addition to their similar WTO commitment can provide a second safety net for them. The trade regulatory regimes of most parties to ACFTA are still plagued by nontransparency and administrative arbitrariness, which are likely to cause trade frictions between China and individual ASEAN countries. Under ACFTA, such a dispute can be settled — probably more efficiently and amicably — according to the DSM Agreement. The Rules of Origin Issue Rules of origin (ROOs), understood as the criteria used to define where a product was made, have become a key source of problems in the RTAs. ROOs exist because there is considerable differentiation of treatment of imports of different origins. Currently under the WTO there is no established ROOs to govern trade between WTO members. In the world of RTAs, rules of origin can be a potential trade barrier because, as each RTA has its own ROOs regime. This phenomenon has led to the so-called “spaghetti bowl” phenomenon, a term first coined by economist Jagdish Bhagwati in the 1990s, which indicates the complex trade barriers caused by protectionaccommodating rules of origin.29 For example, as reported in a Singapore newspaper, a United Nations study has concluded that there are a few possible negative consequences from Singapore’s bilateral trade agreements, one of them being the “spaghetti-bowl effect”. As the report notes, this opens the door for bilateral trade frictions: “Apart from higher costs of administering multiple agreements, it makes Singapore more vulnerable to trade disputes based on rules-of-origin violations, given the entrepôt nature of Singapore’s foreign trade structure.”30 Annex 3 of the TIG Agreement prescribes the rules of origin for ACFTA. Under Annex 3, products which are wholly obtained or produced in the exporting country shall be, of course, deemed to be originating and eligible for preferential concessions. If a product is not wholly produced or obtained in the exporting country, a 40 per cent value-added rule applies.

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From the ASEAN perspective, this means that the ASEAN content is at least 40 per cent either on the “Single Country Content” test or the “Cumulative Content” test. The TIG Agreement endorses also the universally recognized “substantial transformation rule”. Rule 6 of Annex 3 stipulates a “product specific criteria”, pursuant to which the parties are to negotiate a list of products which, if recorded in Attachment B to Annex 3, will be considered as “goods to which sufficient transformation has been carried out in a Party”. Currently, the list include 424 items of textile and textiles products, 2 items of preserved fish, 6 items of wool, 22 item lines of leather goods, 14 items of firkins and 4 items of footwear. A survey of several RTAs in Asia demonstrates that the “spaghetti bowl” effect is apparent. For example, under the Singapore-Australia FTA, the general rule of a specified threshold of local value content is either 30 per cent or 50 per cent. According to the Japan-Singapore FTA, each product has one corresponding specific rule of origin, although a significant portion of the rules require 60 per cent of local content. Such a world of complex clauses governing rules of origin, as criticized by the President of the Asian Development Bank, “could create a bureaucratic tangle that might put individual companies off trading together”.31 CONTINGENCY PROTECTION The Use of Contingency Measures under ACFTA Contingency measures in the area of foreign trade law refer to regulatory rules used by governments to restrict imports of foreign goods, such as the antidumping duties, countervailing duties, or safeguard measures. In the trade of goods, anti-dumping can be applied when dumping, defined as a private commercial activity “by which products of one country are introduced into the commerce of another country at less than the normal value of the products”, occurs and causes or threatens material injury to an established industry of the importing country or materially regards the establishment of a domestic industry.32 Anti-subsidies or countervailing duties may be applied against exports that have benefited from a subsidy granted by the government of the exporting country that is injurious to a domestic industry of the importing country.33 Safeguards are temporary emergency measures permitted to counter a sudden surge of imports that cause or threatens serious injury to a domestic industry. It is unfortunate that ACFTA still retain the trade remedy measures, given the strong body of economic theory and evidence suggesting that there

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is no economic justification for maintaining trade restrictions through contingency policies, and safeguard.34 ACFTA does not have special rules regarding anti-dumping and countervailing duties, which are to be based on existing WTO disciplines.35 It has a relatively lengthy clause on safeguard measures.36 ACFTA has borrowed the basic logic of safeguard from the WTO disciplines. According to Article 9.3 of the TIG Agreement, safeguard measures can be by a party applied under the following conditions: – If, as an effect of the obligation incurred by that Party, including tariff concessions under the EHP, or as a result of unforeseen developments and of the effects of the obligations incurred by that Party, including tariff concessions under the EHP, – imports of any particular product from the other Parties increase in such quantities, absolute or relative to domestic production, – and under such conditions so as to cause or threaten to cause serious injury to the domestic industry of the importing Party that produces like or directly competitive products.

Apparently, Article 9.3 of the TIG Agreement combines the rules on the conditions of initiating safeguard measures contained in Article XIX of GATT and Article 2 of the Agreement on Safeguard. However, the safeguard disciplines under ACFTA are remarkably less restrictive than the corresponding rules in the WTO Agreements in respect of the application and duration of safeguard measures. First, an ACFTA safeguard measure can only be initiated on a product within the “transition period” of that product. Under ACFTA, “the transition period for a product shall begin from the date of entry into force of [the TIG Agreement] and end five years from the date of completion of tariff elimination/ reduction for that product.”37 After the five years, trade in the liberalized goods can no longer be subject to investigation and imposition of safeguard measures. Under the WTO rules, safeguard measures can however be initiated and applied at any time. Clearly, while the WTO only disciplines safeguard measures, ACFTA aims at eliminating this form of protection completely after a short transition period. Second, under the WTO, the importing nation can use tariff measures or quantitative restrictions such as quotas. If a quantitative restriction is used, the level of quota shall not be below the actual import level of the most recent three representative years, unless there is clear justification for setting a different, lower, level.38 The TIG Agreement, in contrast, does not allow the contracting parties to use quantitative restriction measures set out in Article 5 of the WTO Agreement on Safeguards.39

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Third, although tariff measures are the only form of safeguard protection under ACFTA, there is still a remarkable limit on the level of tariff increase. Namely, the tariff can only be increased from ACFTA preferential tariff rate to the importing country’s WTO MFN tariff rate applicable to the product. That is to say, even in the worst scenario, the exporting country is still guaranteed the treatment as a WTO partner of the importing country. Fourth, under the WTO rules, the duration of any safeguard measure is four years, unless it is extended according the Safeguard Agreement’s provisions. However, the initial period of application and any extension cannot exceed eight years.40 The ACFTA shortens substantially the duration of safeguard measures. Under Paragraph 5 of Article 9 of the TIG Agreement, “Any ACFTA safeguard measure may be maintained for an initial period of up to 3 years and may be extended for a period not exceeding 1 year.” Further, “Notwithstanding the duration of an ACFTA safeguard measure on a product, such measure shall terminate at the end of the transition period for that product.” Put simply, within the transition period, the total period allowed under ACFTA is four years, which is only half of the maximum period allowed by the WTO rules. In terms of the duration and extension of safeguard measures, ACFTA excludes the application of Article 9 of the WTO Safeguard Agreement which prescribes special treatment for developing members. Although, literally, all signatories to ACFTA are developing countries, they have undertaken not to invoke the more flexible rules reserved for them to use when initiating an ACFTA safeguard measure. Specifically, they would lose the privilege to apply a safeguard measure again to the import of a product which has been subject to such a measure.41 Substituting Safeguard Actions for Anti-Dumping and Countervailing Measures? It is lamentable that ACFTA still retains the use of contingency policies. As previously noted, there is little evidence to justify the economic efficiency of trade remedy measures. Take anti-dumping as an example. Anti-dumping is purported to defend against “predatory pricing”, which refers to the practice of a foreign company to use temporary low prices to drive its competitors out of a market and then raises prices.42 As pointed out by Trebilcock and Boddez, [t]here are strong theoretical reasons and empirical evidence suggesting that predatory pricing, and in particular, international predation, will be a very improbable occurrence. In any market and particularly international markets, sustainable market power is extremely difficult to achieve through predatory pricing.

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In the increasingly globalized and connected world markets, the predator, in order to achieve its objective, must eliminate not only domestic competition in the domestic market, but also worldwide competition as well. The predator must raise the prices to a supra-competitive level in order to recoup its loss as a result of dumping, but it then will face both domestic and foreign entrants to the domestic market. It is unlikely that the predator can sustain these seemingly endless rounds of competition. Apart from the “predatory pricing” argument, another justification of anti-dumping actions is the prevention of market destabilization caused by transitory or intermittent dumping. In this situation, foreign exporters sell in the domestic market at low prices in order to maintain capacity utilization and a high home market price during a period of low demand in the home market. By doing so, the exporters may successfully avoid the costs of temporary adjustment in plant utilization and maintain current employment levels.43

Trebilcock and Boddez note that an anti-dumping duty, however, could only make domestic inefficient production economically viable. It is observed that: In summary, there are no economic justifications for ADD law. In reality, what is called dumping in the international context is usually healthy competition, generally welcomed in the domestic context. Foreign firms with legitimate comparative advantage are branded unfair traders for performing in a manner which would be commendable had they been domestic producers.44

In reality, anti-dumping has become a pure tool for protectionist purposes. Mankiw and Swagel45 remarked that, although the ostensible purpose of antidumping law is to help ensure competition, “[i]n practice, however, antidumping has strayed far from this purpose, becoming little more than an excuse for special interests to shield themselves from competition at the expense of both American consumers and other American companies.” The situation in other countries is no better. As for countervailing or anti-subsidies duties, it is, first of all, still very difficult to evaluate whether subsidies contribute to or derogate from efficient resource allocation. A study shows that the evaluation exercise is highly indeterminate because of three factors: (1) the pervasiveness of externalities which subsidies may help internalize; (2) potential private-public intersectorial economies; and (c) the possibility that the subsidization of a firm from government is used to offset some burden that has been imposed by the government.46

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But even assuming subsidies distort international trade, it is questionable that countervailing duties law should be the appropriate policy instrument to reduce the distortions. Trebilcock and Howse47 observes that it is unlikely that anti-subsidies action can improve resource allocation: [I]t has now been convincingly demonstrated that in almost every conceivable set of circumstances, countervailing duties reduce domestic social welfare in the importing country, where social welfare is defined as the maximization of producer, consumer and government surplus. Gains to domestic producers from the higher prices induced by the duties are offset by losses to consumers who remain in the market and pay the higher prices, while some consumers who would have purchased the product are priced out of the market and suffer deadweight welfare losses. Even accounting for the increase in government surplus in terms of increased revenue from duties, consumer losses outweigh all gains, leaving total welfare lower. Thus, however ambiguous the welfare effects of a subsidy either in the country providing it or globally, there is nothing ambiguous about the welfare effects of the subsidy in the importing country. This analysis suggests that rather than condemning foreign subsidies, importing countries should send expressions of gratitude to the subsidizing country, noting only their regret that the subsidies are not larger and timeless.

It is important to note that, apart from economic justifications, there are however other justifications, which are probably sufficient to support the maintenance of some form of trade remedy measures at this stage of international trade. One powerful argument is that, trade remedy measures can lead to a higher quantum of market access at any given point in time than would be the case without them.48 The logic is that governments “may be willing to go further in opening markets if they know they are protected against unforeseen circumstances”. This “buying votes” approach, as so termed by John Jackson, can pragmatically address a few concerns, including, inter alia, allocating the market adjustment costs, providing a safety valve for protectionist pressures, and giving a sense of security for those sceptical of free trade. In the end, having such an “escape” can help earn domestic support for trade liberalization.49 Given both the domestic and international political economy of foreign trade, it is not realistic to eliminate trade remedy measures in the regional trade agreements in Asia, although they are more trade-distorting than the actions against which they are set up. It is however highly advisable that, if some form of contingency protection must remain, it is a better idea, from both domestic and regional perspectives, to keep only the safeguard measures and abandon the use of antidumping and countervailing measures.

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There are several strong advantages for substituting safeguard measures for anti-dumping and anti-subsidies measures. First, safeguard actions are much more flexible. The foreign trade authority of the importing country can tailor a contingency protection package to match individual situations, ideally by balancing the major different needs (including the overall national welfare and the need for efficient allocation of resources) of the economy. Second, the domestic producers petitioning for safeguard protection must put together a plan to revive and increase their competitiveness. As such, a pressure is placed on the domestic industry to run efficiently, which is the original objective of the trade remedy policies.50 Third, a safeguard measure is less protectionist because its duration lasts, even under the WTO, no more than eight years. The maximum period of a safeguard action taken under ACFTA is four years. In huge contrast, anti-dumping and countervailing duties may be imposed and extended indefinitely. Finally, safeguard actions would be at least not “hypercritical” and with more patent honesty, as they are indeed manifestly protection measures, not predicated on any notion of “unfair trade,” but rather on an economic and political choice. Using the words of Barfield,51 “increased use of safeguard actions would reduce the inflammatory and oftenspurious comparisons made between fair and unfair trade practices.” DISPUTE SETTLEMENT UNDER ACFTA Overview of the Dispute Settlement Procedures under ACFTA As an international treaty, ACFTA is a legal system of rights and obligations for the contracting parties. The enforcement of a trade agreement, which translates provisions on paper into economically meaningful results, lies in the implementation of the obligations and resolution of disputes arising out of the implementation. The Dispute Settlement Mechanism Agreement (“DSM Agreement”) under ACFTA is a landmark document in China’s economic relations with ASEAN countries. The ACFTA dispute settlement procedures comprise three stages. First, Article 4 of the DSM Agreement provides a mechanism for consultations. A party complained against is required to “accord due consideration and adequate opportunity” for consultations requested by a complaining party with respect to any matter concerning the implementation or application of ACFTA. Paragraphs 2 and 4 emphasize the importance of full exchange of information. The compliant should include not only the specific measures at issue, but also the factual and legal basis. The parties are required to “provide sufficient information to enable a full examination of

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how the measure might affect the operation” of ACFTA, as well as to keep confidentiality of the information exchanged during the consultations which was designated as confidential.52 Paragraph 3 mandates prompt responses to request for consultations: the respondent shall reply to the request within seven days and enter into good faith consultations within a period of not more than thirty days after the date of receiving the request, otherwise the complaining party may proceed directly to request for the appointment of an arbitral tribunal.53 In cases of urgency, the parties shall enter into consultations in ten days.54 Another stage of dispute resolution under ACFTA is conciliation or mediation. This, however, is not a stage following consultations as the parties to a dispute may at any time agree to commence conciliation or mediation, and may continue conciliation or mediation even during the arbitration proceedings of the case.55 The formal and last stage is arbitration, used if the parties cannot settle a dispute within sixty days after the date of request for consultations or within twenty days in cases of urgency. An arbitral tribunal, composing of three arbitrators, shall be established to solve a dispute.56 Each of the two parties concerned shall, respectively, appoint one arbitrator. The two shall then endeavour to agree on an additional arbitrator who shall serve as chair. If they are unable to reach such an agreement, they should request the Director-General of the World Trade Organization (WTO) to appoint a chair. In the event that one of the parties to the dispute is a non-WTO member, the President of the International Court of Justice shall be entrusted with such a task. Unlike NAFTA, ACFTA does not provide for a roster of arbitrators. The requirements on the qualifications of the arbitrators include that they shall have expertise or experience in law, international trade, other matters covered by ACFTA, or resolution of disputes arising under (other) international trade agreements. In addition, the chair shall not be a national of any party nor have his/her usual place of residence in the territory of, nor may be employed by, any party to a dispute.57 The terms of reference of the arbitral tribunal is specified in Article 8, paragraph 2 as “To examine, in the light of the relevant provisions in the Framework Agreement, the matter referred to this arbitral tribunal by (name of party) … and to make finding, determinations and recommendations provided for in the Framework Agreement.” With this, the tribunal is granted the power to recommend the party complained against to bring measures inconsistent with ACFTA into conformity with provisions of the Agreement.58

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After deliberations of the case, the arbitral tribunal shall draft its report on the case, which is of course its judgment. A draft report should be released to the parties concerned for them to comment. The final report shall be released to the parties to the dispute by the arbitral tribunal within 120 days from the date of its composition. In case of urgency, the report should be released within sixty days. Although the deadlines can be extended, in no case should the period from the composition of an arbitral tribunal to the release of the final report exceed 180 days.59 The litmus test of the efficacy of any trade dispute resolution system is, of course, the implementation and enforcement of the decisions of the tribunal. Under ACFTA, if it is impractical to comply immediately with the recommendations and rulings of the arbitral tribunal, the respondent shall have a reasonable period of time to adjust its policies. The reasonable period of time should be mutually determined by the parties to the dispute, otherwise they should refer the matter to the original arbitration tribunal.60 If the recommendations and rulings of the tribunal are eventually not implemented within a reasonable period of time, the proceedings on compensation and suspension of concessions or benefits will be triggered. If the responding party fails to bring illegal measures into compliance with the recommendations of the arbitral tribunal, it shall enter into negotiations with the complaining party with a view to concluding a mutually satisfactory agreement on any compensatory adjustment. Absent of such an agreement which shall be reached within twenty days after receiving the request for negotiation, the complaining party may request the original arbitral tribunal to determine the appropriate level of any suspension of concessions or benefits conferred on the responding party. Although it is required by the DSM Agreement that the complaining party shall first seek to suspend concessions or benefits in the same sector or sectors affected by the illegal measures of the responding party, cross-sector retaliation is allowed under the Agreement. Namely, “the complaining party may suspend concessions or benefits in other sectors if it considers that it is not practicable or effective to suspend concessions or benefits in the same sector.”61 Relationship to Other Dispute Settlement Mechanisms A trade dispute arising under ACFTA is also likely to be covered by the WTO Agreements including the GATT, given that most signatories of ACFTA are WTO Members, and by the Asean Free Trade Agreement (AFTA), to which only China is not a party. With the signing of ACFTA, none of the contracting parties renounced their rights under the WTO and/or AFTA, both of which

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have their own dispute settlement procedures. Obviously, uncertainty will arise if the parties to a dispute cannot reach agreement as to which forum to select for resolving the dispute between them. The DSM Agreement under ACFTA does not exclude the right of the parties to have recourse to dispute resolution mechanisms of any other treaty to which they are parties.62 It, however, has a “rule of exclusion”. Presumably in order to avoid parallel proceedings, and above all, contradictory decisions, the DSM Agreement mandates that, once dispute settlement proceedings have been initiated under ACFTA or any other treaty to which the parties concerned are signatories, the forum chosen by the complaining party shall be used to the exclusion of any other for such a dispute.63 Interestingly, the DSM Agreement does not have a “single forum” requirement. Article 2, paragraph 7 of the Agreement implies that the parties to a dispute may expressly agree to the use of more than one dispute settlement forum in respect of a particular dispute. In contrast, under Chapter 20 of NAFTA, the parties should choose one forum to solve the dispute between them, be it the WTO or NAFTA.64 Allowing the parties to choose multiple forums may lead to a great deal of uncertainty, especially when the different tribunals render contradictory ruling regarding one dispute. Apart from the institutional aspect of the relationship to the WTO, it is more than likely that an ACFTA tribunal might have to borrow extensively the jurisprudence of GATT/WTO dispute settlement. This is because, first of all, with respect to dispute in international trade, the GATT/WTO has the richest body of jurisprudence. The norms, principles, and methods established by the dispute settlement system in its over fifty-year’s history, including even the reasoning and analytical approaches, can be applied, in many instances, in a dispute arising under ACFTA. Implication of the DSM Agreement Jackson65 observes that there are two techniques of modern diplomacy in trade relations: In broad perspective one can roughly divide the various techniques for the peaceful settlement of international disputes into two types: settlement by negotiation and agreement with reference (explicitly or implicitly) to relative power status the parties, or settlement by negotiation or decision with reference to norms or rules to which both parties have previously agreed.

Although all diplomacy is featured with a mixture of these two types of techniques, it can be argued that, to a large degree, “the history of civilization may be described as a gradual evolution from a power-oriented approach, in

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the state of nature, towards a rule-oriented approach.” Jackson further notes that, in addition to the generally perceived advantages of the rule-oriented approach, including “less reliance on power, and the temptation to exercise it or flex one’s muscles, which get out of hand”, “a fairer break for the smaller countries, or at least a perception of greater fairness”, and “the development of agreed procedures to achieve the necessary compromise”, there are special reasons for relying more on this approach in economic affairs. As the world becomes more economically interdependent, private citizens, realizing that their welfare is tremendously affected by government policies, would assert participation and representation in the processes of international economic policy. Jackson remarks: This makes international negotiations and bargaining increasingly difficult. However, if citizens are going to make their demands heard and influential, a “power-oriented” negotiating process (often requiring secrecy, and executive discretion so as to be able to formulate and implement the necessary compromises) becomes more difficult, if not impossible. Consequently, the only appropriate way to turn seems to be toward a rule-oriented system, whereby the various citizens, parliaments, executives and international organizations will all have their inputs, arriving tortuously to a rule — which, however, when established will enable business and other decentralized decision makers to rely upon the stability and predictability of governmental activity in relation to the rule.

Traditional Chinese perception of world order in East Asia, which was the “cultural jurisdiction” of the Chinese concept of “Tianxia”, was based on Sino-centrism and cultural supremacy.66 With the military, economic and cultural invasion of Western powers in the second half of the nineteenth century, the concepts of nation-state and national sovereign took root in China. The People’s Republic of China, since its establishment in 1949, has been extremely sensitive of its sovereignty. In the settlement of bilateral disputes, China, preferring informal over formal mechanisms, has been very cautious of utilizing international arbitration or judicial institutions. For instance, China has never agreed to the jurisdiction of the International Court of Justice. As for arbitration, China was vigorously against any type of arbitration before the mid-1980s.67 The significance of ACFTA lies in that it is China’s first foreign trade agreement in which it agrees to resolve bilateral and regional trade disputes through formal mechanisms. This represents a shift toward a rule-oriented approach, or legalism, from the assertation of absolute sovereignty and, to some extent, Sino-centrism, in China’s foreign trade relations.

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Smith68 observes that bilateral dispute settlement mechanisms present institutional options as a standard set that ranges from direct negotiation at one extreme to third-part adjudication at the other. Specifically, the level of legalism is determined by several features. The first is the existence of an explicit right to third-party review of complaints regarding the implementation of treaty obligations. Many trade agreements provide only for consultations and perhaps mediation or conciliation. The second issue is legally binding effect under international law of the rulings that result from the dispute settlement process. Although many agreements impose an international law obligation on the disputants to comply with rulings, such as panel reports or arbitral awards, others provide that the rulings have legal effect only after they have been officially adopted, “and perhaps substantially revised, by political representatives of the member governments acting through one of the pact’s governing institutions”. The third issue is about how the panel or arbitral tribunal is composed. In particular, in the event that the parties to the dispute cannot agree on the composition of the tribunal, whether a third, impartial party can be designated to appoint the remaining members. In the most legalist way, a standing tribunal of justices is established to rule collectively on disputes during extended terms of services. The next question concerns the standing of the parties to file complaints and obtain rulings. Most trade agreements allow only member states to initiate disputes, but many others grant locus standi to treaty organizations (such as a secretariat or commission), or even private individuals or firms, to file complaints. Finally, what remedies are available in case of treaty violation is also a factor affecting the level of legalism. Ideally, a legalist solution entails a direct enforcement effect of the rulings in domestic law, such as that of the judgment of European Court of Justice. In most trade pacts, a less legalistic solution is adopted, in which permission is given to the complaining parties to impose sanctions or take retaliatory measures against the responding party. Measured against the above measures, it is fair to characterize ACFTA as a trade agreement which has reached a certain degree — probably only a low level — of legalism. ACFTA provides independent third-party review of complaints. The members of the tribunal, if not agreed by the disputants, can be appointed by an independent third-party which is the director-general of the WTO in the case of ACFTA. It however, does not have a standing body for dispute resolution. There is no permanent secretariat or central commission for ACFTA, and private individuals and enterprises are not allowed to file complaints. Further, in case of treaty violation, in the most radical scenario,

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ACFTA allows for retaliatory sanctions, but does not grant domestic enforcement effect to rulings made by the dispute settlement process. THE LEGAL NATURE OF ACFTA ACFTA as an International Treaty If signed, ACFTA will be a treaty as a matter of international law. Article 2 of the Vienna Convention on the Law of Treaties of 1986 defines a “treaty” as “an international agreement concluded between states in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation”. Thus, to be a treaty, an agreement has also to be “an international agreement” which is “concluded between states”, “in written form”, and “governed by international law”. The phrase “governed by international law” entails an “intention to create obligations under international law” according to the International Law Commission’s Commentary.69 The Vienna Convention on the Law of Treaties between States and International Organizations or between International Organizations of 1986, in its Article 2:1(a), modifies this definition by recognizing treaty “between one or more States and one or more international organizations; or between international organizations”. As such, both states and international organizations can conclude treaties or agreements and thus create binding international legal obligations. Treaty-making Power of International Organizations The treaty-making power of an international organization is closely associated with whether it possesses objective international legal personality. As a leading text on international law observes: Whether an organization possesses personality in international law will hinge upon its constitutional status, its actual powers and practice. Significant factors in this context will include the capacity to enter into relations with states and other organizations and conclude treaties with them, and the status it has been given under municipal law. Such elements are known in international law as the indicia of personality.70

States, as the original and major subjects of international law, deprives their personality from the very nature and structure of the international system which recognizes independence (or sovereign) and equality as the fundamental characteristics of states.71 For international organization, their role in the world order centres on their possession of international legal personality as well as the scope of powers derived from this personality. The

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acquisition of personality of international organizations in the first instance depends primarily upon the terms of the instrument establishing the organization. “If states wish the organization to be endowed specifically with international personality, this will appear in the constituent treaty and will be determinative of the issue.”72 The International Legal Personality of ASEAN Popular view has it that ACFTA, or at least its Framework Agreement, is a bilateral agreement between ASEAN and China. This view however has to be called into question after a serious examination based on international law and ASEAN’s own legal and policy instruments. The assertion that ASEAN cannot be a party to an international agreement such as ACFTA is caused by ASEAN’s loose institutional structure and the unsettled question of ASEAN’s legal personality, as well as the institutional powers existed thereunder. Since ASEAN is an intergovernmental organization, it is largely up to its constituent instruments to determine its legal personality and powers. ASEAN was established by the ASEAN Declaration (hereafter known as the Declaration) reached by the five original Member States on 8 August 1967.73 Also known as the Bangkok Declaration, the ASEAN Declaration 1967 is actually the founding instrument establishing ASEAN as a regional international organization. The Declaration contains five major clauses, laying down some very general principles of cooperation. It has been argued that, although lacking in detail, the Declaration “goes beyond ‘a mere statement of intent for cooperation’, to enumerate the aims and purposes of the Association and to establish a machinery to carry out the aims set forth in the Declaration.”74 Arguably, the parties’ subsequent conducts, including the conclusion of a number of political accords for the gradual strengthening of ASEAN’s institutional character, are indicative of that ASEAN is an international institution with some power.75 However, none of the instruments gives explicit legal personality to ASEAN nor do they confer treaty-making power to the organization. As analysed above (that is, the ICJ’s analysis in Reparation), the legal personality and powers of an international institution do not necessarily have to come from its constituent instruments. Absent of a provision in the constituent instrument, these legal characteristics can also be evidenced by other agreements, established practices, direct or implicit intention of the members, or an understanding that they are indispensable for the fulfilment of the organization’s purposes.

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Rodolfo C. Severino, the formal Secretary-General of ASEAN, summarized the organization’s mission as follows: ASEAN’s founders in 1967 intended ASEAN to be an association of all the states of Southeast Asia cooperating voluntarily for the common good, with peace and economic, social and cultural development its primary purposes.76

However, he further noted that, to achieve these purpose does not entail the need for a strong ASEAN institution: [ASEAN] is not and was not meant to be a supranational entity acting independently of its members. It has no regional parliament or council of ministers with law-making powers, no power of enforcement, no judicial system.77

One commentator quite rightly observes the basic shortcomings suffered by the present ASEAN machinery and modus operandi:78 •

•

•

•

•

It lacks an integrated decision-making structure. ASEAN basically serves as a forum for talks and there is virtually no centre decision-making body in the organization. Application of the consensus method is applied to all issues and all levels, which has considerably reduced the effectiveness of intra-ASEAN cooperation. The principle of rotation, heavily emphasized in ASEAN, has had a debilitating effect on the role of the ASEAN Secretariat, which is largely marginalized by the system of national secretariats. The ASEAN structure reflects the dominant emphasis on national interests and national representation; in contrast, there is no provision for representation of the ASEAN “community interest”. ASEAN relies almost entirely on a policy regime and does not have a legal regime.

In short, ASEAN is deliberately designed to have a loose structure, which provides opportunities and room for behaviours that conform to the cultural environment in this part of the world, that is, “face saving” which is considered vital for regional solidarity and cohesion.79 More significantly, ASEAN was designed as not a sovereign body, but a regional grouping of sovereign nations. At this stage, ASEAN is more an instrument of cooperation than integration.80 The common desire of the member states here is to promote regional and national peace, progress and security, and these goals are perceived be better achieved by a social community, not a legal community.81 In conclusion, it is yet too early to decide that

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ASEAN has an independent, objective international legal personality and treaty-making power. Insofar as legal personality and powers of an international organization can also be acquired through practices and recognition, this cannot be applied to ACFTA as it has already been rebuffed by ASEAN’s external relations practices. In recent years, ASEAN has developed “dialogue” relations with major nation-states and regions, including China, Japan, Korea, India, EU, among others. Increasingly, foreign countries and regions have shown an interest in dealing with ASEAN as a collectivity.82 ASEAN, however, has not taken this opportunity to make use of the “recognition” principle in international law. Instead, it seems to be developing a “selective exercise of legal personality” practice. In recent years, for important agreements with foreign countries, ASEAN’s ten heads of states have affixed their signatures without representation of ASEAN as an organization. Examples in these regard include the three “framework” agreements on comprehensive economic cooperation/partnership with China, India and Japan, as well as the Instruments of Extension to the Treaty of Amity and Cooperation in Southeast Asia which admit the accession of China, Japan and India, respectively, to the Treaty of Amity and Cooperation in Southeast Asia. In contrast, agreements concerning issues in a special area — which is also probably considered less important — can be signed by the Secretary-General of ASEAN. For example, the Memorandum of Understanding between the Association of Southeast Asian Nations (ASEAN) Secretariat and the Ministry of Agriculture of the People’s Republic of China, concluded on 2 November 2002, was signed by ASEAN’s Secretary-General Rodolfo C. Severino and the Vice Minister of Agriculture Qi Jingfa. A more representative agreement is the Memorandum of Understanding between the Governments of the Member Countries of the Association of Southeast Asian Nations (ASEAN) and the Government of the People’s Republic of China on Cooperation in the Field of Non-Traditional Security Issues, which was signed by ASEAN’s incumbent Secretary-General Ong Keng Yong and the representative of China on 10 January 2004. This “selective personality” practice, as I call it, is not yet sufficient to establish that ASEAN as an institution has international legal personality and treaty-making powers. One can easily see from the title of the two MOUs mentioned above that the ASEAN Secretary-General’s representation was based more likely on an ad hoc basis rather than a regular exercise of authority. Furthermore, assuming “selective personality” can be established through this practice, it actually strengthens the view that those “important agreement” between ASEAN states and foreign countries, including the Framework

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Agreements with China, India and Japan, are definitely not agreements between those individual countries and ASEAN as a collectivity. In any case, the ACFTA Framework Agreement is not a bilateral agreement between China and ASEAN as an independent entity. The Legal Nature of ACFTA It is yet too early to tell the nature of this agreement as it is in the negotiating process. Its current form looks more like a multilateral agreement, with its parties being China and individual ASEAN countries. However, a more precise — and thus more acid — view would be that it is largely a collection or combination of bilateral agreements between China and individual ASEAN members. With certain exceptions, this view is confirmed by the language and rights/obligation structure of the Framework Agreement. The provisions in the Framework Agreement and its various Annexes support this view: They show that China’s obligations — for example, those under the Early Harvest Programme — are towards individual countries — and vice versa, although sometimes “ASEAN member states” as a whole was referred for purpose of convenience. This is first evidenced by the language of the Framework Agreement. In the preamble of the Framework Agreement, the parties declared that the Framework Agreement was signed by WE, the Heads of Government/State of Brunei Darussalam, the Kingdom of Cambodia, the Republic of Indonesia, the Lao People’s Democratic Republic (“Lao PDR”), Malaysia, the Union of Myanmar, the Republic of the Philippines, the Republic of Singapore, the Kingdom of Thailand and the Socialist Republic of Viet Nam, Member States of the Association of South East Asian Nations (collectively, “ASEAN” or “ASEAN Member States”, or individually, “ASEAN Member State”), and the People’s Republic of China (“China”) …83

It is noted that all the names of the ten member states of ASEAN as well as the name of China appear in the Framework Agreement as the contracting parties. Although it is also stated in the preamble that the ten Southeast Asian states should be “collectively” called “ASEAN” or “ASEAN Member States”, or “individually”, “ASEAN Member State”, in the end of the Framework, only the Heads of the eleven nation-states (including ASEAN-10 and China) affixed their signatures to the agreement, while no ASEAN’s own representative was called to sign the Framework Agreement. Paragraph 3 of the preamble, stating the parties’ desire to adopt a Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China, interprets the phrase

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“ASEAN and China” as “collectively, ‘the Parties’, or individually referring to an ASEAN member state or to China as a ‘Party’ ”.84 All these expressions, with little doubt, explicate that the contracting parties’ intention to make the eleven sovereign nations parties to the Framework Agreement. The core of the Framework Agreement is its Article 6 that prescribes the Early Harvest Programme (EHP). Unlike other provisions which aim at establishing a framework for conducting negotiations, Article 6 is a provision concerning substantive rights and obligations. In international law, it is considered as imposing binding obligations upon the contracting parties. It allows ASEAN members states to export to China at preferential tariff rate for all the goods covered by Chapter 1–8 of the Harmonized System. China’s unilateral concessions to the member states of ASEAN are embodied in the stipulation that ASEAN countries are allowed to “carve out” those products for which they have difficulties to grant market access. In short, every ASEAN country can put forward an Exclusion List for agricultural products, denying market access to imports. In addition, China agreed to grant concessions on 130 categories of manufactured goods to individual ASEAN countries, provided that those countries can put forward an “inclusion” list of products. For goods included in the list, China will extend special and preferential tariff treatment to the ASEAN country. The ASEAN country concerned has to render some concessions to China, which however will be offered on less than full reciprocity basis.85 In terms of mutual grant of preferential benefits, the Framework Agreement initially followed a “multilateralism” approach, which once made the Framework Agreement like a multilateral agreement. The essence was that, under the EHP, for agricultural products, except for those placed in the Exclusion List as prescribed in Article 6(a)(i) of the Framework Agreement, each ASEAN country should not only extend preferential treatment to China, but also give the same privilege to other ASEAN Members. As the Philippines was eventually not able to put forward an exclusion list, Malaysia had managed to secure a clause allowing it to offer EHP benefits only to China. This practice was later on incorporated in the Framework Agreement through the 2003 Protocol, changing effectively the direction of ACFTA in terms of agricultural products from multilateralism to bilateralism. The 2003 Protocol to amend the Framework Agreement consolidated this practice by adding the following amendments, among others, to Article 6(3)(b)(i) of the Framework Agreement: (1) A Party may accelerate its tariff reduction and/or elimination under this Article in relation to the rest of the parties on a unilateral basis;

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(2) One or more ASEAN Member States may also conduct negotiations and enter into a bilateral or plurilateral acceleration arrangement with China to accelerate their tariff reduction and/or elimination under this Article.

Half-hearted multilateralism is also embodied in Article 6(a)(iii) of the Framework Agreement, which prescribes that: The specific products set out in Annex 2 of this Agreement shall be covered by the Early Harvest Programme and the tariff concessions shall apply only to the parties indicated in Annex 2. These parties must have extended the tariff concessions on these products to each others.

So Framework Agreementr, only Indonesia, Malaysia and Thailand have submitted their “inclusion list” under Article 6(a)(iii). These countries, plus Brunei and Singapore who are allowed to “be parties to any arrangements that have been agreed on or will be agreed to between China and any other Party pursuant to Article 6(a)(iii)”,86 constitute only half of ASEAN states who can participate in the EHP. The Framework Agreement only set up principles for conducting negotiations toward the final FTA, the ACFTA. The nature of ACFTA itself is thus yet undisclosed. However, the essential question in this regard actually depends on the institutional characteristics of ASEAN. If ASEAN continues to be an organization without legal personality, which can be established either explicitly through legal provisions in the constituent instruments, or implicitly through practice, ACFTA cannot be a bilateral FTA deal between ASEAN as a group and China. The Implications of ACFTA being not a Bilateral Agreement between ASEAN as an Entity and China The recognition that ACFTA is not a bilateral agreement between China and ASEAN as an entity will have impact on a number of significant issues, including the organization’s and the member states’ respective responsibility and liability to a third state (in this case China), especially when disputes arise out the agreement. International legal personality brings forth responsibility and liability. However, it is still an unsolved international law issue — whether a treaty concluded by an international organization has binding effect upon the member states of the organization. In the negotiating process of the 1986 Vienna Convention on the Law of Treaties between States and International Organizations or between International Organizations, the International Law

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Commission put forward a draft clause on this issue, providing that member states of an international organization shall be bound by a treaty if (1) the states members have agreed to be bound by virtue of the constituent instrument of the organization; and (2) the assent of the states members to be bound has been duly brought to the knowledge of the negotiating states and negotiating organizations.87 Such arrangement has particular value to international trade deals, such as a tariff agreement concluded by a close regional organization such as the European Community, and another state/organization. As one commentator observes, “such agreement would be of little value if they were not to be immediately binding on member states.”88 However, despite the strong support from the European Community, the draft clause was rejected at the conference adopting the 1986 convention, and was replaced by Article 74(3) of the convention which stipulates: The provisions of the present Convention shall not prejudge any question that may arise in regard to the establishment of obligations and rights for states members of an international organization under a treaty to which that organization is a party.

It has now become a general principle of international law that the question of the legal effect of a treaty concluded by an international organization on its member states should be “resolved on the basis of the consent of the states concerned in the specific circumstances and on a case-by-case basis”.89 The European Community, having objective personality and implementing common policy in social, commercial and other arenas, has a closer organizational structure than any other major international institutions in the world. On the international plane, the EC often acts as representatives of member states with explicitly authorized powers from its constituent instrument. The EC is an independent member of the WTO, the major international economic institution in the world. It has become a widely recognized state practice that, in the WTO’s dispute settlement system, the EC acts as one party, bearing rights and obligations collectively.90 ASEAN has not been like the EC. It is an international organization with ambiguous legal personality. It does not have a central decision-making structure nor enforcement regime. It is more like a forum for political dialogue. In all the formal agreements with outside countries, it is all the sovereign states members rather than the organization itself that present and sign. Accordingly, it appeals directly to individual members of ASEAN to implement the treaty obligations. The language and rights and obligations structure of the ACFTA Framework Agreement further conform this: The rights and obligations of the treaty are directly borne by individual members;

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the rights and obligations are directly between individual ASEAN members and China or, as the case may be, between individual ASEAN members. This will have a profound implication on enforcement of the obligations and the dispute settlement relating to ACFTA. The parties, namely the eleven nationstates, are directly responsible to each other in terms of performing the obligations. In this sense, ACFTA is more like the WTO which is a multilateral agreement but is indeed bilateral in nature. ACFTA, however, will probably contains mainly the bilateral obligations and rights between individual ASEAN members and China, with something on ASEAN nations’ obligations and rights to each other. Among ASEAN countries, if the reciprocal benefits offered by ACFTA are no betters than those in the Asean Free Trade Agreement (AFTA), ACFTA will be of little value to them in terms of the relationships among ASEAN countries. This bilateral nature of the obligations is reflected in the dispute settlement mechanism. Basically it will be a mechanism for resolving disputes between China and the concerned individual ASEAN countries, and disputes between two or more ASEAN nations, if the obligations between them are breached. However, in no case can be there a dispute resolution system between China and ASEAN as a collectivity. For China, the trouble will be that it will have to pursue every ASEAN member to enforce the trade privileges accorded to it. ASEAN as an organization will offer political, goodwill help, but will not give legal assistance by commanding the individual country concerned to perform its obligations. Given its current structure, ASEAN is not in the legal position to call upon the responsible member to remedy its default. ASEAN, the institution, will however bear no responsibility and liability towards China. On the part of ASEAN, as an organization which is not a party to ACFTA, it does not have the right to pressure China to enforce any ACFTA obligation. CONCLUDING REMARKS This chapter examines the various legal issues concerning ACFTA, including the tariff reduction and elimination arrangements, trade remedy measures including anti-dumping, countervailing duties and safeguards, the rules of origin, the dispute resolution mechanisms, and the legal nature of ACFTA which may have impact on the understanding and implementation of ACFTA rights and obligations by the contracting parties. The examination demonstrates that the Framework Agreement, and the several agreements concluded subsequently, represent a landmark achievement in the China-ASEAN economic relationship. The general theme of this

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relationship can be characterized as liberalization and legalization. The WTOplus tariff concessions in ACFTA, fixed by legal obligations, will increase tremendously the trade between China and ASEAN countries, and promote regional economic integration in East Asia. Multilateralism and regionalism are both important for trade liberalization and growth. Further, both multilateral and bilateral agreements can be beneficial if designed appropriately. The chapter observes that special attention should be drawn the rules of origin in ACFTA. Regional and bilateral trade agreements are proliferating in Asia, which might lead to the “Asian noodle bowl effect” highlighted by officials of the Asian Development Bank. It is important to harmonize the rules of origin in Asian FTAs. In this regard, ACFTA should endeavour to adopt identical or similar rules of origin with other FTAs. Further, in order to achieve substantial liberalization, it is recommended in this chapter that the contracting parties of ACFTA should give up the use of anti-dumping and anti-subsidy actions, while retaining the use of safeguards as an escape. In the case of dispute resolution, it is advised that ACFTA should move toward more legalism in its dispute settlement system. The title of ACFTA connotes that it is a bilateral accord. This, however, is a misunderstanding of the legal nature of this agreement. Given the nonexistence of an international legal personality of ASEAN, as well as the participation in ACFTA by individual countries as sovereign states, ACFTA is actually a regional agreement with eleven parties. This legal nature will have a profound implication on the implementation of ACFTA obligations. NOTES 1. By early 2006, fifteen FTAs had been signed in Asia since 1998, with twenty more being negotiated and at least sixteen proposed. See Pilling 2006. 2. Wang, Tieya, Guojifa [International Law]. Beijing: Falü Chuban [Law Press] 2004, p. 124. The text of the Framework Agreement is available at the ASEAN Secretariat’s official website at (last visited 31 March 2006). 3. The text of the Protocol is available at the ASEAN Secretariat’s official website at (last visited 31 March 2006). 4. The Framework Agreement, supra note 2, art. 1(b). 5. Ibid., art. 2. 6. The text of the TIG Agreement is available at the ASEAN Secretariat’s official website at (last visited 31 March 2006). 7. The text of the DSM Agreement is available at the ASEAN Secretariat’s official website at (last visited 31 March 2006).

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8. TIG Agreement, art. 3. 9. Annex 3 of the Framework Agreement, Part B. A slightly different schedule is used for the newer ASEAN members. 10. Annex 2 of the Framework Agreement. 11. “ASEAN, China Launch First Stage of Free-Trade Plan”, AFP, 7 October 2003 (on file). 12. China, however, has excluded from EHP some agricultural products such as rice and palm oil, which are said to be major exports from ASEAN countries. These products are to be negotiated in the coming years. 13. For instance, Singapore exporters are entitled to enjoy tariff reduction for additional seventy-five industrial goods, and Malaysia for eighty-seven industrial goods. 14. FA, art. 9. Currently Vietnam and the Lao PDR are not WTO members. 15. “Malaysia Early Harvest Clause a Way out for RP”, Manila Times, 7 April 2003, available at . 16. The Protocol, supra note 35, art. 2. 17. Ibid. Only Brunei and Singapore will, subject to conformity with specified requirements, automatically become parties to any arrangements that have been agreed on or will be agreed to between China and any other ASEAN state under the EHP. See ibid., Annex 2. Singapore has already become a Party to the ChinaThailand EHP arrangement. 18. TIG Agreement, Annex 1, supra note 6. 19. Anna Maria Samsudin, “China, ASEAN to Lower Tariffs from July 20”, New Straits Times (Malaysia), p. 21, 3 July 2005. 20. Ibid. See also the explanatory notes of the Singapore government in its official website on FTAs at (last visited 5 April 2006). 21. TIG Agreement, Annex 2, supra note 6. 22. Ibid. 23. Hufbauer, Gary Clyde and Yee Wong, “Prospects for Regional Free Trade in Asia”, Working Paper 05-12, Institute for International Economics, Washington D.C., 2005. Available at , p. 7. 24. See information at the website of the Ministry of International Trade and Industry of Malaysia at (last visited 5 April 2006). 25. See statistics at the website of the Ministry of Commerce of China at (last visited 5 April 2006). 26. Acharya, Rohini, and Michael Daly. 2004. “Selected Issues Concerning the Multilateral Trading System”. Discussion Paper no. 7, The World Trade Organization, p. 5. 27. Ibid., p. 12. 28. The TIG Agreement requires that non-WTO members of ASEAN shall phase out their quantitative restrictions three years (Vietnam: four years) from the date of entry

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30. 31. 32. 33. 34.

35.

36. 37. 38. 39. 40. 41. 42.

43. 44. 45. 46. 47. 48. 49. 50.

143

into force of this Agreement or in accordance with their accession commitments to the WTO, whichever is earlier. See footnote 2 of the TIG Agreement. Bhagawati, Jagdish, and Arvind Panagariya, “Preferential Trading Areas and Multilateralism — Strangers, Friends, or Foes?”, in Trading Blocs: Alternative Approaches to Analyzing Preferential Trade Agreement, edited by Jagdish Bhagwati et al. (Cambridge, Massachusetts: The MIT Press, 1999, p. 77). Daniel Buenas, “Downside of FTAs Highlighted”. Business Times, 31 March 2006, p. 12. David Pilling, “ADB Chief Hits out at ‘Noodle Bowl’ Trade”, Financial Times (Asia), 2 February 2006, p. 1. General Agreement on Tariffs and Trade, art. VI: 1. WTO Agreement on Subsidies and Countervailing Duties. Trebilcock, Michael J., and Thomas M. Boddez, “The Case for Liberalizing North American Trade Remedy Laws”, Minnesota Journal of Global Trade 4, no. 1 (1995): 1–41. Article 7 of the TIG Agreements provides that, “the parties hereby agree and reaffirm their commitments to abide by the provisions of the WTO disciplines on, among others … subsidies and countervailing measures, anti-dumping measures ….” It further states that “the provisions of the WTO Multilateral Agreements on Trade in goods, which are not specifically mentioned in or modified by this Agreement, shall apply, mutatis mutandis, to this Agreement unless the context otherwise requires.” TIG Agreement, art. 8. TIG Agreement, art. 9.2. WTO Agreement on Safeguards, art. 5. TIG Agreement, art. 9.6. WTO Safeguard Agreement, arts. 7.1, and 7.2. WTO Safeguard Agreement, art. 9.2. Trebilcock and Boddez, op. cit., pp. 13–14; Mankiw, N. Gregory and Phillip L. Swagel, “Antidumping: The Third Rail of Trade Policy”, Foreign Affairs (December 2005). Trebilcock and Boddez, op. cit., p. 16. Ibid., p. 17. Mankiw and Swagel, op. cit. Trebilcock, Michael J., and Robert Howse, Regulation of International Trade (London: Routledge), p. 282. Ibid., p. 283. WTO (World Trade Organization), World Trade Report 2003 (Geneva: World Trade Organization, 2003), p. 179. Jackson, John H., The World Trading System, 2nd ed. (Cambridge, Massachusetts: The MIT Press, 1997), p. 176. Barfield, Claude, “Anti-dumping Reform: Time to Go Back to Basics”, World Economy 28, no. 5 (2005): 731.

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51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65.

Ibid. DSM Agreement, art. 4.4(a) and 4.4(b). Ibid., art. 4.3. Ibid., art. 4.7. Ibid., art. 5. Ibid., art. 7. Ibid., art. 7.6. Ibid., art. 8.1. Ibid., art. 9.8. Ibid., art. 12.2. Ibid., art. 13. Ibid., art. 2.5. Ibid., art. 2.6. North American Free Trade Agreement, Chapter 20, art. 2005. Jackson, John H., The World Trading System, 2nd ed. (Cambridge, Massachusetts: The MIT Press, 1997), p. 109. Li, Zhaojie (James Li), “Traditional Chinese World Order”, Chinese Journal of International Law 1 (2002): 25. Wang, Jiangyu, “China’s Regional Trade Agreements: The Law, Geopolitics, and Impact on the Multilateral Trading System”, Singapore Journal of Legal Studies (2004): 445. Smith, James McCall, “The Politics of Dispute Settlement Design: Explaining Legalism in Regional Trade Pacts”, International Organization 54 no. 1 (2000): 139–42. See Fourth Report on the Law of Treaties, Year Book of the International Law Commission (ILC) II, 1965, p. 12. Shaw, Malcolm N., International Law, 5th ed. (Cambridge: Cambridge University Press, 2003), p. 241. Ibid., pp. 189–93, 242. Ibid., pp. 1187–88. It is however important to note that, although the constituent document is without doubt the most important source of treaty-making power of an international organization, as a principle of international law, the absence of explicit provisions conferring legal personalities and treaty-making power does not necessarily lead to a lack of capacity in this regard. In many cases, the legal personality of an international organization may be inferred from the powers or purposes of the organization and its practice. See “Reparation for Injuries Suffered in the Services of the United Nations Case”, Advisory Opinion, ICJ Reports, 1949. The legal text of the ASEAN Declaration 1967 is available online at . The five states are, respectively, Indonesia, Malaysia, Philippines, Singapore and Thailand. Davidson, Paul J., The Evolving Legal Framework for Economic Cooperation (Singapore: Times Academic Press, 2002), p. 34.

66. 67.

68.

69. 70. 71. 72.

73.

74.

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75. Major political accords after the ASEAN Declaration 1967 includes the Zone of Peace, Freedom and Neutrality Declaration, Kular Lumpur, 27 November 1971; Declaration of ASEAN Accord, Bali, 24 February 1976; Treaty of Amity and Cooperation in Southeast Asia, Bali, 24 February 1976; ASEAN Declaration on the South China Sea, Manila, 22 July 1922; Treaty on the Southeast Asia Nuclear Weapon-Free Zone, Bangkok, 15 December 1997; ASEAN Vision 2020I, Kuala Lumpur, 15 December 1997; and Declaration of ASEAN Accord II, Bali, 7 October 2003. 76. Severino, Rodolfo C., “Asia Policy Lecture: What ASEAN is and What It Stands for”, Secretary-General of ASEAN, at The Research Institute for Asia and the Pacific, University of Sydney, Australia, 22 October 1998, transcript available online at (visited 10 November 2004). 77. Ibid. 78. Alagappa, op. cit., pp. 22–24. 79. Ibid., p. 22. 80. Davidson, op. cit., p. 29. 81. Ibid. 82. Ibid., p. 37. 83. ACFTA Framework Agreement, the Preamble, para. 1. 84. ACFTA Framework Agreement, the Preamble, para. 3. 85. The lists of goods put forward by ASEAN countries are contained in Annex 2 of the Framework Agreement. 86. Annex 2 of the Framework Agreement. 87. Shaw, Malcolm N., International Law, 5th ed. (Cambridge: Cambridge University Press, 2003), p. 859. 88. Annex 2 of the Framework Agreement. 89. Shaw, op. cit., p. 860. 90. See for example, WTO Appellate Body report, European Communities — Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, 9 September 1997.

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8

ASEAN-China Economic Relations: Moving Towards Services Chang Chiou Yi

INTRODUCTION A discernable move towards greater services trade and investment on a global scale has been detected in the past decade. Increasingly, ASEAN1 and China are beginning to recognize the pivotal role that services could play. The ASEAN Framework Agreement on Services (AFAS) and China’s commitments under the General Agreements on Trade in Services (GATS) are examples of the efforts being made to liberalize and promote the services trade and investment in this regard. How would these developments bear out? What progress has been made on services liberalization under the AFAS, and in particular, China’s GATS commitments? What is the outlook for ASEAN-China’s services trade and investment, and where are the key areas for cooperation? These are some questions the chapter seeks to shed light on. Admittedly, given the wide-ranging nature of the study and nascent developments to date, there are no easy answers. What this chapter aims to do is thus to work towards a more comprehensive understanding of ASEAN and China’s move towards services, which has hitherto been lacking, so as to serve as a practical starting point for further research on this increasingly vital subject.

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The chapter begins with an assessment of the global trend in services trade and investment. This is followed by an examination of the growing focus on services within ASEAN and China. Developments in services liberalization under the AFAS and in particular, progress on China’s commitments under the GATS would be assessed. The chapter next explores the potential for ASEAN-China services trade and highlights selected key ASEAN-China service deals before concluding. GLOBAL TREND IN SERVICE TRADE “A service is traded when the supplier and the customer are from different countries, regardless of the location of the transaction” — The World Trade Organization

According to the GATS, trade in services can be classified under four modes: 1) cross border services, which are independent of supplier or consumer, 2) consumption abroad, where the consumer of the services is non-resident in the country where the services is consumed, 3) commercial, where the supplier of the service is an affiliate or branch of a foreign supplier, and 4) movement of natural persons, where the supplier is a non-resident of the country in which he is working on a temporary basis. Broadly speaking, telecommunications, postal and e-banking tend to fall under mode 1, while travel and training of foreign students, local branches of multinational companies such as banks; and professionals, construction workers and domestic helpers; would fall under modes 2, 3 and 4, respectively. Marked difficulties lie with measuring services trade under these four modes. Notably, current statistical measures under the IMF Balance of Payments (BOP) Statistics, the only source of global statistics on trade in services, do not match the coverage nor allow for the modal allocation of these transactions. This problem has been fully recognized with the interagency publication of the Manual on Statistics of International Trade Statistics in 2002,2 which recommended the extension of the usual BOP definitions to include foreign affiliate trade in services (FATS) statistics so as to match mode 3 services, as well as to provide employment data to match mode 4 services. To date, statistical deficiencies and fragmentation of services remain key issues that have yet to be resolved.3 Nevertheless, within the four modes of services trade, it is useful to note that commercial presence (mode 3) and cross-border (mode 1) services make up an estimated 85 per cent of the total trade in services in terms of

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importance4 and that significantly, these two modes are on the rise, as measured through foreign direct investment (FDI) statistics, and in particular, cross-border merger and acquisition (M&A) activities. This phenomenon is partially attributed to globalization and deregulation trends, as multinational firms take advantage of attractive incentives in host countries, lowered barriers in once protected service sectors, and local firms’ experiences and networks with host markets and governments, in their search for market opportunities and profit worldwide. Notably, in 2003 alone, 56 cross-border M&A deals, each worth over US$1 billion were concluded. Of these, 18 deals were in services, namely, financial services, telecommunications and television services. In terms of value, these deals make up a considerable 32 per cent of the total value of the deals.5 Available M&A sales and purchases data also paints a convincing picture of the growing focus on services. According to the UNCTAD, services had been occupying an increasingly dominant position of the world’s total M&A sales and purchases between 1987 and 2003, with services M&A sales making up 59.3 per cent of all deals, and services M&A purchases similarly at a high 64 per cent of total deals, in 2003.6 Notably, the lion’s share of the increase in cross-border M&A sales in services went to Northeast and Southeast Asia.7 In fact, as Figure 8.1 demonstrates, between 1990 and 2002, services Figure 8.1 Sectoral Distribution of FDI Inward Stock

Share of total (%)

70 60 50 services

40

manufacturing

30

primary

20 10 0 1990 2002 1990 2002 1990 2002 World

Developed Developing Countries countries

Source: UNCTAD: World Investment Report 2004: The Shift Towards Services.

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have edged up consistently to occupy a dominant position in the overall FDI stocks of both developed and developing countries. This growing interest in services is further reinforced by the World Trade Organization (WTO), which states that 2004 had seen world commercial services in fields such as transportation, travel and banking, surpassing the US$2 trillion mark for the first time.8 In contrast to the dominance of M&A in services between developed countries prior to 1990 also, 1990 onwards has persistently seen an increase in services M&A activities between developing countries. Between 1987 and 2003 for example, intra-developing countries M&A sales and purchases rose from a meager 222 million to hit a record 13,789 million in 2003.9 This phenomenal growth of intra-developing countries’ M&A activities in services speaks volumes of the growing opportunities for services trade and investment among developing nations. Against the backdrop of the growing potential in services trade and investment, particularly that between developing countries, the following section shall assess the role of services within ASEAN and China. ASEAN AND CHINA: PIVOTING TOWARDS SERVICES It is significant that ASEAN and China have seen an upsurge in activities on the services trade front. To illustrate, by BOP statistics alone, latest data shows that ASEAN’s services exports grew at a healthy 8 per cent annually between 2000 and 2005, with services imports growing at an equally strong 9 per cent in the same period. More significantly, in the same period, China’s export of services saw a remarkable average annual 22 per cent growth, second only to India globally, while import of services grew no less significantly by 18 per cent annually. Significantly in 2003, China’s export of services rose by an astonishing 59 per cent.10 These figures serve to reflect the growing importance and dependency on services in both ASEAN and China. THE ROLE OF SERVICES IN ASEAN Services have taken on an increasingly important role in ASEAN. Faced with exacerbating competitive pressures on the world merchandise trade front, particularly with the accession of China to the World Trade Organization (WTO) in 2001, ASEAN members have stirred into introducing a gamut of measures aimed at improving its domestic investment climate and regaining competitiveness on various fronts. In recognition of the potential in the services trade, and in particular, to provide a hedge against the competitive

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pressure on the merchandise goods front therefore, greater efforts have been made by ASEAN to facilitate the services trade and investment. Indeed, it can be seen that services play a critical role in several of the key initiatives that ASEAN has adopted. Notably, within moves to create an ASEAN Economic Community (AEC) with a 500 million market by 2020; allowing for free movement of goods, services, investment and labour, eleven priority sectors have been identified for accelerated implementation under an ASEAN-minus-X approach.11 Significantly, four priority sectors in services have been targetted. They are air travel, tourism, e-ASEAN and healthcare. At the same time, while ASEAN members have sought to forge greater economic relations and opportunities through a multi-pronged approach with the inking of regional and bilateral FTAs and economic partnership agreements, efforts have also been made to include services and investment provisions. Specifically, the flagship ASEAN-China Free Trade Area (ACFTA)12 was arguably accepted by ASEAN with the objectives of hedging the negative competitive pressures while gaining opportunities to ride the waves of China’s development. Although services negotiations under ACFTA are still ongoing and any developments thus likely to be nascent, ACFTA, critical to say, was conducted with a “GATS-plus”13 approach in mind. Undoubtedly, the success of the various initiatives, in particular, that of the AEC, hinge upon a combination of serious progress on the trade, services and investment fronts, conditions for which were already encapsulated to a large degree under the ASEAN Free Trade Agreement (1992); ASEAN Framework Agreement on Services (AFAS) (1995) and the ASEAN Investment Area (AIA) (1995) initiatives. Given the already substantial progress in tariff reductions, there is hence mounting agreement within ASEAN that services would now come to play a “pivotal role in ASEAN’s economic strategy and competitiveness” both domestically and with third parties.14 In view of the growing emphasis on services, the following section shall provide the reader with a brief update on developments under the AFAS. The ASEAN Framework Agreement on Services (AFAS) In recognition of the growing importance of services, ASEAN has set out to enhance cooperation and efficiency through the improvement of market access, as well as the diversification and facilitation of services suppliers, both within ASEAN and without. This led to the signing of the AFAS during the Fifth ASEAN summit on 15 December 1995 which granted national treatment and expanded services liberalization beyond the scope of the GATS, on a “GATS plus” basis to all members. To date, four packages of commitments

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have been finalized.15 A list of recommended commitments is provided in Table 8.1 below. As Table 8.1 indicates, the rounds of negotiations under the AFAS have thus far involved seven service sectors. Critics however have pointed to the weak implementation and the unremarkable impact on the services trade.16 This is particularly so given the difficulties of negotiations among the ten member countries, many of which are in a disparate stage of development. As set out in the previous section however, there is a palpable urgency within ASEAN to improve its services and investment climate. Since the third round of negotiation was launched in 2001 therefore, one could see some changes in the way ASEAN has approached the AFAS. For example, a modified common sub-sector approach, whereby a particular sub-sector would be identified as a common sub-sector as long as three or more member countries make commitments to that sector under GATS or AFAS, have been introduced.17 Furthermore, Mutual Recognition Arrangements (MRAs) to facilitate the movement of professional service suppliers with signatory member

Table 8.1 Sector Commitments under the ASEAN Framework Agreement in Services Air transport

Sales and marketing of air transport services, computer reservation, aircraft repair, maintenance, etc.

Business services

IT, accounting, auditing, legal, engineering, architecture, market research, etc.

Construction

Construction of commercial buildings, civil engineering, installation works, etc.

Financial services

Banking, insurance, securities and broking, financial advisory, consumer finance, etc.

Maritime transport

International passenger and freight services, storage and warehousing

Telecommunications

Public telephone services, mobile phone services, business network services, data and message transmission, etc.

Tourism

Hotel and lodging services, tour operator, travel agency, etc.

Source: ASEAN Secretariat, .

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countries have been introduced more recently on an ASEAN-minus-X basis; whereby two or more member countries could embark on negotiations and others join in when they are ready later on. Completion of MRAs in the fields of accountancy, tourism and engineering, to name a few, are expected by 2008, with plans to establish a “Professional Exchange” also in the pipeline.18 Critically, it is hoped that the experience gained and measures adopted under the AFAS might come in of use in future negotiations in services with other entities. Granted that service integration and liberalization within ASEAN still have some way to go, the focus shall now turn to China, and in particular, China’s services liberalization under its GATS commitments. Notably, it is through an updated and comprehensive understanding of the market access opportunities under China’s GATS commitments, that more concrete opportunity for ASEANChina services trade and investment could be identified. THE ROLE OF SERVICES IN CHINA At the same time, as China accelerates into the third decade of widening market access, since its first forays from its open-door policy in 1979, services has also taken on a vital role. That China had committed to substantive services liberalization under the GATS in various fields more extensively than most developing countries19 testifies to its willingness and urgency in upgrading and reforming the services sector. This is in recognition of the need to meet the vast infrastructure demands of the vast domestic production networks, create employment for its urbanizing population of 1.3 billion, attract further foreign investment, gain expertise and knowledge transfer, as well as advance economic opportunities with the outside world. Notably, despite jumping ranks in economic competitiveness in the World Competitive Yearbook 2006 to nineteenth position from thirty-first in 2005, the International Institute for Management Development (IMD) has singled out progression to higher value activities, especially services, as a most necessary albeit challenging move.20 The following section shall thereby turn the spotlight on the progress seen thus far in China’s commitments to the GATS. China WTO Commitments 11 December 2004 marks the third anniversary of China’s WTO accession and with it, the promises of the fulfilment of several commitments set forth in the Schedule of Specific Commitments, under the GATS.

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The GATS in itself is made up of two key components, namely, a framework of general rules that facilitates market access through the removal of restrictions such as geographical and foreign ownership restrictions, as well as the granting of national treatments to sectors of foreign trading partners, with whom a “national schedule” listing each country commitments has been negotiated. Underlying GATS is the key principle of non-discrimination21 that would require foreign suppliers to be treated equally as per local supplier in areas where market access had been granted. Given that a complete assessment of China’s commitments progress may be hampered by incomplete data and implementation ambiguities, it is nevertheless hoped that Table 8.2 would present a critical update on the progress and developments seen thus far under China’s commitments to the GATS. Focus will be placed on the fields of banking, insurance, securities, telecommunications, tourism and freight transport, respectively. As the progress report indicates, substantial progress can be seen in China’s services liberalization under GATS, with several commitments fulfilled ahead of schedule. Tourism and banking in particular has made substantive progress, with liberalization of the latter accelerating since WTO accession, on the back of close to two decades of gradual opening up.22 Liberalization in the insurance and securities markets has tended to be more cautious given the relatively immature market reflected by low penetration rates, lack of sophisticated products and rather differing standards. Nevertheless, in view of the mammoth 1.3 billion consumers market as well as the flood of companies setting up operations in China, these sectors are slated to see rapid rise in foreign involvement. In fact, barely two years following accession, total assets of foreign invested insurance companies were growing at around 50 per cent, year on year.23 Freight transportation by road, rail and waterways has also made significant inroads as foreign investors capitalize on their management and technical expertise to provide logistics and distribution services to the pulsating Chinese market. Telecommunications remain one of the most difficult areas in opening up to market access, given greater protectionism and regulatory discrepancies on China’s end. Despite the breakthroughs, concerns remain particularly in the fields of implementation and deliverance, given the enormous tasks that the legislative and regulatory authorities are faced with, as well as possible lapses in compliance with the State Council regulations by the various agencies and ministries. Nevertheless, there are no doubts that this is a most opportune time for foreign investment and trade into the service fields mapped out above.

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Table 8.2 Progress Report on China’s Commitments to the GATS

Banking Commitments

Progress

1) Geographical restrictions on foreign exchange business to be removed upon accession. Staggered removal for local currency business 4 cities per year; restrictions in Shanghai, Shenzhen, Tianjin and Dalian to be eliminated upon accession; those in Guangzhou, Zhuhai, Qingdao, Nanjing and Wuhan to be lifted within 1 year: those in Jinan, Fuzhou, Chengdu and Chongqing to be lifted within 2 years; those in Kunming, Beijing and Xiamen within 3 years; those in Shantou, Ningbo, Shanyang and Xian within 4 years. All geographical restrictions to be eliminated within 5 years upon accession.

1) Successful. Upon accession, foreign currency banking businesses were fully opened. Currently, more than 18 cities are open for foreign banks local currency business with more than 60 foreign banks approved for local currency business.

2) Within 5 years upon accession, nonprudent measures restricting ownership, business and establishment of foreign banks, including measures concerning internal branches and business licensing in existence to be eliminated. (national treatment)

2) Rather successful. Foreign ownership ceiling in local banks have been raised from the initial 15 per cent for single shareholders; requirement on working capital of foreign bank branch lowered and partial foreign ownership have been approved for commercial banks. By end 2005, foreign banks have made strategic investments in more than 17 Chinese Banks with a total value close to US$17bn. Concerns remain over capital requirements and prudential rules that exceed international norms.

Insurance Commitments

Progress

1) Permit up to 51 per cent foreign investment in insurance brokerage joint venture

1) Successful

2) Lift all geographical restrictions within 3 years upon accession

2) Successful. Beijing, Tianjin and Shanghai opened up ahead of schedule

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Economic Relations: Moving Towards Services 3) Foreign Life Insurers to be permitted to provide health, group and pension insurance and annuities to Chinese and foreign clients. Foreign non-life insurance and large-scale commercial insurance companies allowed to establish wholly foreign-owned subsidies, 2 years and 5 years within WTO accession, respectively.

155

3) Rather successful. Generali China Life Insurance set up in January 2002, the first joint venture insurance company set up in China after WTO accession. Anina plc and Prudential plc approved to offer health and group insurance, respectively. Concerns remain over vague branching rights and high capitalization.

Securities Commitments

Progress

1) Securities joint ventures with up to 33.3 per cent foreign investment to be permitted in the underwriting of A shares and to underwrite and trade B and H shares.

1) Rather successful. Joint venture securities companies include Changjiang BNP Paribas Peregrine Securities. As of April 2006, China has granted 39 foreign institutions the right to invest a total of US$6.32 billion under the Qualified Financial Institutional Investor (QFII) program.24

2) Up to 49 per cent foreign investment in fund management joint ventures permitted

2) Successful. UBS the first to receive approval for a 49 per cent stake in a joint venture with Shenzhen-based China Dragon Fund Management Co Ltd.

Telecommunications Commitments

Progress

1) For basic domestic and international services, foreign share no more than 25 per cent allowed in joint ventures in Beijing, Guangzhou and Shanghai within 3 years after accession. Within 5 years, this is expanded to secondtier cities and foreign share up to 30 per cent permitted. Within 6 years, all geographical restrictions to be removed and foreign share of not more than 49 per cent to be permitted.

1) Not very successful. In part because foreign operators are reluctant to subsidize the rollout of service in rural areas. Weak implementation seen due to the reclassification of basic services, large capital requirements and new regulations. First fully foreign-owned telecoms subsidiary by Japan telecom set up only in 2004. Most are in the applying process with few others established operations. A foreign share of less than 50 per cent also means possible management issues.

continued on next page

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Table 8.2 — cont’d

Telecommunications Commitments

Progress

2) For value-added services, joint venture permitted with up to 30 per cent foreign share.

2) Rather successful. Value-added services over a Chinese operated network possible. However international value-added services face greater deterrence. To date, issue of 3G licence to once again have been postponed till end 2006 or 2007. It is expected that the licence would first be issued only for the homegrown provider before other foreign providers.25

Tourism Commitments

Progress

1) Foreign majority ownership in joint venture travel agencies and tour operations allowed by January 2003, and wholly foreign-owned companies to be allowed by 2005.

1) Successful, ahead of schedule. In July 2003, the establishment of the first wholly foreign-owned travel agency was approved. By end 2004, 63 countries/regions had become travel destinations of Chinese travel companies.

2) Foreign services joint ventures allowed to build, renovate and operate hotels and restaurants in China. Wholly foreign-owned hotels permitted to be set up within 4 years of accession.

2) Successful. Major international hotel conglomerates have entered the market.

Freight Transportation Commitments

Progress

1) Wholly foreign-owned storage, warehousing and road enterprises permitted. Foreign majority rail joint ventures allowed. To be free of restrictions within 7 years of accession.

1) Rather successful. No more specified restrictions on warehousing on an agency basis means it is easier to obtain central government approval to store goods. Greater success for roadfreight than for rail. Concern remains over the limitation of a 20 years operation term for foreign investors in freight forwarding. As well, PRC government approval not been eliminated for both road and rail.

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Economic Relations: Moving Towards Services 2) Joint ventures with share of no more than 49 per cent allowed on international shipping services as well as in ship agent service.

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2) Successful. Inter-government agreement on sea and river transportation signed with 64 countries by as early as end 2002. Many shipping investors have set up water freight forwarding services. Maximum percentage of foreign equity increased to 70 per cent in China International Freight Forwarding (CIFF) Enterprises by 2004.

Source: compiled by author from various reports and press sources.26

In view of the growing focus on services, both globally and within ASEAN and China, the following section shall provide an examination of the outlook for ASEAN-China services trade, as well as flesh out selected key deals in services conducted to date. ASEAN-CHINA SERVICES OUTLOOK The year 2005 saw the largest foreign-domestic M&A deals — a total of US$9.7 billion in completed acquisitions — taking place in the financial services sector in China, rather than in manufacturing and industry. This serves to epitomize the heightened interest and opportunities in services trade with China.27 Certainly, as the progress report on China’s WTO commitments has set out to show, China’s continued efforts in liberalization and investment promotion would provide ASEAN companies with greater market access, in fields ranging from logistics, distribution, transportation, to financial services. The opportunities to be exploited would generally differ from country to country, in acknowledgement of the differing competitive advantages and needs of the economies involved. In terms of mode 2 services specifically, one can see that rising Chinese affluence holds vast potential for tourism given that Chinese tourist visits overseas rose by a remarkable 42.6 per cent in 2004.28 At the same time, this was reciprocated by a rapid increase in tourist visits by selected ASEAN member nations, as Figure 8.2 seeks to demonstrate. Despite much having being made of investment diversion from the ASEAN countries to China, there is also a general trend towards rising Chinese investment into ASEAN.29 This is partially a result of the “Go Global” strategy advocated by China since 2000, as well as the positive spillover from the strong growth in the Chinese economy which have hovered

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Figure 8.2 Rising ASEAN Visitors to China to

China

80 70 60 50 40 30 20 10 0

Indonesia Malaysia Philippines

04

Thailand

20

02 20

20

98

00

Singapore

19

19

95

10 000 person times

ASEAN Visitors

Source: National Bureau of Statistics of China 2005.

around an average of 9 per cent since the 1980s. The United Nations Global Prospects Assessment (GIPA) 2005–0830 in fact predicts that China could overtake Japan to become the second leading source of FDI, after the United States, into the Asia-Pacific region.31 In particular, of the 87.3 per cent rise in outward investments by Chinesefunded enterprises in 2005, a significant amount, almost equal to that for manufacturing, went into services. Of that total, a reported 60 per cent went into Asia, with a significant amount going to Cambodia and Thailand.32 The following section shall make a novel attempt at presenting some key ASEAN-China services trade deals conducted to date, in the bid to identify specific areas of cooperation and illuminate future potential to be found in services trade and investment between China and selected ASEAN countries. ASEAN-CHINA SERVICES DEALS Cambodia Given the low level of development and poor infrastructure of Cambodia, the trend has, on the overall, been the case of growing outward services investment from China into Cambodia. This trend is likely to persist with the further economic development of China. Key services cooperation between Cambodia and China lie in the field of construction and infrastructure development, particularly in projects such as dams and bridges. The year 2005 has seen a Chinese company make the

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largest investment project in hydroelectric production ever, a deal which is expected to provide 498 GWh of energy annually.33 As well, in December 2005, China agreed to provide a grant of US$8 million to fund a technical survey for a 255 km railway line from Kampong Speu province to the border with Vietnam. In April 2006, China also newly pledged US$600 million in grants and loans for dam and bridge projects. Plans are also in place for the establishment of a Comprehensive Partnership of Cooperation between China and Cambodia in the hope of boosting cooperation in the fields of transportation, culture, education, health, industry, tourism and training in particular.34 Indonesia Much of Indonesia-China trade and investments fall into merchandise goods and resources related fields. However, there is potential for greater services trade with China particularly in terms of tourism and travel, given the relatively low base. Indonesia has already held tourism promotion campaigns in China in the bid to attract 150,000 visitors in 2006.35 More specifically for China, the potential for medical tourism with Indonesia is substantial, with Indonesians spending over an estimated US$500 million a year on these services. In fact, while Singapore, Australia and Malaysia are the biggest medical investors in Indonesia, China is expected to make significant inroads with its highly specialized traditional Chinese medicine (TCM).36 Malaysia Malaysia has sought to increase its domestic efficiency and explore opportunities in the field of shipping, logistics and distribution as market access for services trade with China further opens up. To illustrate its competitive advantage, Port Klang rose rapidly in world container ports rankings from fifty-eighth in 1993 to fourteenth in 2005.37 A 49 per cent stake investment in a shipping terminal of the Port of Tanjung Pelapas, Malaysia, by Cosco Pacific, a subsidiary of China Ocean Shipping Group Co, serves also as an example of the two-way potential of ASEAN-China services trade and investment.38 Given that outsourced logistics services have been set to grow by 25 per cent or more in China, leading that of any other regions in the world, one would expect to see more concerted efforts from Malaysia in this area. Specifically, Integrated Logistics Bhd recently obtained a Class A licence to operate as a full-fledged logistics company in China, with plans for expansion into Guangzhou, Suzhou, Hangzhou and Dalian.39

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Malaysian companies are also reportedly interested in undertaking water supply work and gas distribution projects on a Build-Operate-Transfer basis. With the upcoming Olympics to be held in Beijing in 2008, there will be opportunities for further services trade and investment. Chinese visits to Malaysia hit a record three million in 2004 and are set for a positive trend over the long term. Malaysia, which saw 26,000 foreign students in 2003 alone, is also likely to see a rising intake of Chinese students, with initiatives such as twinning programmes with other foreign universities used to attract Chinese students.40 Singapore Due to her competitive advantages in logistics, transportation, and distribution as well as its good business links with China aided by the use of a common language, Singapore has made the greatest inroad in services trade with China among all ASEAN member countries. Singapore is also favoured to reap benefits and take significant advantage of China’s commitments under the GATS. To illustrate, in China’s Guangxi Province alone, Singaporean companies have committed cumulatively up to US$2 billion in investments, making them the largest ASEAN investor.41 In particular, opportunities are vast in the areas of port construction, logistics, tourism and industrial park construction. For example, Singapore Airport Terminal Services has formed a joint venture with the China Aviation Qingdao Liuting Airport for ground services operation.42 To combat the competitive pressure from the rapid growth of Chinese ports, particularly in Shanghai, PSA International has also made use of its expertise to operate several port projects in China, namely Dalian and Guangzhou. Notably, in 2004, PSA China was awarded the Best Emerging Container Terminal award for Guangzhou Container Terminal at Maritime Asia Awards. At the same time, Singapore has a stake among the foreign invested travel agencies while her investments in road transport projects in China have risen. The prospects in the field of construction and real estate also see CapitaLand, a Temasek Holdings-linked company with a US$7.4 billion portfolio of Chinese projects, sets up Sichuan Zhixin CapitaLand, through a joint venture with China-based Chengdu Zhixin Industrial Group.43 To take advantage of the financial sector liberalizations and the opportunities inherent in the 1.3 billion market in China, Temasek Holdings have also made several investments in this aspect, namely a 7 per cent direct interest in China Construction Bank and 5 per cent stake in Bank of China respectively,44 while Overseas Chinese Banking Corporation (OCBC); the

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first Singaporean bank to operate in China, took up a 12.2 per cent stake worth S$120 million in Ningbo Commercial Bank (NBCB) on 10 January 2006.45 In April 2006, DBS Bank Ltd was also newly awarded the right to invest US$100 million under the QFII programme. The much-anticipated opening up of the local currency business to all Chinese clients, by December 2006, also saw DBS bank opening its first retail banking branch in Shanghai.46 At the same time, May 2006 saw DBS Group Holdings making it’s first acquisition with a S$35 million deal to buy a 33 per cent stake in a Changsheng Fund Management. Given the nascent developments in this sector, a first mover advantage might be seen, in time to come. Even in the still restricted field of telecommunications, Singtel, Singapore, had landed a landmark deal to collaborate on global corporate communications links, in this instance, with China telecom.47 Similarly, the common language and high standards have seen an influx of Chinese students on all levels into Singapore’s government and private schools. There is also a significant number of Chinese professionals residing and working in the country. Tellingly, Chinese tourist arrivals to Singapore hit a record 54.8 per cent growth rate in 2004.48 Thailand Proximity with China has made Thailand a prime candidate to cooperate with China, in fields relating to logistics and infrastructure in particular. Notably, in April 2006, Thai-owned Trans Asia Logistics Company Limited announced a joint venture with Nuctech Company, a state-run Chinese company, to invest in establishing four integrated logistics centres as part of a $3.8 billion project. Target areas are Chiang Khong in Chiang Rai, Mohan in South China and two sites in Myanmar. The Mohan complex, in particular, is envisioned to include a bus terminal, hotels, cargo warehouses, container yards, a shopping centre, a hospital, banks and distribution centres. The centre would serve to facilitate trade where all goods would be duty-free within the complex. Preliminary forecasts predict that 8,000 containers of fresh fruits could pass through the centre every day. Slated to finish in five years, Thailand is certainly banking on serving as a regional logistics hub for trade between ASEAN and China.49 Another joint venture that Trans Asia Logistics Company Limited is involved in with the Chinese Government have been the construction of a road link between ASEAN and China through the north of Thailand. This is expected to help increase the numbers of Chinese visitors to Thailand to four million by 2010. Another road to be completed in 2007 is the 1,797-kilometre

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road from Kunming, China to Bangkok, Thailand. Further potential in logistics and distribution is set to arise with the rising networks and greater traffic between the booming Chinese economy and Thailand.50 Vietnam Opportunities for services trade with China have manifested in cooperation in infrastructure and road building, inter-banking services, education abroad and tourism. Chinese visitors to Vietnam stood at more than 23 per cent of the total visitors to Vietnam in 2005, remaining the top tourist market to date. A transport network linking Nanning, capital city of Guangxi, to Vietnam’s northern Lang Son province and to Hanoi have also been completed recently while plans have been put in place to accelerate construction of two economic corridors between Vietnam and China and the Beibu Gulf economic belt.51 In addition, Agribank of Vietnam has signed a cross-payment cooperation agreement with the Guangxi branch of the Industrial and Commercial Bank of China. As well, it has established cross-border payment partnerships with the Agricultural Bank of China, the Bank of China and the China Construction Bank.52 Although actual data are unavailable, more Vietnamese are also studying Chinese at home or in Guangxi Zhuang Autonomous Region. As a case in point, 6,000 students from Vietnam have received training from Yunnan Normal University and Guangxi Normal University alone.53 Greater Mekong Sub-region In line with the greater liberalization in shipping and transportation, Laos, Myanmar, Thailand and China have also agreed to jointly formulate and implement the “Rules for the Navigation Charges of Commercial Ships on the Upper Mekong River” by mid-2006. This would bode well for the Lancangjiang-Mekong shipping line, deemed the most important international river in Southeast Asia.54 CONCLUSION The chapter has set out to provide a more comprehensive study of the potential for ASEAN-China services trade and investment. Despite difficulties in measurement, a discernable global trend towards greater services trade and investment has been spotted. ASEAN and China’s growing focus on services have also been explored and special emphasis has been placed on understanding

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service commitments made, both within ASEAN and China, and between the two parties. This is critical as a humble start towards the careful mapping of the budding services trade and investment between ASEAN and China, for only through a deeper understanding of the above developments, can a concerted effort be made to improve and enhance the services trade, alongside initiatives on the merchandise trade and investment fronts. NOTES 1. Ten member grouping consisting of Malaysia, Singapore, Indonesia, Thailand, the Philippines, Brunei, Cambodia, Myanmar, Laos and Vietnam. 2. The manual has been developed and published jointly by six organizations, namely The United Nations, European Commission, International Monetary Fund, Organization for Economic Cooperation and Development, United Nations Conference on Trade and Development and the World Trade Organization. It is available online at . 3. This is particularly so for developing countries such as those mentioned in this chapter. For example, until recently, China had even been using the outmoded terminology of “tertiary” share which includes all economic activities other than “primary” and “manufacturing and construction” instead of the more consistently used “services” term. 4. Cross-border takes up 35 per cent and commercial presence takes up 50 per cent, according to WTO International Trade Statistics 2005. 5. Calculated by author from UNCTAD World Investment Report 2004: The Shift Towards Services. 6. Ibid. 7. UNCTAD World Investment Report 2004: The Shift Towards Services. 8. WTO International Trade Statistics 2005. 9. Ibid. 10. WTO 2006 Press Release, Press/437, April 2006. 11. Countries that are ready for services liberalization can move first while others join in later. Refer to Opening Speech by H.E. Ong Keng Yong at Opening of ASEAN Forum on Trade in Services, 5 July 2005, available at . 12. The ACFTA was formally proposed by Chinese Premier Zhu Rongji in 2001. 13. This applies to ASEAN members who are also WTO members. For others, the commitments are meant to further enhance market access beyond existing measures. 14. Opening Speech by H.E. Ong Keng Yong at Opening of ASEAN Forum on Trade in Services, 5 July 2005. 15. Refer to ASEAN Secretariat at .

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16. Refer to Ramkishen S. Rajan and Rahul Sen in “Liberalization of Financial Services in Southeast Asia under the ASEAN Framework Agreement on Services”, CIES discussion paper no. 0226, Adelaide University, Australia. 17. This improves upon the common sub-sector approach which required four members’ commitments. 18. Opening Speech by H.E. Ong Keng Yong at Opening of ASEAN Forum on Trade in Services, 5 July 2005, available at . 19. See Richard Janda and Men Jing in China and Long March to Global Trade (London: Routledge, 2002), p. 81. 20. Xinhua News 12 May 2006. 21. GATS, Article II. 22. Since 1979, the Chinese regulatory authorities have moved from allowing foreign market access in non-business institutions, to that in business institutions, to that in local currency business, etc. Refer to China Foreign Investment Report, MOFCOM, 2003. 23. Ibid. 24. The QFII was first launched in November 2002 and paved the way for foreign capital access to China’s financial markets, both in securities and investing in the A shares market. Under this programme, investors need at least US$10 billion in asset and US$50 billion to spend can apply for a licence and quota to local currency shares and bonds. Refer also to (16 April 2006). 25. 3G provide high transfer data speed and allow users to download movies and hold video conferences on cell phones. 26. Sources include: U.S.-China Business Council 2005; Richard Janda and Men Jing, China and Long March to Global Trade (London: Routledge, 2002); China Foreign Investment Report 2003; Caijing Magazine 2004, no. 23 (2004); China Daily, various issues; Shanghai Daily, 31 May 2006. 27. A distant second was the high technology sectors such as computers followed by industrials. Refer to EIU, The Great Buy Out: M&A in China, 2006. 28. Calculated from National Bureau of Statistics of China 2005. 29. Refer to Stephen Frost, “Chinese Outward Direct Investment in Southeast Asia: How Big are the Flows and What Does it Mean for the Region?”, The Pacific Review 17, no. 3 (2004): 323–40. 30. The GIPA 2005–2008 was based on the findings of three worldwide surveys of the world’s largest transnational companies (TNCs), national investment promotion agencies (IPAS) and international investment experts. 31. Note that this is not a ranking of the overall magnitude of FDI flows but an expectation of the largest source of investment in 2005–2006. 32. People’s Daily Online, “China Makes more Overseas Investment in 2005, Mainly in Asia”, 10 February 2006. 33. Xinhua News, “Chinese Firm to Build Hydroelectric Dam in Cambodia”, 23 February 2003.

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34. China Daily, China, “Cambodia to Establish Comprehensive Partnership”, 10 April 2006. 35. Indonesia Tourism at . 36. Jakarta Post, “Foreign Hospitals still Gaining Ground”, 16 April 2006. 37. Independent Business Weekly, “Port Klang Aims for Greatness”, 3 May 2006. 38. Refer to The US-China Business Council, Foreign Investment in China, . 39. Business Times, “China ops set to rev up Integrated Logistics profit”, 1 May 2006. 40. Ibid. 41. Straits Times, “S’pore Firms to Sign Deals Worth $2.3b with Guangxi”, 8 April 2006. 42. Air Cargo World, 6 May 2006. 43. Straits Times, “CapitaLand to Quadruple its Housing Projects in China”, 31 May 2006. 44. Refer to . 45. OCBC Media Release, January 2006, . 46. Straits Times, “DBS Opens First Retail Branch in Shanghai”, 31 May 2006. 47. China Telcom, “SingTel and China Telecom to Jointly Offer Full Suite of Endto-end Data Services to and from China”, September 2003. 48. Singapore Tourism Board. 49. The Nation, “Trans Asia Gateway JV to Boost Trade”, 17 April 2006. 50. Thai News Service, “Thailand: Trans Asia Logistics to Form Joint Venture with Chinese State-owned Company”, 18 April 2006. 51. BBC Monitoring Asia Pacific, “Vietnam, China’s Guangxi Keen to Boost Trade”, 15 April 2006. 52. Thai News Service, “Vietnamese, Chinese Banks Sign Agreement”, 2 May 2006. 53. Xinhua News Agency, “More ASEAN Students Pursue Studies in China”, 25 March 2006. 54. China Chemical Reporter, “Oil Product Transportation on Mekong River”, 6 April 2006.

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9

ASEAN-China Financial Cooperation in the Asian Bond Market Sun Jie

INTRODUCTION The Asian financial crisis can be characterized by “double mismatch”, overreliance on banks, quick reversal of capital flow, as well as weak corporate governance and poor regulatory quality. In particular, short-term debt financing long-term project and excessive borrowing abroad demonstrate the systemic risk of an unbalanced financial structure. In contrast, a highly diversified, deep and liquid financial market would be less fragile and more efficient in capital allocation. Furthermore, a mature domestic longer-term debt security market could alleviate the effect of double mismatch, and bond valuation would also provide the correct signal for corporations and speculators to make their decisions, enhance efficiency in financial intermediations, and promote stable economic growth and development in the region. The stability of Asia’s economic growth is under threat now for three reasons: global imbalance and the depreciation of the U.S. dollar; U.S. interest rate hikes and the reversion of international capital flows; and finally, the surge in oil price. All these make the situation tough for Asian economies.

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FINANCIAL STRUCTURE IN ASIAN COUNTRIES: A THEORETICAL AND INTERNATIONAL PERSPECTIVE According to Goldsmith,1 the three stages of financial structure in economic development are: 1) the beginning stage, when the financial interrelation ratio is as low as 0.2 to 0.5, dominated by debt security and direct financing; 2) the take-off stage, when the financial interrelation ratio is still low and debt security prevails,2 loans extended by banks are predominant and governments begin to play a significant role; 3) the last stage, when the financial interrelation ratio is as high as 1 to 2, equity financing is growing at the same time and non-bank financial institutions are expanding their services. The common trend of financial structure evolution is as follows: 1) accompanying economic growth, growth in the financial sector is faster than in other sectors, and the financial interrelation ratio will keep increasing until it reaches 1–1.5; 2) when the financial interrelation ratio comes to a plateau, the financial intermediate ratio can still keep on rising, and debt financing surpasses equity financing; 3) financial growth is often led by bank growth, but lending by banks will decrease. In the meantime, financing by non-bank financial institutions will increase till they surpass bank financing;3 4) international finance serving as a supplementary source for insufficient domestic finance or an outlet of surplus domestic capital, play a significant role in the different stages of economic growth.4 Table 9.1 describes the stock of external finance of Asian economies, Latin American countries, Central European countries and developed countries at the end of 2001. In terms of financial interrelation ratio, Asian economies are lower than developed countries, but they have the highest ratio among emerging markets, which indicates their relatively developed financial sector. In the meantime, bond markets in Asian economies are the smallest in the four groups, while banks’ shares in total financial assets are the biggest. As a means of finance, the bond market in Asia has been underdeveloped. As a result, the important function of channelling savings into investments, a process that is crucial to economic growth and development, domestic finance has been overly dependent upon banks and equity markets. The relative lack of diversity in financial instruments also raises questions about financial efficiency and the stability of the financial system to some extent. The Asian financial crisis also indicates that the efficiency of regional financial intermediation is low in Asia, with the bulk of Asian savings flowing out, funding the balance of payment deficits of developed economies. Moreover, some of these savings find their way back to Asia, and are largely in the form of foreign portfolio or short-term banking credit inflows, which

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1.86 2.52 2.24 4.80 3.87 2.96 2.35 1.75 1.12 1.23 1.58 2.18 0.59 0.90 1.14 1.06 0.77 4.56 5.82 4.49 3.58

Emerging Markets Asia: China Hong Kong SAR Malaysia Singapore Republic of Korea Thailand Latin America Argentina Brazil Chile Mexico Central Europe Czech Republic Hungary Poland Developed Countries Japan United States Europe 90.21 (48.48) 131.91 (52.29) 140.59 (62.89) 141.98 (29.61) 156.23 (40.41) 102.95 (34.78) 110.37 (47.03) 112.03 (63.95) 41.21 (36.70) 37.13 (30.28) 59.19 (37.41) 76.74 (35.13) 24.69 (41.51) 42.48 (47.21) 51.84 (45.55) 49.54 (46.65) 37.34 (48.22) 194.13 (42.53) 308.67 (53.02) 160.56 (35.78) 121.30 (33.87)

Bank Credit

56.87 (30.56) 75.56 (29.95) 45.21 (20.23) 310.81 (64.81) 135.92 (35.15) 138.25 (46.71) 54.97 (23.42) 31.67 (18.08) 38.70 (34.46) 71.62 (58.41) 37.06 (23.43) 89.28 (40.87) 20.49 (34.45) 16.04 (17.82) 16.22 (14.25) 19.80 (18.65) 14.85 (19.17) 122.92 (26.93) 92.10 (15.82) 137.48 (30.63) 156.25 (43.63)

Stock Market Capitalization 5.76 5.76 0.90 3.07 50.40 6.71 27.84 4.96 1.73 2.71 0.56 8.82 1.52 1.23 4.79 1.53 0.00 20.55 16.48 23.90 8.05

Corporate 24.96 24.96 25.04 11.78 36.57 34.16 18.32 26.17 26.12 9.11 51.99 29.76 12.10 29.32 36.35 35.31 25.26 85.18 104.45 83.53 44.12

Public Sector 8.28 8.28 8.80 11.90 7.54 20.61 23.20 0.35 4.53 2.04 9.40 13.86 0.68 0.92 4.61 0.00 0.00 33.64 15.94 43.32 28.44

Financial Institution

Debt Security

39.00 (20.96) 44.79 (17.76) 37.74 (16.88) 26.75 (5.58) 94.51 (24.44) 54.77 (18.51) 69.36 (29.55) 31.48 (17.97) 32.38 (28.84) 13.86 (11.31) 61.95 (39.16) 52.44 (24.00) 14.30 (24.04) 31.47 (34.97) 45.75 (40.20) 36.84 (34.70) 25.26 (32.61) 139.37 (30.54) 181.42 (31.16) 150.75 (33.59) 80.61 (22.50)

Total

Source: Edited and recalculated from Barry Eichengreen (2004), “Why Doesn’t Asia have Bigger Bond Market”, NBER Working Paper 10576. The total bond market capitalization is calculated as the sum of the corporate, public sector and financial institution issues. The number in brackets of columns 2, 3 and 7 is the ratio to the total amount of bank credit, stock market capitalization and debt security. FIR (financial interrelation ratio) here is the ratio of total financial assets (bank credit, stock market capitalization and debt security) to GDP calculated from the data in the table.

FIR

Country

Table 9.1 Total Outstanding Domestic External Finance (Percentage of GDP, 2001) 168

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presents risks to financial stability. Once the economic situation in Asia worsens, these capitals might flow out and bring about economic instability and financial crisis. Economists have reached the common views that: 1) the quick development of trade and investment relations in the region need the support of a deeply integrated regional financial market system with a well-developed market infrastructure; 2) in view of the over-reliance on bank finance and short-term foreign debt dominated by the U.S. dollar, the development of the Asian bond market can help to solve the problems of “double mismatch”, as well as the over-reliance on bank finance; 3) a well-developed Asian bond market can absorb the huge amount of savings and foreign reserves of Asian economies and prevent the huge reversal of capital flow which can bring about a crisis; 4) development of the Asian bond market can promote more intensive use of the Asian currency in regional trade and financial transactions. WHY ASIAN BOND MARKET IS PREMATURE Eichengreen and Luengnaruemitchai’s Five Broad Hypotheses Eichengreen and Luengnaruemitchai5 illustrated five broad hypotheses to explain the under-development of the Asian bond market and find empirical evidence respectively. The five hypotheses are: 1) Historical reason. Imperfections of information and the contracting environment gave a strong comparative advantage to the banking sector, and governments found banks to be a convenient vehicle for advancing their industrial policies. Although these circumstances have now changed, banks still retain dominant status on the Asian financial markets. Institutions and social conventions have also adapted to the dominance of the banking sector. Bonds may face an uphill battle when seeking to acquire a larger market share. 2) Structural characteristics. Most Asian economies, especially ASEAN countries, are limited by geographical endowment and difficulty in developing a bond market because it requires a certain minimum level of liquidity for efficiency. 3) Legal tradition. Inefficient contract enforcement and weak investor protection as in many emerging markets resulted in the under-developed Asian bond market. Even though most Asian economies have undergone the transition to modern economies, these weaknesses are hard to change in a short time. 4) Infrastructure. The inadequate quality of prudential supervision and regulation, the lack of the existence of a well-defined yield curve, institutional

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investors and rating agencies, as well as adequate trading, settlement and clearing systems, are all technical reasons. 5) Macro-economic policy. Controls on capital flows may discourage foreign investors’ participation in domestic markets and rob those markets of liquidity. The currency risk may limit the market for domestic currency denominated securities, while domestic interest rate volatility may make it unattractive to hold long-term debt securities. A Perspective of the Legal System Economists have long debated about the bank-based versus market-based financial system. Demirguc-Kunt and Levine6 have found financial structures did not matter much but 1) countries with a common law tradition, strong protection of shareholder rights, and good accounting regulation tend to be more market-based; 2) countries with a civil law tradition, poor protection of shareholder rights, contract enforcement and accounting standards, tend to have under-developed financial systems. Demirguc-Kunt and Maksimovic7 found that: 1) firms in developed economies have more long-term debt, which cannot be explained by matching of maturity of assets; 2) variations in leverage and maturity are based on differences in the legal system, financial institutions, government subsidies, firms’ characteristics and macro-economic factors; 3) large firms in economies with an effective legal system have more long-term debt relative to assets. Schmukler8 further mentioned that: 1) larger firms and firms with more tangible assets extend their debt maturity. Higher profits are associated with more internal financing, less leverage, and shorter debt maturity; 2) the debt maturity shortens when economies undertake financial liberalization; 3) domestic firms that actually participate in international markets obtain better financing opportunities and extend their debt maturity. A Micro Perspective on Corporate Governance and Agency Cost Hart9 found that debt contracts can serve as a control mechanism in a corporation between shareholders and management. However, if the governance is incomplete, when management has controlling rights, debt finance could be the last resort in a financial decision and thus present an adverse pecking order against the theory which draws from the experience of developed economies with full corporate governance. Sun10 suggests that almost all theories of capital structure indicate that the corporate

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financial decision between debt and equity are all in relation to agency costs between debt holders and shareholders, as well as management and shareholders. Hence, from the micro-perspective, corporate governance and agency costs in Asian corporations is another reason for the under-development of the Asian bond market. Section 4 discusses it in detail in the case study of China. A Global Perspective to the Imbalance and Asian Bond Market The under-development of the Asian bond market also results in the global financial imbalance. By 2005, the global saving-investment pattern had become extraordinarily imbalanced. Among major countries, only the United States is running a huge current account deficit, while the rest of the world, East Asian countries in particular, is accumulating a significant current account surplus, and the surplus keeps flowing to the United States, funding its current account deficit. The current global saving-investment imbalance appears as the current account deficit of the United States and its increasing foreign debt, but the key issue lies beneath. Since the United States is still the largest country source of FDI and technology and has gained much from these, its current account deficit is much lower than its trade deficit. In the meantime, the amount of financial account surplus is much higher than the amount of current account deficit. This pattern of balance of payment accounts for the relative stability of the exchange rate of the U.S. dollar. But we need to note that where capital inflow to the United States is concerned, the amount of FDI is stable while the portfolio and other investments are increasing but could change, which means the balance is risky. Table 9.2 shows that the U.S. current account deficit is about US$668 billion in 2004. Even though it is difficult to know how much Asian foreign reserves have flowed into the United States, they definitely account for a large share of the capital inflow to the United States. Table 9.3 suggests that the capital flow between Asian economies and the United States is to a great extent sustaining the global imbalance in the following way: Asian economies export to the United States and accumulate a lot of foreign reserves from trade surplus. Because of the inadequacies of their financial systems, those huge amounts of foreign reserves flow back to the United States again, hence financing the current account deficit of the United States in the form of its huge external debt.

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–140.91 –876.49 222.31 706.79 105.59 333.11 268.09

1997 1999 2000 2001 2002

2003

2004

–214.04 –300.08 –416.00 –389.45 –475.21 –519.68 –668.07 –917.11 –1,029.99 –1,224.42 –1,145.93 –1,164.74 –1,260.75 –1,472.96 76.51 227.40 486.66 405.15 504.00 559.12 581.79 423.56 740.21 1,046.89 782.86 794.34 889.04 1,440.11 179.03 289.44 321.27 167.02 80.84 67.09 106.83 187.57 285.60 436.57 428.34 427.61 538.83 762.70 56.96 165.17 289.05 187.50 285.89 283.12 570.58

1998

Note: According to the BMP5, the current account deficit should be financed by capital account and financial account. For the reason of the tiny amount of the capital account, we only take financial account into consideration. Resource: IMF, Balance of Payments Statistics, monthly, September 2005.

Current Account Deficit Trade Deficit Financial Account Deficit Foreign Investment in U.S. FDI Portfolio Other Investment

Items

Table 9.2 Trade Deficit and Net Capital Inflow to the United States (US$ billions)

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Foreign Reserves Overseas Investment Foreign Reserves Overseas Investment Foreign Reserves Overseas Investment Foreign Reserves Overseas Investment Foreign Reserves Overseas Investment Foreign Reserves Overseas Investment Foreign Reserves Overseas Investment Foreign Reserves Overseas Investment Foreign Reserves Overseas Investment Foreign Reserves Overseas Investment

Items 1997 1998 1999 2000 2001 2002 2003 2004

–35.86 –6.25 –8.65 –10.69 –47.45 –75.22 –116.59 –206.36 –43.07 –41.51 –36.70 –56.09 –6.73 –17.69 –14.79 8.47 Hong Kong n.a. 6.79 –10.03 –10.04 –4.68 2.38 –0.99 –3.29 SAR n.a. 120.80 –12.86 –71.34 –5.23 –21.97 –89.51 –129.95 Japan –65.7 61.6 –762.6 –489.6 –404.9 –461.3 –1,871.5 –1,608.5 –3,571.0 –1,715.7 32.4 –2,304.5 –2,000.9 –1,563.1 –1,145.4 –3,067.8 Korea 118.75 –309.68 –229.90 –237.90 –75.86 –117.69 –257.91 –386.75 –179.17 –11.12 –64.36 –85.19 –14.42 –69.83 –141.41 –238.22 Thailand 99.00 –14.33 –45.56 16.08 –13.07 –41.97 –1.22 –57.13 –32.05 –35.19 –21.03 –23.40 –1.28 31.16 –18.37 3.93 Malaysia 38.75 –100.18 –47.12 10.09 –10.00 –36.56 –101.81 n.a. –46.04 –52.69 –97.82 –81.98 –27.17 –72.04 –59.25 n.a. Indonesia 51.13 –23.45 –32.86 –50.51 13.71 –40.10 –42.36 n.a. –1.78 –0.44 –0.72 –1.50 –1.25 –5.00 –0.05 n.a. Singapore –81.14 –29.89 –41.88 –67.51 8.67 –13.27 –66.75 –120.87 –658.58 –160.34 –398.87 –339.11 –378.70 –242.05 –365.80 –609.11 Philippine 26.09 –19.38 –39.38 0.73 –4.65 3.99 3.56 16.37 2.80 0.46 –194.17 –160.17 –143.31 –136.73 –10.36 –40.29 Total –171.69 –429.9 –1,386.1 –1,025.99 –1,007.41 –1,435.3 –3,513.79 –4,253.38 –4,916.52 –1,182.08 –1,240.18 –4,270.07 –2,686.56 –2,454.2 –2,783.57 –5,166.3 Index 1 1.96 4.69 13.5 8.38 8.79 12.3 27.9 28.9 Index 2 12.2 20.1 46.2 24.7 25.9 30.2 67.6 63.7 Index 3 –69.6 –27.9 –16.8 –40.8 –34.3 –30.9 –31.3 –35.9 Note: The overseas investment of Asian economies consists by FDI, portfolio and other investments. Foreign reserves consist of increments of monetary gold, SDRs, position in IMF, foreign reserves and other liabilities in the year. Minus indicates increase of foreign reserves, while positive figures indicate decrease of foreign reserves. Index 1 is the ratio of the total foreign reserves of Asian economies to the total trade deficit of the U.S., Index 2 is the ratio of the total foreign reserves of Asian economies to the total current account deficit of the U.S., Index 3 is the ratio of the total overseas investment of Asian economies to the total foreign investment in the U.S.. The overseas investment of Hong Kong SAR, Japan, Korea, Malaysia and Philippines also consisted of portfolio investment debts, while other economies are not included because of unavailable data. It is important to note that because exact data for Taiwan is unavailable, whose foreign reserves is on the top three Asian economies, the capital flow (shown in the table) from Asian economies to the U.S. shown in the table, is highly under-estimated. Sources: IMF, Balance of Payments Statistics, September 2005. The Chinese Statistic Year Book 2004.

China

Economy

Table 9.3 Asian Foreign Reserves and Overseas Investment (US$ billions)

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In the pattern above, Asian economies found themselves in an embarrassing position besides the problem of double mismatch. On the one hand, the increasing trade surplus and foreign reserves indicate that Asian economies are becoming more and more important in the world, and their currencies should appreciate again the U.S. dollar. On the other hand, in order to avoid the loss in value of their investments in the U.S. financial market, they have to support a strong dollar policy. The new dilemma for Asian economies is that their efforts to strengthen the Asian financial market by promoting the establishment of the Asian bond market will threaten the sustainability of the global imbalance at the same time. It is obvious that the establishment of the Asian bond market will have a profound effect on the adjustment of the global imbalance as well as the sustainable growth of the region. A smooth process needs the United States to make internal adjustments to reduce its demand for capital inflows. Table 9.4 shows that compared to Japan and China, the ratio of capital inflow to GDP is much higher for the United States, hence the stability of the world economy is also sensitive to the volatility of capital flow, and may also be sensitive to the establishment of the Asian bond market. Since the establishment of the Asian bond market and adjustment of the U.S. economy will take time, all players will have enough time to play the game. We can reach the following conclusion: The best situation for the United States is to make the adjustment before Asian countries establish the Asian bond market, and the sub-optimum situation is to make the adjustment while Asian economies are endeavouring to establish the Asian bond market.

Table 9.4 The Ratio of Capital Flow to GDP (Percentages) Country U.S.

Items

1997

Inflow to GDP 29.1 Outflow to GDP% –19.9

China Inflow to GDP 0.86 Outflow to GDP% –0.57

1998

1999

15.9 24.9 –13.0 –17.2 0.45 0.51 –0.53 –0.44

2000 31.2 –16.7 0.65 –0.63

2001 21.6 –10.4 0.42 –0.07

2002

2003

2004

20.5 –7.47

21.1 30.4 –7.83 –18.1

0.46 –0.16

0.56 –0.12

0.76 –0.95

Japan Inflow to GDP 0.045 0.011 –0.008 0.029 0.030 0.019 0.037 0.065 Outflow to GDP% –0.068 –0.033 0.006 –0.045 –0.039 –0.031 –0.023 –0.061 Sources: Calculated by data from IMF, Balance of Payments Statistics, September 2005 issue. The Chinese Statistic Year Book, 2004.

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In short, to make the adjustment is always the best policy for the United States. At the same time, the best situation for Asian economies is to establish the Asian bond market while the United States is trying to make the adjustment, and the sub-optimum situation is to establish the Asian bond market while the United States is not making the adjustment. In short, establishing the Asian bond market is always a good policy for Asian economies. As a result, the final equilibrium solution could be around a point near the matrix shown in Table 9.5. Table 9.5 Prisoner Dilemma and Nash Equilibrium

Asia promotes bond market Asia does not promote bond market

U.S. makes adjustment

U.S. does not make adjustment

3, 1

1, –1

–2.5, 2.5

–2, –2

Note: We assume that the value of short-term welfare is 1, the value of long-term welfare is 2 and the value of cross-effect on welfare, like the welfare change caused by exchange rate or capital flow velocity, rather than the macro adjustment or the establishment of bond market, is 0.5.

Progress of Asian Bond Market within the Framework of ASEAN+3 The 1997–98 Asian financial crisis spurred the trends in regional cooperation and financial cooperation, and replaced trade cooperation as the priority item. In particular, the establishment of cooperative mechanisms to prevent the recurrence of financial crisis became a key imperative. In fact, when IMF proved itself inadequate in responding quickly to the crisis in 1997, Asian economies became aware of the need to assemble bilateral liquidity support mechanisms. Japan put forward a proposal to establish a new regional monetary fund — Asian Monetary Fund (AMF) — to aid economies in crisis. The AMF proposal encountered a number of obstacles from the United States and the IMF. But the rapid spread of the financial crisis further heightened regional awareness of the necessity for regional collective action in the prevention and containment of financial crises. At the same time, IMF rescue packages with conditions came under criticism for their “one size fits all” character. By 1999, a growing sense of regional financial cooperation among the East Asian economies resulted in ASEAN+3 meetings focused on establishing

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mechanisms for the prevention and containment of financial crises. Major initiatives have been placed in three main areas: 1) the creation of mechanisms for short-term liquidity support, 2) the establishment of a common currency arrangement, and 3) the creation of an Asian bond market. Chiang Mai Initiative (CMI): Mechanism for Short-term Liquidity Support The CMI, initiated in 2000 by ASEAN+3, was the first step in regional financial cooperation in Asia in the form of bilateral currency swap arrangements (BSAs). Each agreement enables a country in crisis to borrow the equivalent of only US$1 billion in foreign exchange reserves from partners as a form of urgent short-term liquidity support, but it is still tied to an IMF programme. However, it is difficult to move forward without establishing an effective surveillance mechanism. The current arrangements might be inefficient for three reasons: 1) shortage of available funds — the amounts involved under the CMI remain small and clearly inadequate for stopping speculative attacks; 2) linkage with the IMF — the release of funds in the BSAs, contingent upon recipient countries already having an IMF programme in place, may not come in time; 3) lack of a central body — bilateral, rather than multilateral arrangements, also limit its bailout effect. In short, the CMI can serve as a symbolic supplement to the existing international financial arrangements, rather than a function equivalent to the proposed AMF.

Table 9.6 Basic Elements of Bilateral Swaps Under Chiang Mai Initiative Modality:

U.S. dollar and local currencies.

Maturity:

90 days, renewable for up to 2 years.

Drawing conditions:

Activation linked to IMF programs but up to 10 per cent may be disbursed without linkage to IMF programmes.

Interest rate:

Market interest rate + premium.

Other:

Guarantee or collateral provided by the government of country requesting the swap.

Source: Amyx, Jennifer A., “A Regional Bond Market for East Asia? The Evolving Political Dynamics of Regional Financial Cooperation”, Pacific Economic Paper, no. 342, The Australian National University, 2004.

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A Common Currency Arrangement Even before the crisis, there was the concept of a yen bloc. After the crisis, Ogawa and Ito11 discussed the desirability of a regional currency basket arrangement in detail. Williamson12 also proposed a basket based on trade weight. All these researches were considered within a theoretical framework to examine an optimal exchange regime for Asian economies. Optimality of the exchange rate regime is defined as minimizing the fluctuation of trade balances. While these proposals are still only present in papers, the issues could be key to the process of financial cooperation in Asia. The trade balance situation is important because it could affect the confidence of the exchange rate regime. But the problem is when capital flow is large, a sudden and huge capital flow could cause currency overvaluation and result in current account deficit. In order to determine whether or not the exchange rate is misaligned, we need to ascertain the “benchmark” based on the trade balance to manage the effective exchange rate. Since the economic growth of Asian economies relies on its export to the United States and other regions, the exchange rate that is calculated to stabilize the real exchange rate can then serve as the benchmark and reference to answer the question of whether capital flows have caused misalignment. It is obvious that the benchmark could be a currency basket that depends on trade weights. Ogawa and Kawasaki13 calculated weights on the U.S. dollar, euro and Japanese yen for a common currency basket in East Asia. They found that the combination of ASEAN + China could form a common currency basket area with the three major currencies. In other words, the trade weights of the three major currencies are optimized for the common currency basket in ASEAN + China. Ogawa and Shimizu14 further discussed the calculation of the weight. They considered four types of AMU (Asian Monetary Unit), which are based on trade volume, nominal GDP, GDP measured by PPP and international reserves. After choosing both the AMUs based on GDP measured by PPP weight and trade weights from the viewpoint of stability of the AMU value in terms of a currency basket composed of the U.S. dollar and the euro, they calculated the deviation indicators from the benchmark rates for each of the East Asian currencies. They found that both the AMUs based on GDP measured by PPP weight and trade weights were preferable from the viewpoint of stability of the AMU. Williamson15 evaluated a basket weight for nine East Asian currencies and his conclusion is the intervention on exchange rate of Asian economies mainly because of a collective action problem: They fear losing

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competitiveness vis-à-vis their regional peers, and they each had been reacting by pegging (even though many of them do so informally) to the U.S. dollar. He believes this is a sub-optimal reaction, and something like a common basket index would be better for everyone. It is a coincidence that Ogawa and Ito16 also suggested that in order to help the calculation of such a basket tailored to each economy, it may be helpful to calculate and publish the typical currency basket unit for the region like the ACU (Asian Currency Unit), and each Asian economy manages its currency within a reasonable band around the ACU. The Asian Development Bank has announced that they will publish the ACU average in 2006. It could be a practical action towards a common currency arrangement in Asia. The Asian Bond Market The slower progress and inefficiency of the BSAs within the framework of the CMI and the difficulty of implementing a common currency arrangement economically and politically caused a shift in the focus of international attention to Asian financial cooperation, and eventually to the regional bond market, in trying to provide a basis for further financial cooperation and strengthening of the financial structure. The reasons for establishing the Asian bond market are: 1) to keep savings in the region to facilitate development and to reform the bank-dominated financial structure; 2) to expand the use of regional currencies and decrease the use of the U.S. dollar in Asia; 3) to prompt dialogue and cooperation mechanisms in Asia. Several years before the crisis in 1997, the World Bank had already conducted a study on the Asian bond market,17 but relevant research became more urgent since 1998 when economists turned their attention to the Asian financial crisis. Work on the supply side involves the establishment of Asian bond markets, which comprises the removal of barriers impeding the issuance of bonds in both the regional and domestic contexts, and tax, legal, regulation and accounting issues. The Asian Bond Markets Initiative (ABMI) is the main part of the establishment of Asian bond markets on the supply side, aimed at the development of efficient and liquid regional bond markets in Asia, which would enable the region to better utilize their savings in regional investments. The ABMI would also contribute to the mitigation of currency and maturity mismatch. It is a key step towards a practical financial cooperation in ASEAN+3. Development on the demand side involves promoting the pooling of an investor base or the pooling of reserves under the Asian Bond Fund

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(ABF) initiative. The establishment of the Asian Bond Fund (ABF) by EMEAP (Executives’ Meeting of East Asia and Pacific Central Banks) central banks ultimately aims to 1) bring back Asian reserves traditionally saved in the financial markets of Europe or the United States to be used in bond investment in Asia, and the bond itself will act as a channel of finance intermediations that turn local savings into local investment, and 2) provide a catalyst as a lead investor, for private investors to consider investing in the Asian bond markets. Learning from Experiences in Cross-Border Issuance To promote the establishment of the Asian bond market, three practical steps have been made since 2004. The Asian Development Bank (ADB) and the International Finance Corporation (IFC) issued local currency-denominated bonds in Malaysia, China and Thailand. In December 2004, Korean collateralized Bond Obligations (CBO) (Pan-Asia Bond) guaranteed by the Japan Bank for International Cooperation (JBIC) and the Industrial Bank of Korea (IBK) was issued in the region. In June 2004, JBIC started to provide a partial guarantee for the issuance of Thai baht-denominated bond by Japanese subsidiaries in Thailand. These moves encountered three difficulties in their execution.18 First and foremost was the swap market for the management of exchange rate risks.19 In fact, these problems had been foreseen by economists. Ogawa and Shimizu20 compared the currency basket-denominated bonds with those bonds denominated in terms of the three major currencies that include the U.S. dollar, the euro and the Japanese yen. They found that the differences between the U.S. dollar and the currency basket were not that great especially for three- and six-month swap transactions, but were significant for onemonth swap transactions. As a result, investors and bond issuers face tradeoffs between foreign exchange risks and liquidity when they issue or invest in currency basket-denominated bonds in East Asia. But Shimizu and Ogawa21 further concluded that when investors evaluated their returns on investing in single currency-denominated government bonds, their risks were based on their foreign exchange risk rather than their interest risk. Therefore, the introduction of the AMU-denominated bond could prevent the contagious selling of the local currency-denominated bonds caused by the sudden depreciation of the local currency. Eichengreen22 addressed the annual meeting of the ADB with a speech titled, “The Unintended Consequences of the Asian Bond Fund”. His final conclusion can be expressed in one sentence: In Asia, it seems everything goes back to the exchange rate regime.

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RATIONALE OF FINANCIAL COOPERATION BETWEEN CHINA AND ASEAN COUNTRIES Financial cooperation within the framework of ASEAN+3 suggests the possibility of financial cooperation between ASEAN countries and China. It is obvious that the establishment of the Asian bond market is a feasible way to initiate the cooperation now because it is an urgent task for them and need fewer preconditions to get started.23 For sure, the cooperation in establishing the Asian bond market will call for bilateral currency swap arrangements and that could be followed by a regional currency-basket arrangement, but cross-border bond issuance can pave the way for further cooperation at higher levels.

Definition of Asian Bond As a first step in deepening the financial cooperation between ASEAN countries and China within the framework of the financial cooperation of ASEAN+3, a well-defined Asian bond market is needed at the beginning. Just as the ABF1 and ABF2, the establishment of the Asian bond market can be divided into two stages, and hence also into two categories: 1) The existing bond markets in Asia is in foreign currencies-denominated bonds such as the Yankee bond and Euro-bond issued by Non-U.S. governments or corporations, sold and traded globally. Dealers in money centres in Hong Kong and Singapore create markets for these bonds to provide liquidity for international investors in the region. The existing Asian bond market also includes local currency-denominated bonds issued by governments or corporations in the region, sold and traded almost exclusively in the issuing country. Therefore, foreign investors can theoretically buy and hold these bonds. In fact, few foreign investors invest in these local currencydenominated bonds because of various impediments, such as the imposition of withholding tax on interest and capital gains income, foreign exchange control, lack of liquidity in the secondary market, and unfamiliarity with the exchange rate, credit and transfer risks across borders. 2) The Asian bond market to be established. The bond issued and traded on the Asian bond market should have some characteristics and attributes which are likely to represent medium- or long-term promises to pay interest and principal, denominated in local currencies of the governments or corporations domiciled in Asia.24 These local currency-denominated bonds must be bought and traded actively in the secondary markets across Asia borders; the national currency-denominated individual bonds of economies can be securitized into a new synthetic debt instrument called the Asian bond

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fund or ABF, the beneficiary units of which can be sold and traded separately as derivative bond products.

Current Obstacles Faced by the Asian Bond Market As mentioned earlier, Eichengreen and Luengnaruemitchai25 have given the reasons for the under-development of the bond market in Asia. Among those obstacles, historical reasons, legal tradition, and infrastructure are fundamental, but macro-economic policies can be gradually changed, and issues of market scale which hinders the establishment of the Asian bond market could be enlarged through market integration. These two aspects may be regarded as the starting points for financial cooperation between ASEAN countries and China. Market infrastructures can also be reshaped and identified within the region at the same time. An Asian bond market must be part of the global market rather than a segmented and isolated country market in the region. Asian borrowers could issue bonds in the market at a minimum cost and these bonds could be purchased by institutional investors of the region as well as those outside the region, allowing them to gain maximum benefits from the liquidity of primary and secondary markets. It is a form of cross-border market, and does not matter where these bonds are issued, who rates these bonds, who serves as the sponsor, where the bonds are traded, where they are cleared and settled, and which currency they are denominated in. Economies in the region should make every effort to liberalize capital accounts and eliminate any legal and regulatory impediments to facilitate regional activities. On the one hand, Asian economies must first develop domestic bond markets before the creation of an Asian bond market to effectively channel domestic savings into productive private and public sector investments. On the other hand, a regional cross-border bond market need not be a substitute for the domestic bond markets and could play a complementary role in mobilizing domestic savings in the region. No doubt the role of an Asian bond market could become meaningful if the local currency-denominated bond market is promoted to resolve the currency mismatch problem. Nevertheless, a regional bond market will not help a common currency arrangement and the lack of a common currency arrangement will in turn impede the maturing of the Asian bond market.

Market Liquidity and Scale Issue Despite rapid growth in Asia, local currency bond markets remain underdeveloped compared to those in the United States or Japan, where outstanding

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domestic bonds account for over 150 per cent of GDP. Moreover, government bonds make up half of the market and corporate finance is dominated by bank lending and equity finance. The bond markets are segmented from each other, and also segmented from international markets to some extent by deficiencies in infrastructure. As we know, a market with less liquidity will not attract investors to invest in the market. On the supply side, the size of the bond markets in Asia, as Eichengreen and Luengnaruemitchai26 have found, is empirically related to the market depth and liquidity. Small individual issue size on the bond market could also reflect the market shallowness, which may also discourage trading and thereby contribute to the lack of liquidity. On the demand side, a narrow investor base dominated by domestic banks could result in a onesided bond market. Absence of hedging instruments and restrictions on short-selling could discourage broad investor participation. Mohanty27 found that accounting standards based on historical rather than market value could also reduce market liquidity. Guorong Jiang and Robert McCauley28 believe that size matters for market liquidity in Asia too. They found that a larger market tends to be associated with higher trading volumes, which are in turn associated with tighter bid-ask spreads. McCauley and Remolona29 suggest that the critical size for a liquid market is around US$100 billion to US$200 billion. From Table 9.7, we can find that all EMEAP countries, except Australia, China, Japan and Korea, have smaller market size than the threshold, even though their percentage of GDP may be higher. It is noted however, that their total size (Indonesia, Malaysia, New Zealand, Philippines, Singapore and Thailand) is as high as US$465 billion, much higher than the threshold. Combined with the conclusion of Ogawa and Kawasaki30 about the weights of the U.S. dollar, euro and Japanese yen for a common currency basket in East Asia, the trade weights on the three major currencies are optimized for the common currency basket in ASEAN+China, and the minimum size for a liquidity bond market in Asia, suggesting the first rational basis for financial cooperation between China and ASEAN countries.

Macro-economic Policy: Market Development and Capital Account Liberalization As we know, the domestic bond markets in Asian are small compared to that in advanced industrial countries. Low liquidity and high volatility also prevent them from playing a more active role in financial intermediation in the region. What lies behind the market size is the supply-demand mismatch that has impeded market growth in the region.

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10.6 2.4 38.8 0.2 18.6 18.3 128.8 41.7 49.3

15,116.6 2,002.0 355.6

% of GDP

195.9 6.8 49.7 0.2 21.7 31.9

US$ bn

Corporate Bond Market

89.0 146.9 104.2

154.4 42.6 113.9 49.8 70.1 84.9

Domestic Credit

138.4 76.9 74.7

33.4 24.5 140.8 37.5 211.4 67.1

Stock Market Capitalization

42.5 117.2 23.7

18.0 15.2 36.1 21.8 27.6 18.5

Government Bond

Other Channels as a Percentage of GDP

Source: Edited from Jacob Gyntetherg, Guonan Ma and Eli M. Remolona, “Corporate Bond Market in Asia”, BIS Quarterly Review, December 2005, pp. 83–93.

China Indonesia Malaysia Philippines Singapore Thailand Memo: United States Japan Korea

Country

Table 9.7 Size of Local Bond Market in ASEAN-5 and China Economies at End-2004

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On the supply side, the volume of investment-grade issuance, which is in such short supply in many economies, can be increased by strengthening corporate governance, compelling firms to follow international accounting standards, and tightening the prudential supervision and regulation. But at the same time, we can find some success cases like Singapore to encourage local currency issuance by foreign firms and multilaterals.31 On the demand side, Asian economies are deregulating restrictive covenants that have prevented pension funds, insurance companies and other institutional investors to enlarge the investor base. Asian economies are also encouraging the development of asset-backed securities markets to tap the possibility of diversifying the associated risks for investors. No doubt the Asian Bond Fund is designed to address weak demand in a small and fragmented regional bond market, but it is questionable whether US$1 billion of official money (the size of ABF1) or even several times the amount will make a difference, relative to a regional bond market capitalization of US$1.5 trillion. It may be further questioned whether the buy/hold behaviour of ABF1 and ABF2, typical of central banks investing their reserve portfolios, will be conducive to market liquidity. In short, many Asian economies find themselves in a low-level bond market trap, where the small size of the market makes for illiquidity, and the illiquidity of the market locks in its small size. The dilemma is that you cannot have capital account liberalization unless you first have a welldeveloped local bond market. Also, you cannot have a well-developed local bond market unless you first have capital accounts opened. The choice is more difficult to make as Asian economies learned from the Asian crisis that it is important to have strong, diversified and well-developed domestic financial markets, including bond markets, before liberalizing their capital accounts. If financial markets are under-developed, market discipline will be weak, and banks and firms will be prone to over-borrowing. Foreign capitals will inflow through the banking system, and we know what disaster there would be by this combination. Economic Convergence: Aiming at AMU Even though proposals to develop the Asian bond market have been put forward long before the crisis, they received attention only after 1998 as a means of promoting financial cooperation among Asian economies. The ABF clearly indicates that Asian economies want to promote regional cooperation through the development of the Asian bond market as

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a practical way in the initial stage when less progress has been made in the area of exchange rate coordination within the framework of the CMI. Even though East Asia should move towards regional cooperation in the exchange rate regimes and create a common currency basket in order to prevent currency mismatch, relatively rapid progress has been made in constructing the Asian bond market within the scheme of ABMI. The progress made within the scheme of ABF put forward in the Chiang Mai declaration suggests that the development of the Asian bond market can serve as a means of deepening regional cooperation. But it is also clear that it is hard to promote the Asian bond market when there is a lack of bilateral/ multilateral swap arrangements, identified market infrastructure such as accounting standards, tax hurdles, credit ratings, and most importantly, matured corporation governance. A similar situation can be found in Central and East European countries. In contrast to East Asia trying to promote regional cooperation via bond markets, Central and East European countries are trying to extend EMU via bond markets. The difference made the development of the bond market in Central and East European countries easier than in East Asia. Haiss and Matin32 have done valuable research on the issue. The first difference is that the process of implementing the Copenhagen EU-entry criteria in Central and East European countries has highly improved regulation, enhanced transparency, provided stronger investor protection, and laid the groundwork for stable macro-economic policies. These are all key issues to the development of bond markets. More importantly, in Central and East European countries, capital accounts have already been liberalized, so that the free flow of capital necessary for cross-border investments in bond markets has already been achieved. This is still a major impediment in East Asia in the development of a regional bond market. The second distinctive feature is the existence of a regional monetary union. Every new EU member and EU accession countries are legally bound to join, given the heavy economic integration among euro area economies and their euro-related exchange rate regimes, these countries already can be regarded as an extended euro area. East Asian currencies, in contrast, are mostly pegged to the U.S. dollar, formally or informally. This is the one driver that the Central and East European countries indisputably have that the Southeast Asian countries do not. One of the Central and East European countries’ primary economic goals at this time is further EU convergence and EMU entry, though at a different pace for each country. Asia, on the other hand, has only discussed a common Asian market and

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even a common currency, but has yet to realize one as concrete as the scheme of EU and EMU. As a conclusion to this section, because of the lack of economic integration as compared to Central and East Europe countries, the establishment of the Asian bond market as a means of promoting regional cooperation might be in doubt. A consensus of financial convergence, politically and economically, is crucial for the establishment of a regional bond market. THE CHINESE CASE FROM MACRO AND MICRO PERSPECTIVES We have discussed the issues of promoting the Asian bond market in detail, but the first thing that needs to be done is the development of a domestic bond market among Asian economies. Eichengreen and Luengnaruwmitchai33 studied the reasons for the backward development of the Asian bond market, and found that each economy holds its own key to developing a domestic bond market. For China, the work to be done can be understood from two perspectives: Macro and micro.

Macro Policies Needed in China’s Bond Market The under-development of the bond market in China is mainly because of improper regulation, and marketization could be the main policy to promote the development of a domestic bond market. Policies include the following: 1) Improving regulations, amending and then enacting the new the “Regulation on Enterprise Bonds”. Interest rate, maturity structure, fund use, issuance process and amount should be deregulated, bond investors’ rights in bankruptcy clarified; and bond information disclosure34 with reference to the information disclosure of listed company regulated. 2) Expanding the scope of issuers by permitting state-owned commercial banks to issue long-term bonds to optimize their capital structure. Private enterprises should be able to get finance by issuing bonds.35 Listed companies should consider bonds financing before conducting seasoned equity offers or replacement. 3) Relaxing interest rate control and expanding its floating band. Interest rates should be determined and floated on the market by factors such as credit rating, possibility of default, and projects risks. A price inquiry system should be set up to improve the price-forming mechanism based on the developed government bond market.

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4) Permitting international financial institutions (IFIs) to issue RMB bonds. 5) Adjusting the maturity structure. The issuance of long-term corporate bonds should be encouraged. A financial structure characterized by bonds for long-term finance and bank loans for short-term finance should be established gradually. 6) Improving credit rating services. Government should establish regulations36 to make credit rating services more scientific and encourage the establishment of private, partnership, or joint-venture rating agencies. 7) Accommodating institutional investors by establishing standards for qualified institutional investors37 and setting up the identification, registration and supervision mechanisms for them. Corporate bonds investment restrictions for commercial banks, credit cooperatives,38 insurance companies and social security foundation should be deregulated to expand the scope of investors.39 8) Reforming guarantee requirements. Bonds of state commercial banks should no longer be required to be guaranteed. Bonds of listed companies, private enterprises and security companies should be guaranteed with their net assets under information disclosure and bankruptcy regulations. The bonds of large SOEs still need additional guarantees by financial institutions in addition to the guarantees by their net assets. 9) Measures to increase market efficiency. These include improving trading procedures in exchanges; introducing over-the-counter transaction on the inter-bank market; deregulating trading among investors; developing the invisible transaction markets; introducing a short-selling mechanism and market maker to activate transactions. 10) Setting up protection systems for obligees. For example, establishing bond meetings40 and an obligees’ agent system,41 establishing the challenge principle for related obligees,42 enhancing protective provisions in bond contracts,43 and setting up reimbursement funds. 11) Measures to developing an open bond market. These include regulations on issuance; linking the trading systems for the domestic and foreign markets, permitting overseas investors to trade in the domestic corporate bond market and deregulating domestic investors to trade in foreign bond markets,44 and establishing a supervisory system for international bonds trading including information sharing and supervision on short-term capital flows.

Agency Cost and Corporate Governance: Micro Perspectives The domestic bond market development on the supply side is determined by the financial decision of firms, that is, the choice a firm makes between debt

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financing and equity financing, as well as their capital structure. The determinants of capital structure in theory can be broken down into five hypothesis: Static Tradeoff Model (STM) is a kind of standard economic analysis on tax shields and bankruptcy costs; Agency Theoretic Framework (ATF) focuses on the two agency costs based on the interest of shareholders against managerial and debt holders; Pecking Order Hypothesis (POH) emphasizes the information asymmetry, the effect of signals and additional financial cost; Corporate Control Theory (CCT) focuses on the incentives mechanism, incomplete contract, residual control and managerial entrenchment; Product/Input Market Interaction (PMI) stresses industrial competition, strategy commitment, predatory pricing, industrial characteristics and likelihood of bankruptcy. In China, within the framework of STM, the negative relationship between capital cost and capital structure is significant, suggesting the benefits from tax shields are more important than the effect of financial risks for the reason that the debt ratio is as high as 42 per cent.45 The positive relationship between profitability and capital structure is apparent. Retained earning is negatively-related with debt ratio, indicating that a profitable company has less possibility of financial distress and tend to adopt debt financing when retained earning is not enough for investment. The value of tangible assets is negatively related with capital structure. The finding is illogical and may be explained by premature market and corporate governance in China, also indicating that large companies prefer equity finance to debt finance, or indicating some institutional reasons in IPOs. Within the framework of ATF, more state share results in lower performance; more individual’s share results in high performance; there is no relationship between individual’s share and performance.46 More state share results in more managerial control.47 The tobin Q increases with the increase of the first shareholder’s ratio, but decreases when the first shareholder’s ratio is higher than 50 per cent.48 In industries without government protection, the first shareholder’s ratio is positively related with performance significantly.49 The relationship between equity structure and capital structure is insignificant because of state ownership.50 Within the framework of POH, China depends more on external finance compared to G7 countries. The ratio of 61 per cent for China is higher than the highest ratio in G7, that is, Japan’s 56 per cent. In external finance, equity finance accounts for 73 per cent, much higher than the highest ratio in G7 (the French), suggesting that equity finance is preferred against the pecking order (University of Hong Kong 2003). Equity financing preference also

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exists for agency cost because of lower cost. The higher the P/E ratio (30–60), the lower the ratio of cash dividend (1.42 per cent), the lower IPOs cost. The total cost for equity financing is only about 2.42 per cent, while the debt financing cost (including interest and bankruptcy cost) is about 4–6 per cent. At the same time, managements dislike the constraints of the debt contract.51 This can be regarded as a result of agency cost when information asymmetry and low efficient governance exists. Within the framework of CCT, gains from corporate control (premium to net asset value in large equity transactions) reached 30 per cent of net asset value. When the merger becomes the first large shareholder, premium to net asset value is 27 per cent, while the average is 18 per cent. The gain of corporate control is about 2.8 per cent in common law countries, while the gain of corporate control is as high as 21.3 per cent in French law countries. Within the framework of PMI, regardless of industry sector, the capital structure is stable and the deviation is small. As a strategic commitment, debt ratio is positively related to the competition in the product market.52

Capital Account Liberalization in China Even though the closed capital account in China was a major reason why China was not affected by the financial crisis in 1997, the actual process of capital account liberalization in China has been pretty fast in recent years after China’s accession to WTO. After current account transactions were liberalized in 1996, transactions under the capital account also began to be gradually liberalized, including those for the purpose of trade clearance and other transactions. In the meantime, strict restrictions are still in place for transactions for the purpose of investment, especially portfolio investment which are the key to the establishment of the Asian bond market. Summary and Enlightenment The case study of China shows that institutional and legal factors prevent the development of a domestic bond market; a bank-based financial system suggests government’s implicit guarantee to SOEs; an over-investment effect is the main agent cost between shareholders and debt holders; the development of a domestic bond market needs a long-lasting effort to develop market infrastructures. This conclusion might provide some enlightenment for the development of the Asian bond market, as well as the financial cooperation between

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ASEAN countries and China. Corporate financial behaviour and bank-based financial structure are determined by the imperfect market infrastructure. Thus the obstacles to developing China’s bond market may also be the obstacles to developing the Asian bond market, and there is need to improve and identify market infrastructure among the Asian economies. Improvement to the market infrastructure is more important than exchange rate risk at the beginning stage of establishing an Asian bond market. ROADMAP: POLICY-ORIENTED OR MARKET-ORIENTED The roadmap for financial cooperation between China and ASEAN countries should follow the framework of the financial cooperation among ASEAN+3. The general and long-term roadmap can be easily set out in three stages: The establishment of an Asian bond market to provide a basis for further financial cooperation and policy coordination by identifying market infrastructures, exchange rate agreement on policy coordination, and finally, possibly a common currency in Asia. The more immediate, the more we can talk in detail. As for the establishment of the Asian bond market, two aspects need more attention from both domestic and regional perspectives regarding market infrastructure correction and identification. Because a regional financial architecture will evolve over a long period of time to partially or fully coordinate monetary, fiscal and exchange rate policies, the creation of an Asian common currency should be a policy agenda to be pursued on a longterm basis. In contrast, the credit guarantee and enhancement programme is a policy agenda to be implemented immediately in the short-term. In the foreseeable future, the policy focus will likely remain as improving domestic markets. However a longer-term vision of a more integrated regional market should be sketched, at least in broad terms, so that national reforms in policies and market infrastructures can be done with a view to facilitate, not hinder, the eventual process of regionalization. Identified market infrastructure should be built up among economies in the region.

Infrastructure of Asian Bond Market The Asian bond market has grown substantially in recent years. Governments in the region should implement reforms to bring the region’s bond markets to a higher level of development. There are six areas for policy actions and reforms: 1) Market infrastructure should be strengthened by improving corporate governance and transparency, including in accounting and auditing standards, establishing a common financial disclosure and registration rules for bond

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issuers, standardizing bond contracts, underwriting standards, clearing and settlement procedures, and harmonizing cross-border market regulation and taxation. These could help to improve the market’s ability to price credit risk and to lengthen the maturity structure of domestic finance to build a stable financial structure. 2) The legal system is particularly important for securitization markets and need to be strengthened in the areas of enforcement of contracts and predictability in the resolution of contractual disputes, the definition of true sale of assets, legal status of Special Purpose Vehicles, bankruptcy law and foreclosure practice, and the most important, the protection of investor rights. 3) Repo markets can facilitate liquidity management, improving trading and management activities for all market participants and leading to better liquidity in the secondary market. 4) The derivatives markets should be regulated to include disclosure requirements and supervision to encourage the development of financial derivatives markets, so that market participants can hedge their interest rate, foreign exchange and credit risks. Credit derivatives markets are also useful in improving the efficiency of price discovery in local bond markets. 5) Investor bases in Asian needs to develop a diversified range of institutional investors. Experiences from Latin American countries show that pension funds and mutual funds, with continually growing assets and demand for securities, play a key role in increasing the depth and stability of the local market. Governments need to eliminate restrictions imposed on institutional investors and gradually liberalize capital controls to attract non-resident investors in the region as well as internationally to participate in local markets. 6) SMEs account for two-thirds or three-quarters of gross domestic products in most Asian economies, yet most SMEs have been limited to access either capital market financing or bank financing. To ensure a more stable supply of funds for SMEs, the bond market should focus on protecting creditors’ rights and require all bond issuers to be rated by a credit rating agency or join a credit guarantee and enhancement programme.

Inevitable Exchange Rate Agreement Since ABF just works as a signal from governments and gives the initial demand to the market, having Asian central banks invest a small fraction of foreign reserves within the region is a part of a larger effort to integrate Asian financial markets and address the fragmentation problem that investors complain about.53 As with the cross-border issuance in Thailand under the

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ABMI, a new exchange rate agreement should be achieved formally or informally. This should be the approach among Asian economies for market scale enlargement and also to help lengthen the maturity structure of the financing.

Impediments to Cross-border Investment The dilemma of cross-border transactions in the bond market and free capital flow are obvious in efforts to build domestic bond markets. Even harmonizing regulations and taxation, or creating an Asian rating agency (or a common standard for national rating agencies), or using central bank reserves to facility private cross-border investments are the equivalent of capital account liberalization, in the sense that they encourage cross-border capital flows.54 Because many economies in the region formally or informally continue to operate a soft peg against the U.S. dollar and therefore against each another, even if they liberalize the capital account, they would get less crossborder investment in the bond market since the exchange rates are not allowed to fluctuate, and yields on debt securities might be very similar among Asian economies and with those in the United States. Furthermore, the risk of a speculative attack on the peg is relatively slight when the capital account is closed, and pegging protects banks and corporations from exchangerate volatility. But when the capital account is opened, a currency peg offers an irresistible target to speculators, while the private sector can better manage the consequences of exchange rate fluctuations by using foreign currencydenominated assets and liabilities to hedge their exposures. The effort to encourage more cross-border flows to/from the bond markets in the region means that Asian economies must moving toward a fully capital account liberalization. With the moving toward a fully capital account liberalization, government need to tighten prudential supervision and regulation of banks and other institutional investors. But the problem is that these measures, while limiting risks and volatility, will also restrain financial market development.

What Can be Done about the AMU The benefits of a common currency basket include reducing the intraregional nominal effective exchange volatility and does not have the binding rules for policy coordination and surveillance, but the risks are: 1) a common basket peg scheme will bring unbearable exchange risks and transaction costs for those East Asia economies that do not have sophisticated bond markets

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and forward foreign exchange markets; 2) a common basket peg scheme can hardly survive without strong commitment of member countries and an efficient institutional framework; 3) the choosing of a common set of weights is also open to question. To promote Asia exchange rate coordination, three steps are needed: Firstly, facing the common challenge of deepening cooperation. With growing trade imbalance between the United States and East Asia and the surging pressure from U.S. politicians for the appreciation of Asian currencies, and increasing of foreign exchange reserves, Asian economies need to work out a common policy to deal with the external risks as well as to avoid noncooperative action which may ruin the regional coordination. Secondly, regional exchange stability should be announced jointly and officially as one of the goals of member countries’ exchange rate policy objectives. Policy adjustment made by individual economies in a joint way can help to stabilize the intra-regional exchange rate stability. Thirdly, member economies should cooperate with each other to reform the domestic financial system as well as to enhance intra-regional financial integration arrangements. This could include developing domestic and regional bond markets, introducing intraregional banking sector supervision system and intra-regional capital flow monitoring system, and identifying regional infrastructures. These arrangements are fundamentals for further monetary integration in East Asia. Some Technical Issues in ABMI and ABF The progress in the establishment of the Asian bond market provides some hints on how to further promote the Asian bond market in detail at the technical level.

Credit Enhancement by Securitization: Risk Control on the Supply Side Because of weak market infrastructure among Asian economies in the legal system, law enforcement, credit rating, accounting standards and corporate governance, securitization could be a solution to credit enhancement. Even though securitization is a complicated financial instrument in mature markets, for most emerging markets in Asia, securitization is still a practical way to provide confidence to investors. Securitization refers to the issuance of new bonds collateralized by a pool of assets which can be other bonds, loans or any receivables with a regular cash flow. The pool of assets can provide diversification benefits to potential

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investors. The asset-backed securities can be issued in bigger sizes than is usually the case in emerging corporate bond markets and therefore likely to have better liquidity in secondary markets, which is a desirable characteristic for investors. Consequently, securitization can contribute to the development of corporate bond markets by partially overcoming the small size and low credit quality of most emerging market issuers, a problem which has plagued the emerging corporate bond markets. Essentially, securitization is a derivative product, being packaged from existing securities or other debt instruments. In order for the securitization market to function properly, market infrastructure for the underlying assets have to be already in good shape. On top of that, things like the true sale of assets also need to be sufficiently assured. In emerging Asia, Korea has the largest asset-backed securities markets. The exponential growth of the market in Korea is triggered by the need to finance non-performing loans (NPLs) resulting from the 1997–98 crisis, and to restore liquidity to the banking system.55 Thailand has also passed a Securitization Law in 1997, but the ABS market has apparently not picked up. Compared to the case of Korea, the Thai law may have failed to clarify something critical to securitization, such as the valuation and repossession of collateral, as well as the legal status of SPVs, which is key for the real sale of assets. The creation of Cagamas56 in Malaysia in the mid-1980s contributed to the development of a deep mortgage market. The regulatory framework is favourable to securitization, though it is not as clear as the Korean law, while the bankruptcy law does not appear to treat SPVs as bankruptcy-exempt. The lack of financial guarantees has been identified as a major constraint to the development of the market in Malaysia: Banks and finance companies used to provide guarantees in 1995–98 with similar results as in Korea.

Credit Guarantees: Simple Way for Risk Control on the Supply Side In theory, credit guarantees or insurance assure bond holders of payment of principal and accrued interest in the event bond issuers fall into default, or any mutually agreed credit event. Therefore, credit guarantees can upgrade the credit quality of a bond issuer to that of the credit guarantee provider. Consequently, credit guarantees can be used to enable borrowers of weak credit quality to access domestic as well as international financial markets. In emerging Asian markets, given the small size of local corporate bond markets, both in terms of issue size and the variety of borrowers, it seems

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more meaningful to think about providing financial guarantees at the regional level, as there are more opportunities for diversification and would be a more beneficial starting point for Asian economies to improve/identify market infrastructure at the regional level. It also seems more feasible to arrange insurance for asset-backed securities when the related law is inefficient to have real sale of assets, as the pool of underlying assets is already diversified to some extent. From this point of view, we can find again the need to establish the Asian bond market. In conventional thinking, governments can also set up agencies to provide credit guarantees to targeted borrowers, usually small and medium companies in chosen sectors. If these agencies do not charge commercial premiums, they actually provide state subsidy to local companies. This in turn raises issues of transparency, fairness and potential for corruption, and thereby potential fiscal costs to tax payers. Such subsidy may also not be compatible with WTO trade rules. In addition, there is no reason why government agencies should be better than private companies in assessing credit risk.

Indexed Investment in Asian Bond Market: Risk Control on the Demand Side The central concept behind ABF is to mobilize foreign exchange reserves in Asia and invest them into local bond markets rather than flow out of the region, aimed at solving the double mismatch problem and reducing currency vulnerability. ABF2 is intended to promote the development of index bond funds in regional markets, and simultaneously to improve/identify market infrastructure at domestic as well as regional levels of the bond market. The ABF is clearly a signal from the government, and since the fund is composed of foreign exchange reserves, risk control is a key factor. The more important purpose is to provide the investor who is looking for a diversified exposure to Asian bond markets a cost effective investment fund, since the market infrastructure of the Asian bond market is still weak. Similar to ABF1, the PAIF and eight sub-funds will be passively managed by private sector fund managers. These indexes are thought to be used as benchmark indexes by private sector fund managers for their fixed income products and to facilitate structuring derivative products.57 The Pan-Asian Bond Index Fund (PAIF, US$1 billion) invests in local currency denominated bonds in EMEAP economies, is an open-ended, U.S. dollar denominated fund. In the first phase, it will remain unlisted with EMEAP central banks as only investors. In the second phase, it will be opened to other public and private sector investors and listed in Hong Kong;

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additional listings may follow. PAIF will act as a convenient and cost effective investment fund for regional and international investors who wish to have a well-diversified exposure to bond markets in Asia. The Fund of Bond Funds (FoBF, US$1 billion) is a two-layered structure with a parent fund investing in a number of country sub-funds comprising local currency denominated bonds issued in eight EMEAP economies.58 These national sub-funds are thought to provide local investors with low-cost and index-driven investment vehicles and provide regional and international investors with the flexibility to invest in country bond markets of their choice. What is the Final Stage of the Financial Cooperation? There can be four possible final destinations of financial cooperation between ASEAN countries and China within the framework of the financial cooperation of ASEAN+3: Collective nominal anchor, optimum currency areas, common monetary standard, and common currency. The collective nominal anchor rests more on the advantage of lowfrequency rather than high-frequency pegging. For domestic price level stabilization and protection against neighbours’ devaluations, monetary authorities need to be concerned with exchange rate stabilization on a monthly or quarterly basis. Moreover, the stability of this nominal anchor depends more on having all or most of East Asian economies jointly stabilizing their exchange rates not just on the basis of American price level. East Asian economies are now highly integrated in their trading relationships with each other. Kwan59 shows that, for the last two decades, the intra-Asian trade has risen much faster than the trade with the United States. About 50 per cent of gross East Asian exports has gone to other East Asian economies and only 25 per cent has gone to the United States in recent years. From the collective nominal anchor perspective, East Asia has become a natural currency area. Although exchange rates may remain fixed for many years, longer-term exchange rate uncertainty remains. In comparison, a common currency provides an independent anchor and long-run exchange rate certainty. Some East Asian economies do not constitute an optimum currency area because they may experience asymmetric macro-economic shocks. The possibility of complete monetary unification in East Asia, with the introduction of an Asian Monetary Unit, is certainly not imminent. Although not as good as a common currency, a common monetary standard among close trading partners might still be preferable to exchange rate flexibility. In a common monetary standard, participating economies

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keep their exchange rates fixed against a common nominal anchor. A common monetary standard among economies who trade extensively with each other is better than floating exchange rates in facing asymmetric shocks. The importance of targeting the exchange rate as an instrument of monetary policy for stabilizing the domestic price level in an area where most trade is invoiced in U.S. dollars, and providing a highly visible rule for domestic monetary policy at the international standard, constrains independent behaviour by the governments. Finally, we have backed exchange rate targets with high frequency pegging. Situations will become more serious under the hypothesis of original sin.60 It means that these mismatches exist not because banks and firms lack the prudence to hedge their exposures. Similarly, the problem is not that firms lack the foresight to match the maturity structure of their assets and liabilities. It is that they find it impossible to do so. The incompleteness of financial markets is thus at the root of financial fragility. The key is still the development of the bond market to solve the problem of double mismatch. Market-Driven or Policy-Driven Cooperation Having clarified the roadmap for financial cooperation between ASEAN countries and China, next is making the right choice between market-driven cooperation and policy-driven cooperation. The development of financial cooperation among ASEAN countries may be a market-driven process. Measures taken include the establishment of a regional surveillance mechanism like CMI aimed at coordinating exchange rate compatibility. From a broader perspective, the market-driven cooperation process should also include the selection of the anchor currency in the region. But as we can see, progress in a market-driven process might be slow and need the impetus from measures of policy-driven cooperation, like the EMEAP consensus on the establishment of the Asian bond market. More importantly, a central banks meeting should become a regional surveillance mechanism for policy coordination to deepen the financial cooperation between ASEAN countries and China. CONCLUSION When faced with the same challenge of financial fragility because of the lack of a deep and well-developed bond market, the first and foremost task both for ASEAN countries and China is to develop their domestic bond market, especially to improve the market infrastructure, which needs not

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only to be improved, but also to be identified in the region. Here we find the first area for financial cooperation between ASEAN countries and China. This is most practical because of their similarity compare to developed countries in the region. The second area is an exchange rate arrangement which is the key to fostering cross-border issuance and transactions in the Asian bond market.61 Though we may not know exactly what should be the form of regional financial cooperation, we definitely know that the developing of a regional bond market is a starting point. NOTES 1. Raymond W. Goldsmith, Financial Structure and Development (New Haven: Yale University Press, 1969). 2. The reason for the faster growth of debt financing compared to equity financing is that the debt holder cannot be involved in the managerial and information asymmetry between investors and management, which can only be solved by financial intermediation to their advantage. 3. The diversified financial institutions and financial instruments meet the diversified investors’ demand and diversified projects’ needs, and finally reach a sustainable growth. 4. International finance have been significantly surpassed domestic finance historically, as a result, the first solution for some emerging economies is international finance, rather than domestic. In the neglect of the potential domestic financing capacity, McKinnon (1973) and Shaw (1973) put forward the theory of financial deepening, but the theory did not succeed in practice. 5. Refer to Barry Eichengreen and Pipat Luengnaruemitchai , “Why Doesn’t Asia have Bigger Bond Market”, NBER Working Paper 10576, 2004. 6. Refer to Asli Demirguc-Kunt and Ross Levine, “Bank-Based and Market-Based Financial System: Cross-country Comparisons”, The World Bank Working Paper Series, 1999. 7. Asli Demirguc-Kunt and Vojislav Maksimovic, “Institutions, Financial Markets, and Firm Debt Maturity”, Journal of Financial Economics, 54 (1999): 295–336. 8. Sergio Schmukler, “Does Integration with Global Market Affect Firms’ Financing Choices? Evidence from Emerging Economies”, World Bank Working Paper Series, 2000. 9. Oliver Hart, “Capital Structure as a Control Mechanism in Corporations”, Canadian Journal of Economics, 21 (1988): 467–76. 10. Sun Jie, Capital Structure, Agency Cost and Corporate Governance (China Social Sciences Literature Press, 2006), in Chinese. 11. Eiji Ogawa and Takatoshi Ito, “On the Desirability of a Regional Basket Currency Arrangement”, NBER Working Paper 8002, 2000.

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12. John Williamson, “A Currency Basket for East Asia, Not Just China”, Policy Briefs in International Economics, Institute for International Economics, July 2005. 13. Eiji Ogawa and Kentaro Kawasaki, “What should be Weight on the Three Major Currencies for a Common Currency Basket in East Asia?”, Hitotsubashi University Research Unit for Statistical Analysis in Social Sciences, Discussion Paper Series, no. 6 (Institute of Economic Research Hitotsubashi University, 2003). 14. Eiji Ogawa and Junko Shimizu, “A Deviation Measurement for Coordinated Exchange Rate Policies in East Asia”, RIETI Discussion Paper Series 05-E-017, 2005. 15. Williamson, “A Currency Basket for East Asia, Not Just China”. 16. Ogawa and Ito, “On the Desirability of a Regional Basket Currency Arrangement”. 17. Dalla Ismail, Denna Khetdhate, D. R. Rao, Kali Kondury, Lwang Jun and Terry Chuppe published a report of the World Bank in 1995 titled as The Emerging Asian Bond Market. 18. The information is collected from an author’s talk with the staff of JBIC in October 2005 in Tokyo, Japan. 19. Other difficulties are credit rating and accounting standards. 20. Ogawa and Shimizu, “A Deviation Measurement for Coordinated Exchange Rate Policies in East Asia”. 21. Ibid. 22. Barry Eichengreen, “The Unintended Consequences of the Asian Bond Fund”, address to the annual meeting of the Asian Development Bank in May 2004. 23. In fact, the establishment of the Asian bond market still need a lot of preconditions such as market infrastructure, but unlike the establishment of a common currency agreement, those preconditions are all on the technical level with less political consideration and easy to get started. 24. Julius Caesar, Kenneth Waller and Newin Sinsiri (2005) emphasized the importance of the partnership between public sector and private sector in developing bond markets in Asia. 25. Eichengreen and Luengnaruemitchai, “Why Doesn’t Asia have Bigger Bond Market”. 26. Ibid. 27. M.S. Mohanty, “Improving Liquidity in Government Bond Markets: What can be Done?”, BIS Papers, no. 11 (June 2002). 28. Guorong Jiang and Robert McCauley, “Asian Local Currency Bond Market”, BIS Quarterly Review (June 2004). 29. R. McCauley and E. Remolona, “Size and Liquidity of Government Bond Markets”, BIS Quarterly Review (November 2000). 30. Ogawa and Kawasaki, “What should be Weight on the Three Major Currencies for a Common Currency Basket in East Asia?”. 31. This gives us an idea how to improve the market infrastructure of the domestic

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32.

33. 34.

35.

36. 37.

38.

39. 40.

41. 42.

43. 44. 45.

bond market by introducing issuers of IFIs like ADB. It is the present practice of many economies in Asia, like the Panda bond issued by ADB in China. Peter Haiss and Stenfan Matin, “Options for Developing Bond Market — Lessons from Asia for Central and Eastern Europe”, EI Working Paper no. 63, 2005. Eichengreen and Luengnaruemitchai, “Why Doesn’t Asia have Bigger Bond Market”. In April 2001, CSRC published a series of principles on the contents and format of information disclosure for companies listed through public offering. The principles should be further improved. The number of private enterprises is increasing in China, but in the meantime, they need more financing channels. Private enterprises do not enjoy any administrative protection like SOEs and with clear property rights, it is easy to implement supervision and bankruptcy of those firms, which could serve as an example for other issuers. In September 2003, CSRC published “Criterion of Credit Bureau Rendering Bond Rating Report to Security Companies”. Something like institutional investors in the United Kingdom such as CII (Certificated Institutional Investors), SII (sophisticated institutional investors). In the United States, they are called QIB (Qualified Institutional Buyers) and QII (Qualified Institutional Investor). PBC’s “Notice on enhancing supervision of rural credit cooperatives” says that after satisfying the demand of agriculture production, rural credit cooperatives could invest in corporate bonds within a prescribed limit. Their investment items are treasury bonds, financial institutional bonds and central corporate bonds. Corporate bond can be issued to designated qualified institutional investors. The purpose of bond meetings is to prevent insiders from undermining the interest of obligees. Bond meeting is different from the meeting of shareholders, as it cannot make decisions on management, but a corporation must obtain approval from the bond meeting before make decisions that have direct bearing on the interest of obligees. Bond trusteeship under the system is a kind of service provided to investors by issuers, which handle debt-related matters on behalf of bond investors’ interests. Includes issuers, guarantees, and bondholders holds over 10 per cent of corporate stocks and other important related parties. They can take part in bond meetings but have no voting right. It is akin to items in debt contracts restricting the corporation from conducting further debt financing and hence reduce the bankruptcy costs. In 2002, CIRC eliminated the administration’s approval of insurance companies using their fund abroad. Refer to Chen Xiao and Shan Xin, “If Debt Finance will Increase the Financial

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46. 47. 48. 49. 50.

51.

52. 53.

54. 55.

56.

57.

58. 59.

201

Cost of Listed Company?” Journal of Economic Research (September 1999), in Chinese. Refer to Xu Xiaonian, “Establishing a Corporate Governance and Capital Market Based on Legal Person Entity”, Journal of Reform (May 1997), in Chinese. He Jun, “A Empirical Study on Corporate Governance of Listed Companies”, Journal of Economic Research (May 1998), in Chinese. Sun Yongxiang and Huang Zuhui , “Equity Structure and Performance of Listed Companies”, Journal of Economic Research (December 1999), in Chinese. Chen Xiaoyun and Xu Xiaodong, “Equity Structure, Performance and Investor Protection”, Journal of Economic Research (November 2001), in Chinese. Wang Juan and Yang Fenglin, “A Recent Study on the Dominants of Capital Structure of Listed Companies in China”, Journal of International Finance (August 2002), in Chinese. Huang Shaoan and Zhang Gang, “An Analysis to the Equity Finance Preference of Chinese Listed Companies”, Journal of Economic Research (November 2001), in Chinese. Liu Zhibiao, Jiang Fuxiu and Lu Erpo, “Capital Structure and Industrial Competition”, Journal of Economic Research (July 2003), in Chinese. Because foreign reserves of Asian countries are invested in U.S. dollar, they contribute nothing to local bond market development. Even if they were invested in Asian government bonds, they would still contribute little because of central banks’ risk management. But if Asian savings were left in private hands as opposed to being accumulated by central banks and governments in the form of foreign reserves, it would have the consequence of allowing Asian currencies to fluctuate, rather than intervention in order to prevent the exchange rate from appreciating. Douglas Arner, Paul Lejot and S. Ghon Rhee (2005) have done valuable research on the topic. Corporate bonds were guaranteed by commercial banks prior to the 1997–98 financial crisis and concentrated in the largest five chaebols, and hence were little different from loans. Cagamas Berhad, the National Mortgage Corporation, was established in 1986 to promote the secondary mortgage market in Malaysia. Its corporate mission is to provide financial products that would make housing loans more accessible and affordable to Malaysians, particularly the lower income group. With regard to volume considerations, EMEAP (2004b) announced that its members will be careful to limit the volume of the total investment in order to prevent any crowding out effect on private investors. The eight economies are China, Hong Kong SAR, Indonesia, South Korea, Malaysia, Philippines, Singapore and Thailand. C.H. Kwan, “The Economics of a Yen Bloc”, The Brookings Institute and Nomura Research Institute (June 2000).

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60. “Original sin” is a situation in which the domestic currency cannot be used to borrow abroad or to borrow long term, even domestically. In the presence of their incompleteness, financial fragility is unavoidable because all domestic investments will have either a currency mismatch (projects that generate pesos will be financed with dollars) or a maturity mismatch (long-term projects will be financed by short-term loans). 61. Coincidence or not, when China declared to reform its exchange rate regime, Singapore and Malaysia made a simultaneously shift in their exchange rate, which could be regarded as a signal of regional policy coordination.

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10

ASEAN-China Investment Cooperation: Status and Prospects Jose L. Tongzon

INTRODUCTION There are certainly some risks and costs associated with the current initiatives to bring about greater trade liberalization between China and the ASEAN countries within the framework of the WTO and regionalism. But the high level of commitment demonstrated by both parties for the establishment of a free trade area indicates their sense of optimism that the enormous benefits that can be derived from free trade will outweigh the short-term costs.1 It is argued that China and the ASEAN countries can maximize the benefits of trade liberalization by strengthening and enhancing their investment cooperation. Both countries have huge markets (existing and potential) which offer each other enormous investment opportunities. Investment cooperation can take a variety of forms but may be classified into two types: market sharing and resource pooling. Market sharing takes the form of providing access to each other’s investment opportunities by relaxing the restrictions and rules on and creating an environment conducive for foreign investments. Resource pooling could take the form of joint

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ventures and other types of partnerships (such as joint marketing and promotion) using each other’s comparative advantages and complementarities. In this light, this chapter will attempt to identify the specific areas where there is great potential for investment cooperation between these countries and the obstacles that need to be addressed in order to bring this potential into reality. The first part of the chapter will first outline the trends and nature of the investment relationship between these countries. The second section will identify the specific areas where there is potential for mutually beneficial investment cooperation between these countries and the third section discusses the major obstacles and constraints that have come in the way of achieving a significant ASEAN-China investment cooperation. ASEAN-CHINA BILATERAL INVESTMENT Before exploring and identifying areas for possible investment cooperation, it is useful to first briefly outline the trends and nature of the investment relationship between China and the ASEAN countries. Although the growth of ASEAN-China bilateral trade has been quite remarkable since China opened her doors to the world (making China one of the main economic drivers of ASEAN economies), the investment link between China and the ASEAN countries has not been quite impressive. Between 1993 and 2003, ASEAN-China bilateral trade grew at an average annual rate of about 21 per cent and throughout the decade overall ASEANChina bilateral trade grew about six-fold. China’s share in ASEAN-6 exports grew from 2 per cent to 6 per cent, while China’s share in ASEAN-6 imports grew from 2 per cent to 8 per cent throughout the decade. It has been reported that China-ASEAN trade exceeded US$130 billion annually and is likely to match the volume of U.S.-ASEAN trade this year (Straits Times, 10 February 2006, p. 13). However, the ASEAN-China investment link has been less remarkable. ASEAN investments in China have shown a significant growth. In 1991 ASEAN investment in China was only US$90 million but grew to US$4.8 billion in 1998, US$26.8 billion in 2001, and by 2004, ASEAN paid-up investment was over US$40 billion. But Chinese investment into ASEAN has not been increasing. As a matter of fact, compared to its peak right before the Asian crisis, there was a fall in the share of Chinese FDI into ASEAN (see Table 10.1). Thus, whereas ASEAN has grown in importance to China in trade, ASEAN has declined in importance to China in the area of investments as illustrated by the value of ASEAN FDI inflows to China

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570.3 136.7 108.1 5,649.3 660.2 28,230.6 328,862

1995 –276.9 291.3 92.6 3,937.6 90.8 22,406.3 643,879

1998 269.6 188.7 81.2 2,317.7 632.0 18,447.0 632,599

2003

(US$ Million)

390.6 225.9 46.3 2,538.2 896.5 25,654.2 648,146

2004 –1.2 1.3 0.41 17.6 0.41

3.5

8.6

1998

2.0 0.48 0.38 20.0 2.3

1995

2.9

1.5 1.0 0.44 12.6 3.4

2003

4.0

1.5 0.88 0.18 9.9 3.5

2004

(Share in Total ASEAN FDI, %)

Sources: ASEAN Secretariat website ; UN, World Investment Report (1999, 2005).

CER China India Japan Republic of Korea Total FDI into ASEAN World FDI Share of ASEAN FDI in World

Source Countries

Table 10.1 FDI Inflows into ASEAN by Dialogue Partners

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being much higher than the value of Chinese FDI inflow to ASEAN. ASEAN investment in China — nearly US$40 billion in 2005 — is growing and is likely to grow further. A look at Figure 10.1 and 10.2 serves to illustrate further the above argument. China’s FDI inflows to ASEAN-5 peaked just before the Asian financial crisis, and then fell very sharply after that before some recovery could be seen, as many investors had lost faith in ASEAN as an investment hub. Probing the matter more from the Chinese perspective, in terms of lowend manufacturing, China’s abundant cheap and unskilled labour and natural resources tend to encourage domestic investments, so investing overseas in such industries in ASEAN does not make sense. In terms of high-end manufacturing and services, ASEAN in general does not boast of a strong reputation for commercial services, as many ASEAN countries suffer from problems such as weak legal infrastructure and political transparency, which could hamper the growth of commercial trade and investments in ASEAN commercial trade (maybe with the exceptions of Singapore and Malaysia).2 Thus, unless ASEAN cooperates in fostering economic unity quickly by allowing for more transparency, cutting down on bureaucratic red tape, resolving regional issues such as terrorism and helping one another in resolving domestic problems, the region’s investment outlook for China may continue to look uncertain. Figure 10.1 Trends in FDI inflows from China to ASEAN-5

US $ million

300 200 100 0 -100 2003

2002

2001

2000

1999

1998

1997

1996

1995

-200

FDI inflows from China to ASEAN-5 Source: ASEAN Secretariat.

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Figure 10.2 Share of China FDI in ASEAN-5 Total FDI Inflows

2.1

(in %)

1.4 0.7 0.0 -0.7 -1.4 2003

2002

2001

2000

1999

1998

1997

1996

1995

-2.1

Share of China FDI in ASEAN-5 Source: ASEAN Secretariat.

It should also be noted that the share of ASEAN-5 FDI inflows to China is much higher than the share of Chinese FDI inflow to ASEAN. This is mainly attributed to the prominent role of Singapore as a heavy investor in China. Singaporean investments in China have helped to “pull up” the value of ASEAN-5 investments in China. In both 2002 and 2003, Singapore’s investments in China were US$2,337.2 million and US$2,058.4 million respectively. This was about six to eight times higher than that of Malaysia’s, the second largest ASEAN-5 investor in China. Chinese direct investment in Singapore was S$841.2 million while Singapore’s direct investment in China amounted to S$19.02 billion in 2003 and rising. Singapore’s massive investments in China are part of its strategy of investing in expanding markets overseas to maintain its wealth as well as to capitalize on the potential benefits that can derived from the economic rise of China. Another measure of the relative importance of the ASEAN-China investment link can be seen through the use of the investment intensity index. As shown in Table 10.2, the investment intensity index of ASEAN countries with China has been less than 1 in both years and has been declining. What this means is that China’s FDI into the ASEAN countries

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Table 10.2 Estimates of FDI Intensities of ASEAN with China ASEAN-China

FDI Inflow Intensity Index

China-ASEAN

1998

2003

2003

0.22

0.01

1.7

Source: Author’s calculations; 2003 is the latest year for which data are available.

has been lesser in magnitude relative to world FDI to ASEAN, and this value has been declining with time. On the other hand, ASEAN prefers to invest more intensively in China relative to investing in the rest of the world. The findings on Table 10.2 are consistent with the observations made in Figure 10.1 and the reasons behind why this is the case have been explained earlier on. While China might see ASEAN as a key trading partner and an important destination for its exports, ASEAN may not be attractive to China when it comes to low-end manufacturing, as China is more competitive in this area, and ASEAN in general (although there are exceptions such as Singapore and Malaysia) does not boast of a strong infrastructure (in soft and physical aspects) that is conducive to investment growth in high value-added manufacturing or services, in addition to the lack of continued political and social stability in some ASEAN countries particularly Indonesia and the Philippines and lack of integrated market caused by existing non-tariff barriers including differences in customs procedures and other non-tariff impediments to doing business within the ASEAN region. Further, a number of institutional problems continue to dampen the interests of foreign investors in the transitional economies of ASEAN including their under-developed infrastructure, inefficient administration and bureaucracy, lack of transparent rules on ownership and unclear guidelines, inefficient banking sector, and inconsistent policies. The above FDI trend implies that there is considerable scope for more Chinese investment flows into the ASEAN countries. PROSPECTS FOR INVESTMENT COOPERATION To identify and evaluate potential areas for further investment cooperation between China and the ASEAN countries, we need to take a closer look at the degree of complementarity or competitiveness between them in their exports of goods and services. The more complementary they are, the more scope

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there is for further investment cooperation, particularly in the form of resource pooling. Table 10.3 illustrates the top ten products exported by ASEAN and China to the world in 2003. China’s top ten exports to the world account for about 24 per cent of its total world exports, and the bulk of these exports are electronic product parts and components, which take up about 20 per cent of its total exports. Clothing and children’s toys comprise the remaining top ten exports. ASEAN, on the other hand, sees its top ten products account for 40 per cent of its total exports. ASEAN’s key exports are electronic product parts and components as well as oil products such as crude oil and palm oil. ASEAN and China have five products in common out of their top ten exports to the world in 2003. These products are electronic microcircuits, data processing machine parts, storage units, parts for telecommunications equipment and input or output units for automatic data processing machines. However, a look at Table 10.4 also shows that both China and ASEAN are also heavy importers of the products they heavily export. Both ASEAN and China are also heavy importers of three of the common products that they export — parts, data processing machines, parts for telecommunications equipment and electronic microcircuits. This suggests that there is possibly a high level of intra-industry Trade (IIT) in these industries, illustrating the fact that ASEAN and China may actually have a complementary trade relationship. The most common measure of IIT is the Grubel-Lloyd (G-L) index, which computes the ratio of net exports in a product category to its total trade in an index that takes values from 0 to 100. Estimates of the G-L index and the actual level of IIT in ASEAN’s trade with China during 1993, 1998 and 2003 using total exports are respectively presented in Table 10.5. The aggregate G-L index has been increasing rapidly over the decade, rising by almost two-fold. The level of IIT has increased by more than five times. A look at the electronics sector, a major export sector of ASEAN might help explain this trend. Trade in this group of commodity items (electronics) largely occurs under the umbrella of U.S.-based multinational corporations (MNCs), which explain the bulk of transactions attributed to intra-industry and intra-firm trade between the ASEAN branches of MNCs and associated companies in various parts of the world. Since China’s economy has been booming, and more and more MNCs have been flocking to China, we would expect a lot of trade to go on between the ASEAN and Chinese branches of MNCs. China’s main exports in the machinery and electrical appliances category are mainly comprised of telecommunications and equipment, such as sound

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15,760 13,998 13,049 10,515 8,321 6,409

7526 7522 7649 7638 7643 7764 8942 8453 7527

Children’s toys Jerseys, pullovers, cardigans Storage units 5,979 5,845 5,766

18,404

7599

Parts, data proc. etc. mch Input or output units for automatic data processing machines Digital automatic data processing machines Parts, telecommunication equipment Sound, video recording TV, radio transmitters etc Electronic microcircuits

US$ Million

Code

Commodity Description

China

1.38 1.35 1.33

3.23 3.01 2.42 1.92 1.48

3.63

4.24

Share in total

Storage units Crude petroleum Natural gas, liquefied Diodes, transistors Special transactions not classified according to kind Palm oil, fractions Telecom equipment Automatic data processing machines

Parts, data proc. etc. mch

Electronic microcircuits

Commodity Description

4222 7649 7526

7527 3330 3431 7763 9310

7599

7764

Code

ASEAN

Table 10.3 ASEAN and China’s Top 10 Exports to the World in 2003

7,264.2 7,056.3 6,584.2

16,969.3 12,482.1 11,255.5 8,628.8 8,089.1

25,102.7

64,560.1

US$ Million

1.7 1.7 1.6

4.1 3.0 2.7 2.1 1.2

6.1

15.6

Share in total

210

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6,233.9 6,129.1 5,869.4

7527 7843 7763 2222

Soya beans 5,416.9

41,108.3 19,782.4 12,679.3 12,067.3 11,887.6 8,568.2

7764 3330 8719 7599 7649 7284

Electronic microcircuits Crude petroleum Liquid crystal devices; lasers Parts, data proc. Etc. mch Parts, telecommunications equipment Mach. appl. spcl indus nes Storage units, whether or not presented with the rest of a data processing Other parts, motor vehicles Diodes, transistors etc.

US$ Million

Code

Commodity Description

China

1.7

1.6 1.5 1.5

10.3 4.9 3.2 3.0 2.9 2.1

Share in total

Parts, telecom equipment Other parts, motor vehicles Special transactions and commodities Mach. appl. spcl indus nes

7284

7649 7843 9310

7764 7768 3330 7599 7643 7763

Code

ASEAN

Electronic microcircuits Electronic comp pts, crystals Crude petroleum Parts, data proc. etc. mch TV, radio transmittrs etc Diodes, transistors etc.

Commodity Description

Table 10.4 ASEAN and China’s Imports from the World in 2003

3,640.5

5,267.2 4,881.9 3,988.6

38,455.1 26,267.2 23,525.6 20,549.7 6,108.0 5,274.7

US$ Million

1.1

1.5 1.4 1.2

11.2 7.7 6.8 5.9 1.8 1.5

Share in total

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Table 10.5 Intra-Industry Trade (IIT) estimates for ASEAN Trade with China IIT Estimates

1993

1998

2003

G-L aggregate index

24.2

38.6

43.0

9,592.9

19,619.2

52,281.9

Level IIT (USD mn)

recorders and reproducers, television and parts and other accessories. These are relatively labour-intensive. Unlike the former group of labour-intensive products, China is a net importer of machinery and electrical appliances, and China’s export of electronics and machinery have a high import content and are low value-added, so it is highly possible that some ASEAN countries can be more competitive than China in certain sub-sectors, particularly in higher value-added ones. Greater complementarity exists between China and the ASEAN countries in the area of services. The export similarity indices calculated in Table 10.6 show that there is even more scope for investment cooperation in the area of services due to their significant differences in comparative advantage. As Table 10.6 indicates, where services trade is concerned, ASEAN and China are getting less competitive as evident from the fact that their export similarity indices have been declining, showing that ASEAN and China are exporting more dissimilar services products. However, it also demonstrates that while there has been an overall decline in the export similarity indices for services, the index has been rising since 1998. This could be due to the expansion of China’s services sector underpinned by its economic rise, while tourism has played a very important role in boosting its services exports

Table 10.6 Export-similarity indices for ASEAN and China’s Services Sector

1993

1998

2002

Computer, communications and other services Insurance and financial services Transport services Travel services Overall

35.7 0.8 15.9 42.6 95

35.7 0.7 9.6 32.2 78.4

32.2 0.7 14.5 38.2 85.7

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(accounting for more than 50 per cent of China’s services exports since 1998). Yet, in other services sectors such as insurance and financial services, China seems to be lagging behind ASEAN in terms of trade shares. These areas are areas in which ASEAN can continue upgrading so as to maintain a strong foothold over China. These tables indicate that ASEAN should try to move away from competing with China in the manufacturing front (as it will be increasingly difficult for ASEAN to compete with a manufacturing hub that boasts abundant natural resources and unbeatably low labour costs) while focusing on services exports so as not to lose out to China in this area. In summary, ASEAN as a group and China are only competitive in five (5) out of their top ten (10) merchandise exports (in the sense that they overlap in these commodities) consisting of electronic components, storage units, telecommunication equipment parts, data processing machine parts and electronic microcircuits. On the other hand, the ASEAN exports of palm oil, rubber, LNG and crude petroleum do not have a match with China’s other top ten exports. The specific areas where more mutually beneficial joint business ventures are likely to occur (aimed for China and third country markets) are mineral and petroleum products, natural resource-based products such as timber, rubber, palm oil, food and food products. The energy sector in particular is crucial to China’s long-term development policy. Energy consumption in China is expected to grow by 8 per cent on average per annum for the period 2005–09. In the light of China’s limited oil supply and the negative environmental implications of its dependence on the use of coal, China has embarked on an energy diversification and security policy. ASEAN can act as an important partner in this area with its oil endowments. For example, China National Offshore Oil Corporation (CNOOC) is now Indonesia’s largest offshore oil producer from the takeover of Repsol Indonesia in 2002. Brunei, Indonesia and Malaysia have already been exporting their oil to China. There is more scope for cooperation in R&D for an energy-saving technology and for alternative sources of energy (from reliance on coal to oil, hydro and nuclear power). Other areas for investment cooperation can include the transportation of oil, construction/leasing of tankers and drilling rigs, oil extraction, supply of refinery equipment and information facilitation between national oil companies. China’s consumption of forest resources is rising but its domestic growth rate is lagging significantly. There is certainly the possibility of a China-ASEAN joint venture to secure a stable flow of timber and rubber between ASEAN and China and to upgrade these products. As China’s

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population and per capita income continue to grow, it needs more food and agricultural products. ASEAN countries can take advantage of having a preferential access to the Chinese market by supplying China with rice, sugar, tropical fruits, natural rubber, timber, pulses and vegetable oils where they have a competitive advantage. Further, ASEAN-China trade is characterized by a high level of intraindustry trade, as evidenced by a rising G-L index. This means that they are both heavy importers of the products they heavily export, particularly in such export items as electronic microcircuits, data processing machine parts and storage units. This high level of intra-industry trade is a reflection of the high degree of differentiation for these commodities and the market diversification policy of the MNCs which can play a key role in enhancing investment flows between China and the ASEAN countries. Given that China is relatively at the low end of technology-intensive products, Singapore and Malaysia can provide China with technical expertise and quality computer parts to develop international standards. But cooperation can also be undertaken in the establishment of channels for information sharing, training and infrastructure development. Another channel through which the ASEAN countries can complement China is in the trade of intermediate goods. China imports a significant part of its raw materials and industrial components in the production of manufactured goods. China is already a significant importer of textiles, metal and metal products, leather and leather products, chemicals, electronic components and plastics from its Asian neighbours. Over half of China’s trade depends on the import of raw materials and component parts. This means that for every $1 million worth of exports by China requires importing intermediate goods and components worth roughly $500,000 (China in Transition, 2002, p. 1). Further, the proportion of this imported component is higher for high technology-intensive products than for low technology-intensive products. For example, a computer labelled “Made-in-China” is likely to contain a large proportion of imported components including an Intel CPU, Microsoft operating system, disk drives and a liquid crystal display made in other Asian countries. Table 10.7 presents China’s major imports with their RCA indexes. When the RCA index is applied to imports of components of a product, it would reveal whether or not a country has a competitive advantage in assembly operation or comparative disadvantage in production. The formula used is:

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RCAI = (Mia /Mit) / (Mwa/Mwt) Where Mia = value of imports of commodity a by country i Mit = value of total imports of country i Mwa = value of world imports of commodity a Mwt = value of total world imports RCA greater than unity for a component implies competitive advantage in assembly operation. RCA greater than unity for a finished product implies that a country has comparative disadvantage in the production of these products. It is clear from Table 10.7 that China’s major imports are mostly intermediate and capital goods (SITC 7). Except for heavy petroleum/bitum oils (SITC 334), the RCAI are all above unity, which implies that China has a competitive advantage in assembly operations. It should be noted that China has experienced a reduction in RCAI for all the products listed or reduced its advantage in assembly operation over the 1996 to 2000 period, except for valves/transistors/etc. (776), petroleum/bitum oil, crude (333),

Table 10.7 China’s Major Imports at 3-digit level with their RCAI and World Import Shares: 1996–2000 RCAI

1996

1997

1998

1999

2000

Special Industrial Machinery (728) Telecomms Equipment (764) Valves/Transistors/etc (776) Man-Made Woven Fabrics (653) Manufactured Fertilizers (562) Petrol/Bitum, Oil, Crude (333) Textile/Leather Machinery (724) Flat Rolled Irons/Steel Products (673) Textile Yam (651) Heavy Petrol/Bitum Oils (334) Office Equip Parts/Accessories (759) Paper/Paper Boards (641) Stylene Primary Polymers (572) Electrical Equipment (778) Electrical Circuit Equipment (772)

4.23 1.52 0.83 4.68 6.02 0.47 4.82 3.10 2.72 0.79 0.80 1.17 7.32 0.98 1.08

2.95 1.44 1.06 4.79 5.64 0.75 3.37 2.39 2.81 1.24 1.00 1.47 8.03 1.12 1.30

2.77 1.84 1.47 4.26 4.95 0.65 2.43 2.10 2.69 1.09 1.14 1.53 8.02 1.13 1.40

2.54 1.72 1.84 4.28 4.28 0.66 2.91 2.92 2.27 0.93 0.99 1.56 8.08 1.24 1.49

2.36 1.44 1.78 3.85 2.73 1.03 3.23 2.57 2.23 0.66 1.00 1.20 6.25 1.19 1.49

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office equipment parts and accessories (759), paper/paper board (641), electrical circuit equipments (772) and electrical equipments (778), which means that China has improved on its advantage in the production of these components. China’s potential in the production of skilled intensive products and its ability to increase the value added in its exports by expanding production for components is greater than most of the ASEAN countries. Nevertheless, in the near term, China is likely to rely mostly on imported components for expansion of assembly operations. ASEAN countries can, therefore, tap into the Chinese market by supplying the intermediate and capital goods that China imports. But ASEAN countries will have to compete with the more developed countries of the United States, Japan, the EU and the NIEs as they have been the main sources of supply of these Chinese imports. Currently, the ASEAN countries do not have a competitive advantage in the production of high-valued intermediate and capital goods vis-à-vis the developed countries and the NIEs. To enhance international competitiveness, ASEAN countries need to build up their level of technology. There are two ways for the ASEAN countries to enhance their technological capacity: to have the ability to innovate indigenously or to have the ability to promote technological diffusion via foreign direct investment. It is worrying to note that apart from Singapore, the ASEAN countries are way behind other developed countries and the NIEs in terms of indigenous innovation and technology transfer performance based on the Global Competitiveness Report 2000 published by the World Economic Forum. Thus, if the ASEAN countries can boost their technological capacity to produce the intermediate and capital goods China imports, the ASEANChina FTA will be a source of economic opportunity for the ASEAN countries. ASEAN and China are highly complementary in services exports as indicated by their export similarity indices, and the ASEAN countries are more competitive than China particularly in the area of financial services, transport and tourism. The services sector in China is a sector where the ASEAN countries and China can benefit from joint ventures. Tourism, banking and finance, insurance, accounting and professional services, medical and educational services and transport are potential sources of economic benefits for ASEAN. As China continues to enjoy increasing economic prosperity, the demand for travel, financial services and education in particular will increase. There is greater scope for China-ASEAN investment cooperation as the Chinese economy continues to grow and as they see greater investment opportunities in the region. For the period 1979–85 when China’s foreign

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trade was still under state monopoly and foreign investment was under state guidance, there were only 189 approved investment projects with total outward investment amounting to about US$197 million. The scale of investment projects was also small, averaging US$950,000. For the period 1986–91 when outward investments were liberalized (allowing non-state firms to set up subsidiaries in other countries provided they had sufficient capital, technical and operational know-how), 891 investment projects were approved amounting to US$1.2 billion with the average size amounting to about US$1.4 million. For the period 1992–98 Chinese outward investments surged with the setting up of branch businesses in Hong Kong to engage in real estate and stock market speculation, although this surge did not last long due to losses suffered by these firms and a more rigorous process installed as a result. But for the period 1999–2001 when the government provided export tax rebates, foreign exchange assistance and financial support to overseas Chinese enterprises that used Chinese raw materials or Chinese-made parts and machinery, total Chinese outward direct investments soared by US$1.8 billion while the average scale of the investment projects also rose to US$2.6 million.3 On the whole, however, the Chinese Government’s policies for outward direct investments have not been sufficiently supportive. Chinese enterprises have been encouraged to invest overseas in order to gain access to raw materials and advanced technology from abroad, increase foreign exchange earnings as well as to promote China’s exports (Wong and Chan 2003, p. 6). As its per capita natural resource endowment is rather poor, China needs to acquire a stable supply of resources to sustain its rapid industrialization and economic development. To ensure market access to such vital resources as oil, aluminium and iron ore, Chinese firms have established either joint ventures or wholly Chinese-owned affiliates in many countries including Australia, Russia, Siberia, Brazil or Papua New Guinea. Besides having oil-related projects in several countries, Chinese transnational enterprises have also invested actively in North America, Latin America and the South Pacific region in the development of forestry, mines and ocean fishery. Others like wood, rubber, pulp and paper have also attracted extensive Chinese investment (Cai 1999). China also sees its outward FDI as an effective channel to acquire advanced technology and modern manufacturing know-how. Through joint ventures or purchase of shares in those foreign companies that possess advanced technology, Chinese firms absorb advanced technology crucial for their upgrading and sustained economic development. The Shougang (Capital) Iron and Steel Corporation is a good example. In 1988 it purchased 70 per

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cent equity of the California-based Masta Engineering and Design Inc. and obtained access to the U.S. company’s high-tech design capability in steel rolling and casting equipment. In October 2005, Shanghai Automotive Industry Corporation bought Ssangyong Motors, South Korea’s fourth largest automaker and was in talks regarding the ailing MG Rover of the UK. Both deals were aimed at acquiring technologies and design skills of the target companies (Straits Times, 5 October 2005). In line with exploring new markets, Chinese enterprises also seek to invest abroad due to saturation in the home market. Manufacturing firms have in recent years set up factories in foreign countries when the domestic market for household electrical appliances becomes saturated, owing to the dramatic expansion of production capacity since the late 1990s. Faced with sluggish domestic demand and declining profit margins, manufacturers like Haier, Changhong and Konka, have to turn to overseas markets and establish production bases outside China. In some cases Chinese firms are attracted to invest in other countries close to their final destination markets and as a way to avoid anti-dumping and countervailing duties against China by these developed countries. In an effort to make China at the cutting edge of technology, just recently the government of China has offered tax incentives and adopted preferential policies for enterprises investing in R&D. To encourage enterprises to spend on R&D, the government will allow them to claim tax rebates on up to oneand-a-half times their technology spending. New technology start-ups that choose to set up in the country’s high-tech zones also do not need to pay taxes for the first two years after they start making a profit, and will pay 15 per cent less corporate tax from the third year. The government will also encourage all ministries and government agencies to buy technology goods and services produced by local enterprises and improve the procedures for approvals, build fifty high-tech research institutes and create innovation-oriented environments in schools (Straits Times, 11 March 2006, p. 12). OBSTACLES AND CONSTRAINTS There are, however, a number of obstacles and constraints that have impeded the progress in investment cooperation between these countries. Since the ASEAN countries attempted to attract FDI into their respective economies as part of their industrialization strategy, they have relaxed their restrictive rules and regulations on FDI and changed their policy orientation to create an environment conducive to foreign direct investment such as the

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adoption of some form of guarantee against nationalization and expropriation, elimination of restrictions on foreign ownership of business except in few areas where national security and use of domestic natural resources are at stake, significant liberalization of their foreign exchange markets and strengthening of their respective institutions, stabilization of the macroeconomic environment and by ensuring competitive returns on investment. Except for Brunei, the ASEAN countries have some form of guarantee against nationalization and expropriation. Brunei only offers such guarantees to ASEAN investors. Although Singapore has no such guarantee, it does however, promise compensation if the investment is nationalized due to noncommercial reasons. This promise is as good as the guarantees of other countries promising no nationalization except for national welfare reasons, with the promise of compensation should nationalization take place. Malaysia has liberalized its export conditions in that 100 per cent foreign equity is allowed regardless of export levels.4 Export conditions for existing foreign companies were also relaxed when conditions such as expansion or import-substitution were met, that is, up to 100 per cent of their output if those products are not produced locally or where the duty is nil, or up to 80 per cent of their output where domestic supply is inadequate, or where there has been an increase in imports from ASEAN for products where the import duties are 5 per cent or below. It protects sectors where local firms have expertise (if these activities are undertaken by SMEs and where there is excess capacity). There is an argument that, if the local firms have expertise in these areas, then they should not be protected as foreign investment can help to spur the industry’s levels of efficiency through competition. The Philippines and Thailand have adhered to the phasing-down of foreign equity restriction. In terms of repatriation and foreign exchange restrictions, all countries but Malaysia and Myanmar, which have an exchange control and require approval for remittance of profits,5 have no restrictions on repatriation of profits and foreign exchange, and on export of capital, except in times of crisis. Except for the Philippines and Thailand, they do not require minimum investment levels. All countries except Brunei had over twenty double taxation treaties signed with other countries. The above factors were partly responsible for the massive inflow of FDI into these economies especially during the 1980s until the recent crisis of 1997/98. But the significant drop of FDI going to the ASEAN countries was particularly evident since 1998 due to a number of factors including their rising production costs vis-à-vis the emerging economies of Latin America and other developing countries, the deepening of the European economic integration, the continued economic stagnancy of the Japanese economy and

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the increasing attractiveness of China as an alternative destination for manufacturing FDI.6 There have been no doubt clear signs of foreign investment recovery for most of the ASEAN countries in recent years but the prospect for more foreign investment inflows is being constrained by the following factors. The ASEAN region is not yet an integrated market characterized by the lack of a coordinated set of trade and investment policies. Although intraASEAN tariffs are now relatively low after a successful implementation of the first phase of the region’s economic integration, there are still substantial non-tariff barriers which have proven to be more difficult to eliminate or harmonize due to the significant differences in economic development and economic priorities amongst them. Their investment policies are still uncoordinated with significant differences in fiscal incentives provided, in restrictions on entry of foreign personnel, regulations on exploitation of domestic natural resources and for other sensitive sectors and regulations discriminating against foreigners particularly in the area of maritime transport and professional services (for example, the cabotage laws in Indonesia and Malaysia and the requirement that one has to be a citizen to practice a profession in the host country). The transitional economies of ASEAN, since they started to adopt market liberalization reforms and joined AFTA, have also made substantial progress in setting up the required institutions and infrastructure (legal and physical) for foreign investments. Increasing amounts of FDI mainly from their neighbouring Asian countries have continued to flow to these economies as they made progress in building up their legal framework for foreign investors attracted by their relative low wages and generous FDI policies. They have passed several laws to improve the transparency of rules governing foreign investments. Apart from generous fiscal incentives, they all have a guarantee against nationalization and expropriation. They have no laws restricting repatriation of profits and foreign exchange and on the export of capital. They have entered into double taxation agreements with several countries. For more details on their FDI policies, see ASEAN Secretariat (1999). Since the recent crisis, however, inflows of FDI into these emerging economies have slowed down due to their linkages to the crisis-hit Asian countries as their major sources of foreign capital and export markets. Further, a number of institutional problems continue to dampen the interests of foreign investors in these transitional economies including their underdeveloped infrastructure, inefficient administration and bureaucracy, lack of transparent rules on ownership and unclear guidelines, inefficient banking sector, and inconsistent policies.

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Promotion of foreign investment has also been an important element of China’s industrialization programme. To attract FDI, China has adopted measures and offered a number of incentives to foreign investors: establishment of Special Economic Zones where there is preferential taxation treatment, eased restrictions on entry of foreign personnel, better access to foreign exchange and working capital, eased repatriation of profits and foreign exchange, guarantee against nationalization and expropriation and, relaxation of restrictions on foreign ownership of businesses. With its recent entry into the WTO, China has undertaken more reforms of its laws and other institutions to make a more favourable investment climate. China has amended all the major laws and regulations on foreign investment by promulgating the Chinese-Foreign Equity Joint Venture Law, Chinese-Foreign Contractual Joint Venture Law, Wholly Foreign-Owned Enterprise Law and the implementing guidelines for each of these laws. However, there is still some doubt about China’s ability to comply with the WTO requirements. The problem lies in the huge gap between the Chinese legal system and the general requirements of the world trade body.7 Some 1,300 laws and regulations not conforming to WTO agreements have already been identified. Lack of enforcement is another problem. Administrative and legal mandates from the central authority are often ignored at local levels, though to a lesser degree in major cities (Kong 2001). There are still restrictions on foreign investment in a variety of industries, which are either close to foreign investments or require local partnerships. The Interim Provisions on Guidance for Foreign Investment classify projects involving foreign investment into four categories: projects, in which foreign investment shall be encouraged, permitted, restricted or prohibited. For example, they provide that broadcasting and television stations are closed to foreign investments while broadcast and television transmitting systems are only partially open to foreign participation with the majority of Chinese participation. The services sector, such as financial services, telecommunications, media and consultancy are still highly protected by adopting stringent and non-transparent approval practices for foreign investment. China’s investment regime still retains some characteristics similar to the transitional economies of ASEAN. The lack of transparency, clarity and predictability in China’s investment rules and regulations,8 poor physical and legal infrastructure, lack of uniformity among local authorities on investment rules and customs regulations, inefficient bureaucratic procedures and weak enforcement of intellectual property rights have been the source of concern to foreign investors. Although China has also agreed to comply

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with the rules and guidelines of the WTO on foreign investments, whether China is able to implement its investment-related commitments remains to be seen. Although China is a huge market with more than a billion people, it is not a homogeneous market due to local protectionism and lack of consistency between the national laws and local governments’ regulations and practices. Local protectionism and rivalry between provinces has its roots in the old China. This has resulted in different sets of rules and regulations on foreign direct investments between provinces. For example, foreign investors often find that a joint venture contract approved by Shanghai Ministry of Foreign Trade and Economic Commission (MOFTEC) for a joint venture in Shanghai is not completely acceptable in other parts of China. Further, local governments often adopt policies and practices inconsistent with national law and regulations in an effort to encourage more investments in their own respective provinces (Hoong 2001). Further, the poor transportation system linking provinces and the lack of uniformity in customs regulations have made it difficult to move goods from province to province. Although there have been some significant improvements in these areas, there is much work to be done to integrate the various provinces to make one integrated Chinese market. CONCLUSION The above findings that China and ASEAN are not really competing economies in the area of merchandise trade (as they differ to a large extent in terms of their export products and as there is a great deal of intraindustry trade between them) and highly complementary in their services exports, imply that ASEAN-China cooperation in investments would yield mutually beneficial results. Given that there is a great deal of intra-industry trade in goods and high level of complementarity in services, the ASEAN countries should push for coordination of their investment policies for the goods and services sectors covering those areas where there is a high level of intra-industry trade and complementarity for mutual benefits to both parties. By coordinating their respective investment policies and removing the obstacles to the flow of investments to each other’s markets, it will make it easier for Chinese and ASEAN investors to allocate the different stages of their production and distribution activities in these sectors. As China and the ASEAN countries are in various stages of economic development and have differences in factor endowments, there is great scope

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for investment cooperation for a win-win outcome for all. Joint business ventures, resource pooling particularly in infrastructure and human resource development, joint industrial projects, and joint investment promotion are worth exploring. Joint industrial projects and joint investment promotions could be undertaken in such areas as mineral and petroleum products, technologyintensive products such as high-valued electronic components, agricultural and natural resource-based products such as timber and paper products, and food and food products. Cooperation in the area of information technology development, in particular, should be further explored. For instance, there could be joint ventures in the area of telecommunications that provide the infrastructure support for information technology. Countries with the relevant experience such as Singapore can certainly complement China’s abundant pool of engineers and huge potential market. They could, for example, come to a cooperative arrangement whereby the ASEAN countries will supply the capital-intensive inputs of IT products and other industrial raw materials such as chemicals, rubber and plastics to China at preferential terms. Joint ventures and marketing promotions could be undertaken in tourism, banking and finance, insurance, accounting and professional services, medical and educational services and transport. Singapore has already established a foothold in China’s banking and financial sector with some success. More steps should therefore be undertaken to facilitate investment cooperation between China and the ASEAN countries in the services area. There are, however, current impediments and constraints that have impeded the progress of investment cooperation between China and the ASEAN countries. From China’s perspective, the ASEAN countries are still quite a heterogeneous investment market characterized by a high level of divergence of investment policies and rules for foreign investment. The ASEAN market is also not seen as an integrated one although significant progress has been made in the area of market liberalization. It is important therefore, for the ASEAN countries to further harmonize their investment policies or adopt a coordinated approach to foreign investments, and to further deepen their level of economic integration. From the ASEAN perspective, China is still fraught with a great deal of restrictions on foreign investment in a variety of industries and its investment regime still retains some of characteristics similar to the transitional economies of ASEAN. As China continues to implement its commitments as a WTO member, it is hoped that its investment regime and market will be more consistent with the WTO principles and guidelines.

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NOTES 1.

2.

3.

4. 5. 6.

7.

8.

Here ASEAN refers to the older members of ASEAN which consists of Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand unless it is stated, due to unavailability of data. In the absence of data for Brunei, ASEAN refers to the older members minus Brunei. However, there is strong indication that a significant recovery in FDI inflows from China is under way since 2003. In 2004 the total FDI inflows from China to ASEAN amounted to US$225.9 million. In terms of information on outward direct investments there is no designated institute in China to provide the information. Most of the information are available only on the MOFTEC website or the Chinese embassies and consulates in foreign countries. Some companies have to solicit relevant information from other sources such as the investment promotion agencies of the host countries or through exhibitions like the trade and investment fairs. This relaxation of export conditions was later extended to 31 December 2003. Malaysia’s capital control, however, only applies to short-term capital flows, which is meant to discourage capital speculation. China’s low labour costs and huge market potentials are the main reasons for the relocation of FDI to China. There are also other factors which are rarely identified. China is now ranked as less corrupt than Indonesia and the Philippines based on the annual index of perceptions of corruption compiled by Transparency International (The Economist, 31 August 2002, p. 74). Further, steep tariffs on imports of machinery and other tax regulations, which make the production costs higher, have made it difficult for the local manufacturers to compete with Chinese imports (Straits Times, 2 September 2002, p. A1). The quality of judges is also another area that needs substantial improvement. Many judges are known to have no legal qualifications but were appointed based on political considerations. Courts have often been taken as branches of the government and judges viewed as civil servants who have to follow orders from their superiors. The issuance of a new set of guidelines to boost professionalism in its judicial system is a step in the right direction. But whether China can fully implement this set of guidelines remains to be seen (Straits Times, 5 September 2002). For example, it was reported from one Singaporean international logistics company operating in China that foreign companies must now be locally registered in China before a partial refund of the 17 per cent VAT is made. A foreign company must also obtain clearance from the Chinese authorities for remittance of foreign exchange unless it is locally registered. Meeting the criteria and the documentary requirements do not automatically guarantee approval for foreign investment applications. There is a considerable degree of discretionary powers in the approving officials, resulting in doing business through connections or “guanxi” which could be abused for personal benefits.

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REFERENCES ASEAN Secretariat. Investing in ASEAN: A Guide for Foreign Investors (Jakarta, 1999). China in Transition, “Don’t Confuse Made in China with Made by China”, (29 August 2002). Cai, Kevin G. “Outward Foreign Direct Investment: A Novel Dimension of China’s Integration into the Regional and Global Economy”, China Quarterly (December 1999). Economist, The, “Corruption”, 31 August–6 September 2002, p. 74. Hoong, Yik Luen. New China Rising. A Social Economic Assessment of WTO Entry (Singapore: China Social and Economic Series 1, 2001). Kong, Qingjiang. “Is China’s Legal System Ready for WTO Membership?” EAI Background Brief no. 103, 2 October 2001. Straits Times, “Indonesian Textile Industry Choked”, 2 September 2002, p. A1. Straits Times, “Beijing Acts to Boost Quality of Judges”, 5 September 2002, p. A2. Straits Times, 5 October 2005. Straits Times, “Debate Rages on over Lax US Policy on ASEAN”, 10 February 2006, p. 13. Straits Times, “Enterprises to Help Make China World R&D Power”, 11 March 2006, p. 12. Wong, J. and S. Chan. China’s Rising Outward Direct Investment. EAI Background Brief no. 154, 2003. Statistical Databases ASEAN Secretariat China National Tourism Administration China Statistical Yearbook 2004 World Trade Organization, Statistical Database UN Commodity Trade Statistics Database (UN Comtrade) United Nations Conference on Trade and Development (UNCTAD) Statistics Database.

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ASEAN-China Energy Cooperation Elspeth Thomson

INTRODUCTION While there are varying opinions about the quantity of remaining, easily accessible fossil fuels — oil, gas and coal — on the planet, there seems to be agreement that the price of oil will remain high, that oil production facilities and transport will increasingly be the focus of terrorist activities and that the burning of large amounts of fossil fuels is causing global warming. Thus, there are many reasons why it is in the interest of ASEAN and China to strive together to attain the highest possible efficiencies in the supply and use of energy, that is, cost-effective, secure and environmentally-sound sourcing, conveyance and consumption of different types of energy. This chapter examines the potential for ASEAN and China to cooperate in the energy sector. As there are many organizations which provide energy demand and import projections, these are not discussed here.1 It is taken here as a given that energy demand in both ASEAN and China will continue to increase sharply over the next decades at rates considerably higher than the world average. The particular questions addressed here are these: a) What energy supply cooperation is going on now between China and ASEAN?

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b) What more can be done in the way of energy cooperation between China and ASEAN? c) What can be learned from EU experience in this area? ENERGY SUPPLY COOPERATION Oil China has the largest oil reserves in the region but production growth is expected to be minimal in the coming years. In 2004, production stood at 174.5 million tons (see Table 11.1 which gives comparative production data). There is little possibility of ASEAN and China trading much oil in the future. China became a net importer of oil products in 1993 and a net importer of crude oil in 1996. Consumption of oil has increased at an average rate of about 7 per cent from 1995, while production has grown at about only 2 per cent.2 In 2005, dependence on imports of oil reached 49.2 per cent.3 China exports oil products of various types to all ASEAN members, but exports of crude have been drastically cut in recent years to almost all destinations.4 China’s oil companies are very carefully examining, everywhere in the region, the potential for further oil production. They would like to build an oil pipeline across Myanmar to southwest China, and China became the largest offshore oil producer in Indonesia in 2002. At present, about 45 per cent China’s crude oil comes from the Middle East, 29 per cent from Africa, 12 per cent from Asia (almost all ASEAN countries) and 10 per cent from the Commonwealth of Independent States (see Table 11.2). This could change considerably if pipelines and/or railways were built enabling large quantities of oil from Siberia, Russia or the Caspian region to be sent to China. At the time of writing, the Chinese oil companies were holding serious oil purchasing and transport construction discussions with all three of these regions. Indonesia, though the region’s second largest producer, and a member of OPEC, became a net importer in 2004 due to falling production and insufficient investment. Brunei is the third largest producer and exports 90 per cent of its oil production, mainly to Japan, South Korea, Singapore, Taiwan and Thailand. Only 10 per cent of its production is used in the country. Malaysia is currently a net exporter. Almost all (90 per cent) of its oil exports go to Japan, Thailand, Korea and Singapore.5 Reserves had been declining, but this trend has recently been reversed. Vietnam is also a net exporter and production is also expected to increase. It exports all of its crude, sending it mainly to Japan, Singapore, the United States and South Korea.

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53.9

40.3

9.0 20.8 174.5

73.3

55.1

20.3 4.2 40.8

7.4

12.1

10.3

Natural Gas (billion cubic metres)

5.8 14.8 989.8

81.4

Coal (million tons)

74.2

1.8

1.4 1.9

2.5

Hydropower (million tons oil equivalent)

1,386.2

45.1 81.5

60.3 25.0

109.6

Primary Energy (million tons oil equivalent)

Source: British Petroleum, British Petroleum Statistical Review of World Energy 2005, London: BP, June 2005. Note: Empty cells do not mean there was no production at all.

Brunei Cambodia Indonesia Laos Malaysia Philippines Myanmar Singapore Thailand Vietnam China

Country

Oil (million tons)

Table 11.1 ASEAN and Chinese Energy Output, 2004

5,818

1,255 876

1,056

Oil Refinery Capacity (thousand barrels daily)

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Table 11.2 Origin of China’s Oil Imports in 2004 (Percentages) Asia Brunei Indonesia Malaysia Mongolia Philippines Korea Thailand Vietnam Total N. America Canada US Total Europe UK Norway Total

0.72 2.79 1.38 1.98 0.21 0.2 0.75 4.36 12.39 0.06 0.09 0.15 0.13 1.64 1.77

Middle East Iran Iraq Kuwait Oman Qatar Saudi Arabia UAE Total

10.79 1.06 1.02 13.32 0.12 14.05 1.10 41.46

Australia Papua NG

1.23 0.06

S. America Argentina Brazil Equador Venezuala Total

0.58 1.28 0.23 0.27 2.36

Africa Algeria Angola Cameroon Chad Congo Equ’l Guinea Gabon Guinea Libya Nigeria Sudan Total CIS Kazahkstan Georgia Azerbaijan Russia Total

0.56 13.14 0.11 0.68 3.89 2.84 0.45 0.04 1.09 1.21 4.70 28.71 1.05 0.07 0.11 8.78 10.01

Source: Zhongguo shangwu nianjian bianji weiyuanhui, Zhongguo shangwu nianjian 2005 [China Commercial Affairs Yearbook 2005], (Beijing: Zhongguo shangwu chubanshe 2005), pp. 831–32.

With no refining capacity of its own, it presently imports all of the oil products it uses. Myanmar, a net importer, exports about 20 per cent of its oil production. Thailand imports 92 per cent and Singapore 100 per cent. While the Philippines’ production is expanding, demand far exceeds supply. Gas Until recently, China’s reliance on natural gas was low, only about 3 per cent of the total energy consumption mix. However, the government is aiming to double this by 2010.6 The country’s considerable reserves will be used solely for domestic purposes. In 2004, production stood at 40.8 billion cubic metres (see Table 11.1). ASEAN as a whole produces about 40 per cent of the world’s supply of liquefied natural gas (LNG). Indonesia, Malaysia and China have the region’s largest reserves of natural gas. Indonesia is the world’s largest exporter of LNG. However, the Indonesian Government in May 2006 announced a radical shift in policy stating that instead of exporting vast

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amounts of energy (LNG as well as coal and oil) to be used to fuel industries abroad, efforts would be made henceforth to persuade foreigninvested industries to locate within Indonesia where the energy could be used locally and also help create jobs.7 Indonesia and Malaysia presently account for about 70 per cent of Asia’s gas trade. Much of the gas goes to non-ASEAN member states. Some 90 per cent of Indonesia’s gas is exported in the form of LNG, with 70 per cent going to Japan, 20 per cent to South Korea and 10 per cent to Taiwan.8 In September 2002, Indonesia agreed to supply up to 2.6 million tonnes of LNG per year to a planned terminal in Fujian Province. Malaysia’s production of natural gas has steadily increased in recent years, though it also imports from Indonesia. Malaysia exports about 40 per cent of its gas, mostly in the form of LNG, to Japan, Korea and Taiwan.9 Brunei is the fourth largest producer of LNG in the world. About 85 per cent is sent to Japan and 11 per cent to Korea.10 Large-scale production of natural gas did not occur in the Philippines until 2001. The harnessing of the large Malampaya offshore field will continue to transform the lives of millions of citizens but none of the gas will be for export. Similarly, Thailand’s and Vietnam’s natural gas is used entirely for domestic purposes. Myanmar currently exports gas to Thailand and hopes soon to export to China as well. Myanmar very much needs investment in domestic gas infrastructure and hopes to export considerably more gas in the near future. The main trans-border gas pipelines now in operation include: • • • • •

Indonesia to Singapore (2) Indonesia to Malaysia Malaysia to Singapore Myanmar to Thailand (2) China to Hong Kong.

Some planned gas lines include: • • • • • • •

CAA (Commercial Agreement Area between Malaysia and Vietnam) to Malaysia JDA (Malaysia-Thailand Joint Development Area) to Thailand JDA to Thailand and Malaysia Malaysia to the Philippines Siberia to Japan Siberia to China China to Hong Kong.

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In 1998, plans were launched for a Trans-ASEAN Gas Pipeline (TAGP) to be built upon the already established point-to-point links.11 To date, however, there has been little success in establishing multi-country hook-ups and it appears that realization of the project will take many years. The Spratly Islands are claimed partially or fully by China, Taiwan, Vietnam, Malaysia, Brunei and the Philippines. There has been no exploratory drilling in the area but the oil and gas reserves are thought to be extensive — some 17.7 billion tonnes, making it the fourth largest reserve bed worldwide.12 In November 2002, a Joint Declaration on the Conduct of the Parties in the South China Sea was signed by China and the ten ASEAN members.13 By this agreement, all concerned agreed “to resolve their territorial and jurisdictional disputes by peaceful means, without resorting to the threat or use of force…” Then in March 2005, China, Vietnam and the Philippines signed a Tripartite Agreement for Joint Marine Seismic Undertaking in the Agreement Area in the South China Sea to conduct a joint seismic survey of oil potential in the disputed areas of the South China Sea within three years.14 Coal Coal has always been considered the “dirty cousin” of oil products and natural gas. However, with high oil prices, the relative costs of the clean coal technologies (CCTs) are becoming increasingly comparable.15 Several ASEAN countries are seriously examining the relative costs of using more coal with CCTs, but generally still prefer to continue using cleaner fuels. China is the largest coal producer in the world. Coal production stood at 989.8 million tonnes in 2004 (see Table 11.1). Although the industry is at full capacity attempting to meet burgeoning domestic needs, it exports coal to virtually all ASEAN members, and large quantities also go to Japan, Korea and Taiwan.16 However, the government has recently ordered major reductions in exports because domestic demand is expected to continue to rise and the industry is also keen to end the international scorn arising from its shockingly high accident rate, averaging about 6,000 fatalities per year.17 Indonesia has the second largest coal reserves in the region and exports large quantities to Japan, Taiwan, South Korea, China, Malaysia and the Philippines. Vietnam has sizeable coal reserves and exports about 40 per cent of its production, mostly to Japan and China, but also to Thailand and the Philippines.

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Electricity Singapore, Brunei and Malaysia are the only countries in this study which have sufficient supplies of electricity. A great deal needs to be done to alleviate the poverty associated with insufficient power throughout Cambodia and Laos, and also in rural China, Indonesia, Myanmar, Philippines, Thailand and Vietnam. China presently sells power to Vietnam. Malaysia exports power to Thailand, Indonesia and Brunei. Laos exports power to Thailand and plans to export also to Cambodia and Vietnam. Singapore and Malaysia share electricity at peak hours. ASEAN has long been discussing construction of a regionwide electric power grid. At the second Heads of ASEAN Power Utility and Authority Meeting held in Malaysia in May 2006, it was announced that the project would be officially launched in July 2006, with funding from the Asian Development Bank and Japan Bank of International Cooperation.18

i) Hydropower In 2004, China produced 74.2 million tonnes oil equivalent of hydropower (see Table 11.1), ranking third in the world. Some of the world’s largest potential hydropower sites are located in Asia, including the Salween watershed (in Mandarin it is called the Nu Jiang) and other rivers in southern China and Myanmar, the Mekong (traversing Cambodia, Laos, Myanmar, Thailand and Vietnam) and the Chao Praya River System in Thailand. The Salween is mainland Southeast Asia’s longest undammed river, rising from the Tibetan Plateau and travelling through China, serving as the ThaiMyanmar border, and finally flowing into the Indian Ocean in Myanmar.19 Both Myanmar and China are considering hydropower projects for this river. The Chao Praya River has already been seriously affected by harmful smallscale development in its tributaries. The Mekong River Commission (MRC) was founded in April 1995 by Cambodia, the Lao PDR, Thailand and Vietnam. In 2002, China and Myanmar became dialogue members. The MRC’s Hydropower Development Strategy’s stated objectives are “to identify the best options for sustainable hydropower development and to recommend criteria for prioritization”.20

ii) Nuclear Power As the precise quantities of the world’s remaining supplies of fossil fuels are questionable, the transport of oil/gas supplies is increasingly becoming the

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target of terrorist attacks, and governments everywhere are facing scrutiny over their attempts, or lack thereof, to reduce carbon and sulphur emissions resulting from the burning of fossil fuels, several Asian countries have plans to greatly increase their nuclear power production, or to begin using this form of energy despite the well-known safety issues, waste-disposal problems, high capital costs and long construction times. In China, nuclear power currently accounts for only 2.3 per cent of total electricity production but the government plans to expand nuclear capacity fivefold to 40 gigawatts (GW) by 2020. Thailand, Myanmar and Malaysia have recently begun to consider building nuclear power plants. Thailand has one research reactor.21 Indonesia has three research reactors and plans to construct nuclear power plants capable of producing 1 GW by 2015. The ultimate goal is to have 4 GW.22 Vietnam has one research reactor and hopes to have a nuclear power plant completed between 2015 and 2020 able to produce 1.4 to 4 GW.23 WHAT MORE CAN BE DONE IN THE WAY OF ENERGY COOPERATION? There is much that China and the ASEAN can do to reduce their vulnerability to energy supply shocks. Below are some measures in no particular order: 1. Collectively Develop Regional Gas and Hydropower Potential The outlook for major increases in oil production within the region is not sanguine. There is general agreement that ASEAN and China will need to import increasingly more oil from outside the region to meet the rapidly rising demand for transport fuels especially. However, it can be said with reasonable certainty that, with support from Australia, the region will have sufficient natural gas, coal and electricity to meet demand for some time.24 Confirmations of initial survey work and new discoveries of gas (both on and offshore), coal and hydropower are expected to be announced frequently in the coming years. Ideally, China and ASEAN should work together to develop these and also tackle the problems of corruption, political instability and lack of pricing freedom which deter investment in these sectors. The construction of cross-border hydropower systems must be done with care to balance the multiple uses of the water: civilian use, navigation, food for both domestic and foreign human and animal consumption, irrigation and hydropower production. Plans must be devised for these river courses in their entirety, not just sections of them, in order to prevent unnecessary

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damming, flooding and ecological damage. ASEAN and China must together support the efforts of the MRC and other cross-border river management bodies to ensure that the regions’ rivers are used to the greatest benefit for the region as a whole. Ideally, the region ought to have both region-wide electricity and gas grids. However, the transmission of electric power, whether from nuclear, thermal or hydropower plants from surplus to deficit areas, cannot take place until the institutional and physical groundwork are in place. ASEAN and China have a long way to go in terms of standardizing and liberalizing their electricity and gas markets. 2. Develop and Harness Renewable Energies The Chinese Government is aiming to become a world leader in the use of renewable energy. It is striving to have renewable energy supply 15 per cent of the country’s total power consumption by 2020, up from 7 per cent in 2006.25 China is already one of the largest users of solar energy and it is hoped that wind energy will become a major source of electricity in the near future.26 At the twenty-third ASEAN Ministers of Energy Meeting held in Siem Reap in July 2005, it was decided to increase the share of renewable energy in power generation in the region to ten per cent by 2010.27 Particular effort is being made in the development of cogeneration, that is, the production of steam and electricity from biomass.28 Thailand has been successful in producing large quantities of gasohol (petrol mixed with alcohol made from sugar cane, molasses and cassava). In 2005, consumption averaged 1.8 million litres per day.29 However, demand greatly exceeds supply. Experiments with a wide variety of plants and waste products are being made in China and throughout the region in an attempt to create feasible production of biofuels, especially biodiesel.30 Indonesia is estimated to have 40 per cent of world’s geothermal resources. However, to date, only a fraction has been utilized. The Philippines is the world’s largest producer and user of geothermal energy, but it too has had insufficient investment and expertise to develop these resources on a large scale. 3. Set Regionwide Energy Conservation Targets and Energy Consumption Efficiency Standards Conserving energy is paramount in the region’s efforts to reduce energy supply vulnerability. It adds to the supply of energy much more cheaply than procuring more energy either locally or internationally and results in improved

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business competitiveness, higher incomes, improved trade balances and national security. China has made considerable progress in improving energy consumption efficiency but it is still far behind the developed world.31 Table 11.3 indicates that China’s energy intensity decreased from 101,936 British thermal units of primary energy consumed per U.S. dollar of GDP (constant terms) in 1980, to 33,175 in 2003. Though a remarkable improvement, this level of energy intensity was still considerably higher than in the rest of the region, indeed in the world. It is expected that China’s energy consumption efficiency will increase drastically with the announcement of the ambitious target included the Eleventh Five-Year Plan (2006–10) to reduce energy consumption per unit of GDP by 20 per cent by 2010. The Chinese Government realizes that consumption efficiency is now very low and that enormous energy savings can be made quite easily through enforcement of simple measures in the industrial sector (especially the iron and steel, non-ferrous metals, oil, petrochemicals, construction materials, machinery and coal industries), the transportation and construction sectors, and civilian power use. The cooling,

Table 11.3 Energy Intensities, 1980 and 2003 (Total primary energy consumption per dollar of GDP in BTU per U.S. dollar in constant year 2000 terms using market exchange rates) Country

1980

China Indonesia Vietnam Laos Thailand Malaysia Singapore Myanmar Brunei Philippines South Korea United States Japan Cambodia

101,936 23,761 19,838 18,412 18,349 16,224 15,874 15,174 14,486 13,643 13,317 11,870 5,508 746

Country

2003

China Indonesia Vietnam Laos Thailand Malaysia Singapore Myanmar Brunei Philippines South Korea United States Japan Cambodia

33,175 28,041 25,715 24,122 22,158 23,267 18,727 16,132 16,100 14,407 14,739 9,400 4,605 1,969

Source: Energy Information Administration at (2 May 2006). Note: The figure for Brunei was obtained from the same source in 2005. The data for Laos and Cambodia is questionable.

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heating and lighting of buildings in China alone account for 28 per cent of total energy consumption. The installation of energy-efficient lighting in public facilities, hotels, shopping centres, office buildings, sports venues and factories will result in very significant savings, even more so if wasteful habits can also be curbed through legislation and incentives. Over the past thirty years, many conservation programmes, small and large, have been launched in ASEAN. Descriptions of their implementation — their goals, geographical scope, time-frames, etc. — are available.32 Some have been quite successful, but as a whole, the results to date, have been minimal. One of the main problems has been the lack of market forces propelling high energy consumption efficiency. Throughout the region, almost all forms of energy — oil, oil products, coal and electricity — have been subsidized by the governments. When energy prices are set below market prices, energy consumption behaviour tends to be wasteful. Though the subsidies are being gradually lifted, there is still some way to go. Also, energy consumption standards should be set across the region as a whole for all industrial, commercial and civilian fuel-consuming procedures. ASEAN should be using the most modern, energy-efficient energy consuming equipment available. From light bulbs to locomotives, much of the equipment in use now is old and energy-inefficient, dating from before the 1970s. Both ASEAN and China are fortunate they can together learn a great deal about energy conservation from the experiences of other countries, especially nearby Japan which, out of necessity, has become one of the most energy efficient economies in the world (see Table 11.3). For some time, the Japanese Government has already been assisting ASEAN and China to raise their energy efficiencies to comparable levels and is frequently reiterating this pledge.33 4. Form a Collective Oil-purchasing Unit As China and ASEAN seem to have no alternative but to import more oil from outside the region in the coming years, they ought to source together and take a unified position when bargaining with oil suppliers in the Middle East, Africa, South America, the Caspian, etc. It could be more practical for suppliers to negotiate with the region — and a network of complementary refining centres — instead of with a multiplicity of individual small markets. Purchasing as a block may also contribute to global stabilization of oil prices. Moreover, Asia has been paying about US$1–2 more per barrel than American and European buyers for Middle Eastern, especially Saudi Arabian crude.34 The “Asian Premium” is said to be due to the fact that Asia is more

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dependent than Europe or North America on Middle Eastern oil. The solution is to make fewer long-term trade arrangements and to move towards more open and transparent pricing in spot and futures trading. Resolution of this problem requires the countries of the region to speak as one, instead of trying to resolve it individually. 5. Protect the Conveyance of Oil/Oil Products, Gas, Coal and Electricity Thousands of oil tankers sail through the Strait of Malacca each year. Over 80 per cent of Southeast and Northeast Asia’s oil (60 per cent of China’s) oil imports pass through the Malacca and Singapore Straits (10 million barrels per day). It is one of the most critical geo-political chokepoints in the world. There are shallow reefs and dozens of small islands in the area, and the aperture south of Singapore is only 2.5 kilometres. The countries relying on it fear that traffic could be disrupted by a collision or an oil slick, or that it could be deliberately sabotaged. Other, less narrow routes in the vicinity, for example, passing Sunda and Lombok, increase journey time by one-and-ahalf days and significantly increase costs. Considerable effort is already being devoted to protecting the Malacca Strait. Indonesia, Malaysia, Singapore and Thailand carry out continuous air and sea patrols.35 However, all of the ASEAN members should in fact help provide security to all crude oil and oil product shipments in the region. The Malacca Strait is indeed the most vulnerable segment, and it is in the interests of the entire region that these shipments reach their destinations safely. As noted above, most countries in the region have little or no oil production or refining capability of their own. In order to try to protect the oil tanker traffic from the Middle East, the Chinese Government decided to establish what it calls a “string of pearls”, that is, to build bases in, and try to enhance political ties with the countries en route, extending from the Middle East to the South China Sea. To date, the government has created tangible “pearls” with some ASEAN members. These are in the form of naval bases in Pakistan and Myanmar, a military agreement with Cambodia and improved ties with Bangladesh and Thailand. As for alternative oil transport routes which would obviate the need to use the Malacca Strait, the most secure is a pipeline from the port city of Gwadar in Pakistan, situated 72 kilometres from Iran, near the mouth of the Persian Gulf and 400 kilometres from the Strait of Hormuz in Pakistan, to Xinjiang bypassing the Persian Gulf, Indian Ocean, Malacca Strait and South China Sea.

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Another option, formally approved by the Chinese Government in April 2006, is the construction of a 1,700-kilometre pipeline connecting the deep-water port of Sittwe in western Myanmar to Kunming in China’s Yunnan Province.36 This route is 1,820 kilometres shorter than the Malacca Strait route.37 Traversing Thailand’s Kra Isthmus is another possibility. Traders in fact proposed the digging of a 50-kilometre canal across it in 1677. Bypassing the Malacca Strait, it would reduce travelling time by at least 1,000 kilometres and could reduce transport costs (for oil as well as manufactured goods) to East Asia by millions of dollars. In recent years, building a “land bridge” pipeline with storage tanks at either end has gained more favour. Thai Prime Minister Thaksin was keen despite the substantial cost, environmental considerations, separatist aspirations of people in southern Thailand and potential harmful consequences for Singapore’s economy. Another option being examined is the construction of a railroad to take fuel and other commodities from Phuket on the west coast across to Surat Thani on the east coast. Governments, generally, seem to focus most attention on the security of crude oil shipments. However, all energy corridors are vulnerable to terrorists seeking to disrupt economic activity. China and ASEAN ought together to protect all major electricity transmission lines, oil and gas pipelines and main railway arteries. These are equally vulnerable to terrorist acts. 6. Collectively Liberalize National Energy Markets and Eliminate Energy Subsidization Elimination of energy subsidies and raising energy prices towards international levels inevitably causes hardship to businesses and individuals alike. However, raising prices closer to real values will very quickly eradicate consumption inefficiencies, accelerate modernization and benefit the environment. Over the past year, several ASEAN members and China have taken small steps towards reducing their energy subsidies, but their efforts have been carried out individually. Future reductions could be done as a group. Faced with exactly the same political repercussions, they ought to share ideas for cushioning the affects of the price increases on the most vulnerable sectors of the populations. The standardization of energy prices, especially for transport fuels in ASEAN and China will at the same time eliminate the propensity to smuggle gasoline, diesel and kerosene across borders. It is estimated that Indonesia annually loses US$862 million, Malaysia loses US$175 million and the

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Philippines, US$168 million.38 Indeed all governments in the region have suffered from these significant financial leakages. Thus, China and ASEAN ought together to carry out some econometric modelling to determine how best to eliminate the subsidies so that the relative prices of fuels at any given time are equal across borders. 7. Build a Network of Strategic Petroleum Reserves Strategic petroleum reserves (SPRs) are built to serve as temporary supply/ price buffers. They can be filled with either crude or oil products. The largest SPRs are in the United States, followed by those in Saudi Arabia, Japan, Germany and South Korea. The United States, Japan, Germany and France have storage equivalent to their net import volumes of 158 days, 161, 117 and 96, respectively.39 In order to join the EU, European countries must have ninety days of stocks. When launching his five-year tenure in September 2004, Europe’s new energy commissioner called for the establishment of an EU oil stockpile similar to that in the United States.40 China’s reserves, held by the national oil companies, are currently sufficient to last only about three weeks. Though SPRSs have been under discussion since 1992, it was not until late 2003 that the decision was finally made to build them. The International Energy Agency (IEA) simultaneously announced it would assist in their planning and construction. It had asked China to start construction plans for SPRs when the United States and UK were preparing to invade Iraq. It was concerned that if the war caused a disruption in Middle Eastern oil exports, China might panic and exacerbate the situation. In 2005, it was announced that SPRs would be built in Aoshan and Zhenhai (Zhejiang), Huangdao (Shandong) and Dalian (Liaoning) and that China would aim at eventually attaining a stockpile sufficient to last ninety days.41 At this point, however, because the price of oil has remained high, and the Guangdong Provincial Government believes that it should be the first to build an SPR, the construction programme is being re-examined. The Chinese Government is acutely aware that it was largely blamed for the major increase in the price of crude in 2005.42 Whatever the cause of the high price, in recent months the government has been hoping that that price would go down so that the storage tanks might be filled more cheaply. The government also fears that the process of stockpiling, whether publicly announced or not, could cause the international price of oil to rise even higher. Moreover, there is still some disagreement over the actual need of the SPRs. Those in favour of their construction believe they could contribute to

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international price stability in the long run and that China would be foolish not to increase its storage capacity to override any short-term disruptions. They believe that because China’s economy is now such a large component of the world economy, if it experienced a major oil supply crisis, many other countries would also be immediately affected. On the other hand, detractors note that unlike other economies in the region which have little or no energy of their own, China relies almost entirely on its vast coal reserves for electricity. In the event of an oil supply problem, it would primarily be the transport and petrochemical sectors that would be affected. Dissenters also point to the fact that SPRs are expensive to maintain, are of little use when oil shortages or turmoil is prolonged and are vulnerable to bombing or sabotage. Despite China’s prevarication over SPRs, other countries in the region, including Indonesia, Thailand and the Philippines, have been discussing construction of their own stockpiles. Under the ASEAN Emergency Petroleum Sharing Scheme of the ASEAN Petroleum Security Agreement signed in 1986, member countries agreed to share crude oil and/or petroleum products “in times/circumstances of both shortage and over supply”.43 Some international relations specialists, for some time, have suggested construction of large stockpiles, to be used by the entire region, at Singapore’s Jurong Island, Philippines’ Subic Bay and Thailand’s Kra Isthmus. In April 2006, the Singapore Government decided to proceed with the construction of more oil storage at Jurong Island. The country’s total storage will increase from 88 million barrels to 97.2 million barrels in Phase I of the project, and then to 108 million barrels in Phase II.44 China and ASEAN should share the details of their oil storage capabilities and potentials so as to work together in the event of sudden oil supply disruptions. They should also work closely with the IEA stockpiling programme and learn from the experience already gained in the construction and management of SPRs. 8. Share Construction and Maintenance of Oil Refineries China has the largest oil refinery capacity in the region, followed by Singapore, Indonesia and Thailand. China plans to increase its refining capacity annually by 90 million tonnes, or about 32 per cent, by 2010 up from the 285 million tonnes refined in 2005, and to shut down many small and inefficient refineries.45 The domestic refining industry is characterized as “relatively backward and lacking in competitiveness compared with advanced world standards”.46 China’s oil refineries are taking the brunt of the government’s decision to continue subsidizing oil product prices. In all, mainland refineries

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lost 30 billion yuan (US$3.75 billion) in 2005.47 The demand for oil products greatly exceeds supply. China is thus forced to purchase enormous quantities of refined products from South Korea, Singapore, Russia and Taiwan. Perhaps Mongolia’s recently announced plans to build refineries will ease the tight supply situation for oil products in northern China.48 Singapore is a major hub for oil refining, trade and storage, especially for shipping and marine fuels. New oil storage and terminal facilities are being built. Indonesia has nine refineries and must import about 30 per cent of its oil products to meet demand. Foreign investment in this sector is desperately needed, but the subsidized oil product prices, here as well, are a deterrent. Thailand presently has seven oil refineries. For several years, the government has discussed the creation of a regional oil processing and trading hub near the proposed Kra Peninsula land-bridge (see above). Malaysia has six refineries, and Brunei has one from which about 65 per cent of the output is used domestically.49 Vietnam started building its first refinery in 2004 and will have three ready in 2008 or 2009. Much more refining capacity is required in the region. Indeed, even before the hurricanes in the United States in 2005, there was concern over the lack of refining capacity in the world. There has been a very tight situation globally for some time mainly due to the perceived lack of profits. There are demand/supply imbalances in the world and within regions with respect to refined products. There is much need for more trading, terminalling and blending capacity. Securing sufficient supplies of crude oil is only the first step. Ideally, the governments of ASEAN and China should also decide together how much of which oil products they will need in the coming years and where they should be produced. Extremely expensive to build, it is illogical for all ASEAN member states and China to have their own refineries. At the same time, there must also be healthy competition and complementarity among the region’s refineries. In planning new refining capacity for the region as a whole, ASEAN and China should aim to harmonize oil product specifications, for example, the sulphur content of the oil, keeping in mind that oil from the Middle East will likely become more heavy and sour, and that Asia must raise its emission standards to international levels as soon as possible. 9. Institute an Energy Use Peer Review System The IEA has a peer review system by which the member countries assess each other’s energy policies every four to five years.50 China and ASEAN share many of the same problems, especially in the area of improving energy

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consumption efficiency. They could gain from sharing experiences in similar environments and avoid duplication in experimentation. RELEVANCE OF EU ENERGY COOPERATION EXPERIENCE Jean Monnet believed that to advance collective European interests, it was necessary to create institutions which would serve the interests of all the European countries. He also believed that it was necessary to achieve tangible results in a few industrialized sectors first, before attempting to realize ambitious plans for an economic, social and cultural union. In the restoration following World War II, coal, coke, iron ore, steel and scrap were resources that were indispensable to all European countries. It was logical to focus attention on these particular resources and to find ways to cooperate, rather than compete, in their production and transport. Hence, in 1952 the European Coal and Steel Community (ECSC) came into being. The initial participants were West Germany, France, Belgium, Luxemburg, the Netherlands and Italy. While the economic benefits — more efficient industrial production, reduced costs, higher competition and innovation and investment — were considerable, many analysts believe it was the political results which were the most important, that is, it was through this organization that France and Germany, which had been arch enemies, were able to begin reconciliation by working together within a larger framework. Soon after the ECSC was established, Europe’s electricity grid was launched in 1956. By 1968 it connected seventeen countries, and by 2007 there will be more or less, a single inter-connected system over a geographic area stretching from the Atlantic to the Urals and from the Mediterranean to the Artic. The main gas infrastructure extends from Russia to Europe and the UK via the Ukraine, Slovakia and the Czech Republic; from Norway and the Netherlands to Belgium, France, Germany, Spain and Italy; and from Algeria to Italy, Portugal, Spain and Slovenia. LNG may soon be made available to France and Austria. In the future, gas from the Middle East may transit the Balkans and Turkey to reach Europe.51 The EU-25 is now dependent on Russia for 25 per cent of its gas and 25 per cent of its oil. Russia is the single most important external supplier and it is equally dependent on Europe for this trade. Eighty per cent of the gas transits Ukraine. In January 2006, Ukraine briefly suspended gas supplies to Europe during an exceptionally cold winter.52 Amply demonstrating how vulnerable many European countries are vis-à-vis their energy supplies, it was a nasty wake-up call, not only for European governments, but governments

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around the world, including those of China and ASEAN, which rely very heavily on a limited number of energy suppliers. The EU countries immediately scrambled to discuss how they might reduce this vulnerability through the greater sharing of their indigenous energy, developing new forms of energy and finding other external sources. In early March 2006, the European Commission released a green paper presenting an outline for a common EU energy policy focusing on import dependence, climate change and high oil prices. Commission President Jose Manuel Barroso implored, “We should refuse any kind of nationalism of an economic kind, especially in the energy sector in Europe.”53 The release of the green paper was timely, but the issues had in fact been under discussion for some time. In late 2004, the EU and eleven countries of Southeast Europe had agreed to establish an Energy Community for which energy regulations would be made uniform. The core objectives of this green paper were given as “sustainable development, competitiveness and security of supply”. These are precisely the same objectives that ASEAN and China ought to pursue. As energy, especially oil, is such a vital ingredient in the development of Asia, it is plausible that ASEAN and China might similarly use it as a fundamental starting point for increased cooperation within the ASEAN and between ASEAN and China. They are already almost as dependent on the Middle East for energy as Europe has been on Russia. The lessons from the supply disruptions to Europe ought to be heeded. The European Commission, however, is still having a difficult time trying to persuade member countries to think in terms of European interests first and national interests second. In recent years, the trend in Europe has been more towards consolidation of energy services within the member countries, rather than extension across international borders. Regarding energy as strategic, the members have tended to want to protect national interests. The EU has long sought international, liberalized energy systems. There are indeed fragments of successful cross-border deliveries, but considerably less than originally hoped for and the countries are still struggling to standardize the data from all the sub-networks. Energy prices across Europe vary by as much as 100 per cent. There is insufficient capacity at the inter-connections among the national electricity grids to allow prices to equalize over the entire region.54 The EU decreed that these inter-connections be sufficient to carry at least 10 per cent of national consumption, but few countries have upgraded to this level. They tend towards anti-competitive practices. After market liberalization began in 1997, European governments were much less inclined to share information about supply and demand, prices,

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operational status, etc. Whereas prior to the “Electricity Directive”, it was freely available, now all of this is regarded as commercial intelligence. Yet, despite the resistance being expressed at this point, the Commission is still aiming to improve the connectivity of the region’s electricity and gas grids, and to link national oil reserves. They are also hoping to reduce energy consumption through conservation by 29 per cent by 2020. CONCLUSION There is limited potential for more energy trade between China and ASEAN. Most of what energy is available is either being used domestically or is sent to Japan, Korea and Taiwan under long-term export agreements. In the past, the location of economic activity anywhere in the world was determined largely by the geographical situation of one, or a combination of key resources such as fresh water, fertile soil, a deep-water port, metal ores, minerals, energy-making resources, etc. Today, with the advent of modern communications, transmission and transport systems, distances are collapsed and are becoming inconsequential. Information, capital and labour are already flowing freely and economies are becoming heavily inter-connected and inter-dependent. It is only a matter of time before national energy surpluses and deficits become a thing of the past. This will become even more true if ubiquitous sources of energy, such as the sun and waste materials, can be harnessed to create electricity on a large scale and be hooked to large grids. Until such time, however, in the immediate future, ASEAN and China can and must significantly reduce their vulnerability to energy shocks by greatly improving the efficiency with which they currently consume energy. The Japanese Government has pledged to assist all of Asia improve energy consumption efficiency levels to match their own. China and ASEAN must also work together towards: — maximizing the use of all local energy resources; — planning the procurement of energy, especially crude oil, from outside the region; — protecting all energy transport corridors: shipping lanes, transmission lines, pipelines and railway lines; — liberalizing national energy markets and eliminating energy subsidisation; — building a network of strategic petroleum reserves; — sharing construction and maintenance of refineries; and — instituting a peer review system, to prevent duplication of efforts aimed at improving energy consumption efficiencies.

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Since the 1950s, the European Union has been trying to foster regional energy cooperation. However, over the years, the various European governments have had varying degrees of enthusiasm for such cooperation. Some have regarded it as necessary for raising the economic strength of the region as a whole, while others have taken a more nationalistic attitude and resisted any sharing of energy supplies or even energy information. Nonetheless, it can be said with certainty that considerable progress has been made, especially in the harmonizing of consumption standards across Europe. The expansion of regional electricity and gas grids continues, enabling the sale of surplus energy to deficit areas. China and ASEAN can learn a great deal from the progress and setbacks that the EU has experienced in terms of regional energy cooperation. Though there are major differences between Asia and Europe, Asia is in a fortunate position to be able to learn from the EU what types of energy polices seem to contribute the most to regional economic development and growth. NOTES 1. The main data sources are: the International Energy Agency (IEA) at ; Energy Information Administration (EIA) at ; ASEAN Centre for Energy at Asia Pacific Energy Research Centre (APERC) at ; British Petroleum (BP) at ; Institute of Energy Economics (IEEJ) at ; and the Economic Research Institute for Northeast Asia at . 2. Guojia tongji ju, gongye jiaotong tongji sibian [State Statistical Bureau, Dept. of Industrial and Transportation Statistics], Zhongguo nengyuan tongji nianjian [China Energy Statistical Yearbook], (Beijing: Zhongguo tongji chubanshe, various years); Zhongguo tongji jubian [State Statistical Bureau], Zhongguo tongji nianjian [China Statistical Yearbook], (Beijing: Zhongguo tongji chubanshe, various years). 3. Calculated by Chinese analysts and cited in “China’s Oil Consumption, Imports Decreased in 2005”, China Daily, 3 February 2006. 4. Zhongguo shangwu nianjian bianji weiyuanhui, Zhongguo shangwu nianjian 2005 [China Commercial Affairs Yearbook 2005] (Beijing: Zhongguo shangwu chubanshe, 2005), pp. 833–34. 5. Asia Pacific Energy Research Centre (APERC) and Institute of Energy Economics, Japan (IEEJ), APEC Energy Overview (Singapore: Asia-Pacific Economic Cooperation Secretariat, 2003), p. 71. 6. Cui Minxuan, ed., Zhongguo nengyuan fazhan baogao 2006 [The Energy

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7.

8. 9. 10.

11. 12.

13. 14.

15.

16.

17.

18. 19. 20. 21. 22. 23.

Development Report of China 2006] Nengyuan lan pi shu [Blue Book of Energy], (Beijing: Shehui xue wen chubanshe, 2006), p. 90. “Government Likely to Terminate Gas Exports”, The Jakarta Post, 17 May 2006; Azhar Ghani, “Jakarta Plans to Limit Energy Exports”, Straits Times, 13 May 2006. APEC Energy Overview, p. 50; EIA website at (30 March 2006). APEC Energy Overview, p. 72. “Japan Asks Brunei for Stable LNG Supply”, Mainichi Interactive, 11 May 2006 at (13 May 2006); EIA website at (30 March 2006). Details of the plans for a TAGP can be found on the ASEAN website at (18 March 2006). “Conflict in the South China Sea”, UK Defence Forum, no date, quoting Pan Shiying of the Foundation for International and Strategic Studies in Beijing at (29 May 2006). The Declaration is available in full on the ASEAN website at (11 March 2006). Theresa Torres and Niel Villegas Mugas, “RP, China, Vietnam to Explore Spratlys”, Manila Times (15 March 2005) at (29 May 2006). CCTs are processes which reduce the environmental effects of burning coal. They also increase the amount of energy gained per ton of coal. For more information see (27 May 2006). Zhongguo shangwu nianjian bianji weiyuanhui, Zhongguo shangwu nianjian 2005 [China Commercial Affairs Yearbook 2005] (Beijing: Zhongguo shangwu chubanshe, 2005). “Deconstructing Deadly Details from China’s Coal Mine Safety Statistics”, China Labour Bulletin, 6 January 2006 at (26 May 2006). (The China Labour Bulletin has been actively promoting the protection of labour rights and standards in mainland China since 1994.) “ASEAN to Sign Pact to Develop Energy Grid”, Straits Times, 17 May 2006. Southeast Asia Rivers Network website at (19 March 2006). Mekong River Commission website at (19 March 2006). World Nuclear Association Website at (7 March 2006). Azhar Ghani, “Jakarta Revives N-Power Plan”, Straits Times, 19 May 2006. Tatsuo Ikenaga “Vietnam and Indonesia look to Nuclear Power”, initially appearing in Sekai Nippo and reproduced in World Peace Herald, 30 November

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25. 26. 27. 28. 29.

30. 31. 32.

33.

34.

35.

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2005 at , 18 March 2006. This is assuming that electric power will continue to be generated from coal and gas-fed thermal plants, hydroplants, nuclear plants and some renewable energy plants. “Renewable Energy Quota Set for Power Companies”, Shezhen Daily, 17 January 2006 at (18 March 2006). “China: Contract for Largest Windmill Powers Wind Energy”, Shanghai Daily, 14 March 2006. See the ASEAN website at (27 March 2006). See COGEN 3 website at (18 March 2006). “Alternative Fuel: Gasohol Pumps May Soon be Running Dry”, The Nation, 29 January 2006 at (27 March 2006). See also the PTT Company (Thailand’s national energy company) website at (27 March 2006). Push for Biofuels”, Straits Times, 1 May 2006; and “Beijing’s New Driving Spirit”, Asia Times, 4 May 2006. This is partly due to the structure of the economy which has a larger than average heavy industrial sector. See the ASEAN websites, for example, (27 May 2006) and the ASEAN energy conference proceedings. Also see, for example, Peter Rumsey and Ted Flanigan, Compendium: Asian Energy Efficiency Success Stories, published for the International Institute for Energy Conservation by Global Energy Efficiency Initiative, Washington, D.C., 1995; United Nations, Energy Efficiency: Compendium of Energy Conservation Legislation in Countries of the Asia and Pacific Region, New York: UN, 1999; Asia Pacific Energy Research Centre and Institute of Energy Economics, Energy Efficiency Indicators: A Study of Energy Efficiency Indicators in APEC Economies, 2001; Ming Yang and Peter Rumsey, “Energy Conservation in Typical Asian Countries”, Energy Sources 19, no. 5 (1997): 507–21. See the ASEAN, METI (Ministry of Economy, Trade and Industry) and the EJJC (Energy Conservation Centre of Japan) websites, for example, (24 May 2006). Also see, “Asian Nations to Get Help Saving Energy”, Japan Times, 15 May 2006. Karen Teo, “Big Three to Fight ‘Asian Premium’ on Saudi Oil Sales”, Hong Kong Standard, 25 November 2004 on Energy Bulletin website at (25 March 2006). A great deal has been written on this topic. See for example, the websites of the Institute of Defence and Strategic Studies (Singapore) at ; the Singapore Institute of International Affairs at ; and

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36.

37.

38.

39.

40.

41.

42.

43. 44.

45.

46. 47.

48.

the International Institute for Strategic Studies (London) at , etc. This project complements plans for a railway from Yangon to Kunming which will provide access to the Indian Ocean for China’s landlocked southwestern provinces. Phar Kim Beng, “China Mulls Oil Pipelines in Myanmar, Thailand”, AsiaTimes Online, 23 September 2004 at (10 March 2006). Donald Greenlees, “Asia Oil Subsidies Bring Windfall to Smugglers”, International Herald Tribune, 27 September 2005 at (28 March 2006). “Zhongguo jianli ‘shiyou zhanlue chubei’ bing fei zhi wei pingyi youjia” (China Builds SPRs to Counteract Price Turbulence), Xinhua, 12 October 2004 on (21 February 2005). Richard Orange, “Europe’s Energy Commissioner Makes Debut with Call for EU Oil Stockpile”, Knight Ridder Tribune Business News, 19 September 2004, p. 1 (4 February 2005). “Zhongguo shiyou zhanyue chubei qidong” [The Start of China’s SPRs], Xiaoxiang chenbao [Xiaoxiang Morning News], 17 April 2003 at (21 February 2005). Other analysts, however, believe there were a number of other factors involved including wild trading of hedge funds and futures, the fear of terrorism in the Middle East, worldwide lack of production capacity, OPEC’s policies to keep prices high, worldwide refining bottlenecks, supply disruptions in Russia, Nigeria and Venezuela, the effects of Hurricane Ivan, etc. The full text is available on the ASEAN website at (24 March 2006). “Singapore to Build Underground Rock Caverns”, Asia Pacific Oil and Gas Newsletter, 6 April 2006 at (24 May 2006). “China to Boost Oil Refinery Capacity”, China Daily, 17 March 2006 at

(24 May 2006). Ibid., quoting National Development and Reform Commission website. Fu Jing, “Top Planner: Oil Refinery Capacity ‘Must Rise’ ”, China Daily, 14 February 2006 at (29 March 2006). Sergei Blagov, “Russia Views Mongolia as Gateway to China”, Eurasia Daily Monitor, vol. 3, no. 50, Jamestown Foundation, 14 March 2006 at (29 May 2006).

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49. EIA website at (29 March 2006). 50. Yasuo Tanabe is credited with this idea. See his “Asian Energy Partnership: Opportunities and Obstacles” in Elspeth Thomson, ed., Energy Conservation in East Asia: Towards Greater Energy Security, forthcoming. See also “IEA COMMUNIQUE: Meeting of the Governing Board at Ministerial Level” at (25 March 2006). 51. The first section of the North European Gas Pipeline (NEGP) will be in operation in 2010. It will run under the Baltic Sea to Germany and Sweden and then on to other parts of Europe. 52. Claiming that Ukraine was siphoning off large amounts of Russian gas for use in Ukraine, the Russian Government quadrupled the price to try to stem the problem. Ukraine denied there was any siphoning going on and resisted paying the much higher price by stopping the flow of gas intended for European customers. 53. “EU Moves towards Joint Energy Policy”, Daily Times, 9 March 2006. 54. “The Politics of Power”, The Economist, 11 February 2006, pp. 65–67.

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12

China’s Aid to Southeast Asia Zhang Haibing

INTRODUCTION By any criteria, China is a developing country. Nevertheless, China’s international aid programme appears to be significant. It has been giving aid ever since the early 1950s. Since then, the amount and scope of China’s aid has increased many times.1 Aid programmes generally carry a country’s major policy goals and its understanding of national interests as well as the international environment. Hence, to a great extent, it reflects a country’s foreign policy thinking. This is no exception for China. For example, in the earlier period, China’s aids centred on helping the economic and political independence of the newly independent third world countries, especially those of Africa. Such an orientation reflects China’s interest in building a “Third World” coalition in world politics during that period. Through the years, China’s aid programmes have shown many discernible changes in its policy goals and policy tools.2 In recent years, China has provided significant aids to Southeast Asia countries. These include aids to deal with the Southeast Asian financial crisis of 1997, the SARS epidemic of 2003, the bird flu that followed, and the Asian tsunami of late 2004. During the same period, cooperation of various forms between ASEAN and China improved significantly. Is Southeast Asia the next region, like Africa in the 1960s–70s, where China would centre its aid programme? What are the aims of China’s aid to Southeast Asia? How will these aid programmes evolve in the future?

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This chapter will discuss these questions and issues related to them. After a brief discussion of the various conception of aid, the report will proceed to its three major sections regarding China’s aid programme in Southeast Asia. It first reviews the history of China’s aid to Southeast Asia and then discusses the characteristics of China’s aid to Southeast Asia. The last part contains some discussion of the future trajectory of China’s aid to Southeast Asia. DEFINING AID There is no unified definition of aid. Generally speaking, foreign aid is provided by a rich country to a poor country for economic development, military security, disaster relief, and other purposes.3 In practice, however, different countries have adopted different terms for it, such as foreign aid, development assistance, and development cooperation. The United States often uses “foreign aid”, but North European countries use “development cooperation” more often, connoting the equality between the donor and the recipient. Most of other developed countries refer to aid as “development assistance” or “Official Development Aid” (ODA), emphasizing the developmental nature of the aid.4 In addition, “South-South aid” refers to aids from one poor country to another. It is the technical or human resources transferred from one developing country to another, and is usually called development cooperation. 5 Aid is often provided on non-economic considerations as a foreign policy instrument.6 “South-South cooperation” is usually conceptualized as a strategy for rational use of developing countries’ resources in order to promote economic independence and self-reliance, and improve their bargaining power vis-à-vis developed countries.7 Aid for development is also an important theme in North-South relations. For some Western countries, such assistance can project their economic and political influences in the Third World.8 In short, aid is provided in a variety of contexts for motives ranging from the most humanitarian to the most overtly political or strategic. The diversity of motives and mechanisms of aid makes it a controversial policy option as well as a contested topic of intellectual debate. 9 International aid, as defined by the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD), must meet three essential criteria. First, it must have development as its principal objective. Second, it must be sponsored by official agencies. Lastly, at least 25 per cent of any aid must be grants.10 With these theoretical underpinnings, we can see that China’s aid to Southeast Asian countries is a form of South-South aid. In addition, it is generally called “development cooperation”. The aid programmes examined

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in this study will not necessarily be limited by the three criteria mentioned above. The term “China’s aid” in this study refers to any transfer of financial, technical, or human resources to Southeast Asian countries by China. Such transfers are for development purposes and are considered by both sides as “aid” [yuanzhu] or “development cooperation” [fazhan hezuo]. THREE STAGES OF CHINA’S AID TO SOUTHEAST ASIA China’s aid to Southeast Asia Countries is an important part of China’s foreign aid programme. From the establishment of People’s Republic of China, the evolution of its international aid programme can be divided into three stages. In different stages, the policy goals and policy tools of this international aid programme are different. Accordingly, China’s aid to Southeast Asia has also changed through the three stages. The first stage of China’s international aid began from the founding of PRC in 1949 and continued to the early of 1980s. The aid policies of this stage are guided by something called the Eight Principles of foreign aids (see below). The second stage started from the early 1980s, and lasted until the mid-1990s. The guiding principle of this stage can be summarized as: equality, mutual benefits, diverse forms, effectiveness, and co-development. Since the mid-1990s, China’s aid programme has entered the third stage. The Chinese Government now pays more attention to mutual benefits and co-development. Accordingly, policy options have undergone major changes too. For example, it has shifted from grants to loans with subsidized interest rates, or investment in actual projects by creating joint ventures with the aid receiving governments. It is important to note the global background of the first stage of China’s aid is the Cold War. Within this grand geo-political environment, China’s foreign policies focused on building a coalition with developing countries, most of which achieved independence following the end of World War II. Mao Zedong made it clear that “China should help the peoples who recently achieved independence. This is our internationalism obligation.”11 At the beginning of 1964 Chinese Premier Zhou Enlai made a speech during his marathon visit to fourteen Asian and African countries in which he set forth the Eight Principles of China’s aid. These principles were intended to assure the recipient country of China’s commitment to equality in bilateral relationships, respect of the other country’s sovereignty, and efficiency, effectiveness, and pragmatism in its aid programmes.12 When ASEAN was founded in 1967, most ASEAN countries and China harboured suspicions against each other. As a result, no normal economic relationship existed between China and these countries. It would remain so

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until 1974, when Malaysia became the first ASEAN country to establish diplomatic relation with China, and the Philippines and Thailand followed later. As a result, during this period, China’s aid to Southeast Asia was largely non-existent. Nevertheless, China did provide significant aids to the socialist countries in this region. According to published data, during the Vietnam War, the total military technical and equipment aid from socialist countries to Vietnam reached 2.4 million tonnes. Of these, China’s aid was the biggest, at about 1.6 million tonnes.13 But in general, in the 1950s through 1970s, China’s focus of international aid was not in Asia. The lion’s share of China’s aid went to African countries. For Asia, China’s aid focused on seven countries: Pakistan, Indonesia, Sri Lanka, Nepal, Myanmar, Cambodia and Laos. According to published data, the total economic aid of China between 1956 and 1973 amounted to about US$3,384 million. Of these, the seven Asian countries received a total of US$1,089 million, about 32 per cent of the total.14 These aids were mainly given in the form of interest-free or low-interest loans. If the recipient country could not repay the loans in due time, they could normally request for extensions.15 The second stage of China’s aid practice started from the beginning of the 1980s and lasted until the mid-1990s. In 1978, China under Deng Xiaoping adopted the now well-known reform and open policy. Under this general policy, it also adjusted its aid policy. It enlarged the area of aid and mainly helped recipient countries to develop middle- and small-size projects of local needs. At the same time, China also joined in multilateral foreign aid programmes of the UN, international financial organizations, and other countries. The guiding principles have evolved into promoting codevelopment, achieving mutual benefit, and adjusting aid measures to local conditions. It also stressed technical cooperation, managerial cooperation, and joint ventures to improve the benefits of aid. During this period a lot of reforms took place within the managed system of China’s aid. For example, the government began to contract projects out to companies.16 China’s aid to Southeast Asia accelerated during this period. In July 1991, Chinese Foreign Minister Qian Qichen was invited to attend the Twentyfourth ASEAN Foreign Minister Conference, and the relationship between China and ASEAN entered a new period. Since 1991, the ASEAN-China economic relationship has grown deeper and wider. In 2001, a decision was made by the two parties to establish an ASEAN-China Free Trade Area (FTA) by 2010. During this stage, China began to pay more attention to East Asian regional cooperation, and showed its intention of promoting common regional interests and development.

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The third stage roughly started from 1995, and continues to the present. During this period, Chinese foreign aid policy went through significant changes. One of the most important reforms is a shift to connect aid with mutually beneficial cooperation. In practice, this means that under the bilateral inter-governmental agreement, the contract of the aid-supported projects were given to Chinese companies or to joint-ventures formed by a Chinese company and companies of the recipient country. The contracting company, in general, also brings in its own capital investments into the project. The significance of this policy change lies in the new way to combine aid with bilateral or multilateral economic cooperation, and to encourage Chinese companies to be involved in the construction, management, and operation of aid projects. At the same time, combining government’s finance and companies’ capital can bring more benefits to recipient countries, and also promote trade relationship and friendly cooperation.17 According to the statistics of China’s Ministry of Commerce, in recent years China has paid more attention to Southeast Asian countries (Table 12.1). Chinese companies often choose Southeast Asia as the first and best choice for investment. Such preference of the firms has a close relationship with the Chinese Government’s incentives and policy supports. The table does not

Table 12.1 Chinese Investment in Southeast Asia (US$10,000) Country Vietnam Laos Cambodia Myanmar Thailand Malaysia Singapore Indonesia Brunei Philippines

Number of Chinese company

Agreement investment

Chinese side investment

82 19 63 38 239 101 178 61 1 40

13,192.83 5,508.90 15,483.88 17,204.80 37,788.21 7,679.10 9,000.62 27,255.90 92.00 3,959.74

9,011.07 3,722.90 12,770.70 6,614.42 25,467.78 3,842.11 7,927.94 16,372.80 45.08 1,641.04

Sources: Fen He [
 China Commerce Department], “Research on Chinese Companies’ Investment in Southeast Asia and South Asia [
 !"#$
 ! "#$%]”, International Economic Cooperation [
 !"#], no. 3 (2004): 9. Note: Statistics accumulated up to June 2003.

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separate government aid from business investment, but it does show that China is making efforts to promote developments in Southeast Asia. Besides providing economic aid by way of mutually beneficial cooperation, in 2002 China announced its Asia Debt Reduction Plan, which will reduce or cancel part or all debts for Vietnam, Laos, Cambodia, and Myanmar.18 CHARACTERISTICS OF CHINA’s AID TO SOUTHEAST ASIA The Southeast Asian countries receiving aids from China include some whose GDP per capita are higher than China’s, such as Thailand and Malaysia (see Table 12.2). China’s openly stated rationale is that China is a responsible regional big country and it wants to contribute to the prosperity of Southeast Asia. At the beginning of 2005, China’s aid to Southeast Asia tsunami reached 5,216.3 million RMB and US$200 million. The scale and the sum of the tsunami aid is the biggest one in China’s historical urgent foreign aid. China’s aid in Southeast Asia is closely related to ASEANChina economic cooperation. In 2004 on the Eighth ASEAN-China Leaders Conference, Chinese Premier Wen Jiabao had four suggestions for ASEANChina cooperation: maintain frequent political dialogues, enhance trade relationship and upgrade economic cooperation, deepen security dialogue

Table 12.2 GDP per Capita of China and Its Aid Receiving Countries in Southeast Asia Current price (US dollars) Country Brunei Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam China

1996

1997

1998

1999

2000

2001

2002

2003

2004

17,096 317 1,167 396 4,766 109 1184 25,127 3,134 337 667

16,227 320 1,128 360 4,672 100 1157 25,147 2,656 361 726

11,961 265 488 259 3,257 144 896 20,892 1,900 361 758

12,670 295 693 285 3,485 189 1018 20,611 2,046 374 788

12,751 291 731 329 3,881 210 980 22,757 2,029 403 852

12,121 283 688 328 3,698 162 924 20,553 1,887 415 921

12,070 296 820 333 3,924 175 959 20,823 2,050 439 1,096

12,971 310 973 362 4,198 179 973 20,987 2,291 481 1,268

15,612 314 1,165 415 4,624 167 1,013 24,740 2,521 534 1,410

Sources: IMF World Economic Outlook and Economic Statistics. .

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and expand security cooperation, and extend and enrich the substance of cooperation. 19 ASEAN and China have established several important cooperation areas: agriculture, information and communication technique, tourism, Greater Mekong Sub-regional cooperation. China as an emergent foreign aid provider has shown its sincerity and responsibility with regard to Southeast Asia. Since the 1950s, China has continued to provide aid to its neighbouring countries. But starting from the late 1970s, China has adopted more flexible aid policies, and paid more attention to the real effects of aid. Currently, China’s aid policies and aid programmes demonstrate the following characteristics. Using Government Funds to Involve Business Participation China’s aid adopts mainly two forms. First, it can be in the form of government grants and subsidiary interest loans or other benefit loans to recipient countries. Second, it also takes the form of encouraging joint ventures and cooperation in aid projects, which can combine government aid money with business capital to enlarge the aid finance and improve the benefit of aid. China’s aid programme, international project contracting and labour services are playing a significant role in expanding exports of equipment and goods. The Ministry of Commerce is in charge of China’s foreign aid programmes. Its responsibilities are: to formulate and implement China’s foreign aid policies and plans, including the signing of the relevant agreements with the recipient country; to compile and execute annual foreign aid programmes; to supervise and inspect on the implementation of China’s foreign aid projects; to manage China’s foreign aid fund, concessional loans, special funds, and other foreign aid funds; and, to facilitate the reform on foreign aid provision modalities. ASEAN-China Cooperation Fund was established to support human resources development, financing training, and seminars, mostly for ASEAN countries. In 2004, China decided to add US$5 million to the fund. In addition, it will provide another US$15 million to establish the Asia Regional Cooperation Fund to encourage the related government agencies and firms of China to be involved in the cooperation with ASEAN countries.20 With this fund established, the Ministry of Commerce will maintain its portfolio of international aid, while the Asia Regional Cooperation Fund will be available as loans to Chinese firms to invest in recipient countries. The utilization of loans from the fund by Chinese firms is on the condition of a matching investment from the firm itself. Through such forms of mixed investment (from the Ministry of Commerce, fund loans, and firm’s capital), the recipient

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countries can absorb more capital and Chinese companies can also find more opportunities to venture out. China provides aid to Southeast Asia and at the same time opens the latter’s market. This appears to be how China’s policymakers intend to achieve mutual benefits when giving out aid. Technical Training as an Important Form of Aid Providing technical training is an important characteristic of China’s aid. In 2003, the Chinese Government sponsored a total of 42 inter-developing countries technical training classes or seminars. In 2004, there were 59 of these. In 2005, Chinese planned to hold 229 of such classes and seminars, training 5,667 individuals. Of these classes and seminars, many were directly connected to Southeast Asia, such as ASEAN tourism officers training, ASEAN electronic business officer training, ASEAN middle- and smallsized companies’ development training, Mekong area countries’ custom officers’ training, Mekong area countries’ vector control department officers’ training, and training in multi-agriculture and ripening technique in the Philippines. Other training classes offered to all developing countries, to Asian countries, or to Asia-Pacific countries also include many ASEAN countries.21 Myanmar, Cambodia, Laos, and Vietnam are developing countries of ASEAN, similar to China with a large agricultural sector. China’s aid to these countries shows emphasis on agricultural technical aid. For example, the Philippine-China agriculture cooperation has developed very fast and has already become the most important item in their bilateral cooperation. In 1999, the Philippines and China signed the Agreement on Enforcing Agriculture and Related Areas Cooperation. In 2000, China provided US$1 million credit loans to the Philippines for agricultural development. In March 2003, supported by China, the Centre of China-Philippine Agriculture Technique was established in the Philippines.22 China’s ASEAN Agriculture Technical Training programmes are provided to Thailand, Vietnam, Cambodia, the Philippines, Indonesia, Myanmar, and Laos. For every training session, every country can send three to four people to China to learn agricultural techniques in production, research, and dissemination. The Chinese Government provides the training fee, accommodation, local transport costs, and a per diem of 30 RMB per day.23 China’s technical aid in agriculture to some ASEAN countries is in line with its overall international aid tradition. Since the 1950s, China has taken part in South-South agriculture cooperation. To date, it has provided agriculture-related aid to 118 countries. In doing so, China has helped these

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countries to establish firms, centres to disseminate agricultural techniques, and factories for product processing of staples. The total number of these establishments is close to 1,600. It has also trained many people in technical skills and know-how in agriculture.24 In 2002, ASEAN and China signed the Memorandum on Agriculture Cooperation, and identified eight cooperation areas. This cooperation will last for years. According to the memorandum, China will provide training in ripe hybridizing, crop skill, fertilization, and irrigation, and it will also send forty specialists to ASEAN countries. Furthermore, China offers training and funding in other areas such as fishing, herd management, biotechnology, agricultural machinery, and livestock.25 More Attention to Infrastructure Building The construction of infrastructure needs huge financial support, which most poor countries cannot afford. “If you want to get rich, build roads” is a popular saying in China. Now it is also well-known in Southeast Asia. China not only invests heavily in building roads within China, but also provides aid to help some developing countries in Southeast Asia to build roads and connect them with China’s. For example, cooperating with the Asia Development Bank (ADB) and Thailand, China provides free interest loans and grants to build the Bangkok-Kunming highway, amounting to RMB2.49 million.26 In 1997, China helped Laos’ economic recovery and its expansion mainly through investment and trade; during 1998–99, China also provided a large amount of interest-free loans to stabilize the Lao currency, and from 2000, its aid to Laos began to focus on the building of transportation infrastructure. By 2000, China’s aid to Laos had reached US$1.7 billion.27 During a state visit by Chinese President Hu Jintao in April 2005, China extended loans and investments worth a combined US$1.62 billion to the Philippines. The largest loan of US$500 million will be used to extend a rail system to the light-industrial centre north of Manila. China’s company, Huawei, also signed an agreement to provide US$27 million in equipment to a Philippine telecommunication company. The two countries signed various accords to encourage Chinese investment in the infrastructural projects of the Philippines.28 In providing aids to infrastructural building in Southeast Asia, China also benefits from the projects that evolve. China has very strong capability in the field of construction, and through aid in infrastructure, many Chinese firms have won contracts in such projects. Huawei Company mentioned

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earlier, is a good example. The projects supported by Chinese aid also bring Chinese labour to Southeast Asia, alleviating China’s employment pressure at home. Hence, Chinese policymakers see such aid programmes as mutually beneficial, and also want to realize win-win outcomes. Emphasizing Mutual Benefits While maintaining the original Eight Principles since the mid-1990s, China’s guiding principles for aid programmes have put more emphasis on mutual benefits and co-development. With this change in emphasis have come changes in practices. Now China increasingly employs joint-venture as the major aid operation, which has in turn led to expansion in overseas activities of China’s construction firms. This also fits well with recent changes in China’s foreign policy thinking which emphasizes friendly relationship with its neighbouring countries [mulin]. Such combination of aid with economic cooperation is clearly shown in China’s relationship with the Southeast Asian countries. Senior Minister (SM) Lee Kuan Yew of Singapore has praised China’s skilfulness in this regard. According to SM Lee, China knows what the other country needs most. Hence, even before negotiation, they have prepared a list of possible projects which they are more than ready to offer to the other country as part of their aid. In the case of Indonesia, for example: China knows that Indonesia needs highways, bridges, and ports. They are ready. They have tremendous capacity in construction, enormous number of engineers and technicians, to help. What does China need? [They need] oil, natural gas, palm oil and other natural resources, which Indonesia has in abundance. The deal is easily made.29

For another example, during Chinese President Hu Jintao’s visit to the Philippines in April 2005, the two countries signed fourteen business agreements, ten of which involved government-to-government deals. The agreements included a US$950 million investment by Jinchuan Shanghai Bao Steel Company and China Development Bank to develop a nickel mining company in the Philippines. China National Offshore Oil Company also signed a framework agreement for as much as US$10 million in prospective investment in oil and gas exploration off the coast of the western Philippine island of Palawan. Other projected economic benefits include boosting tropical fruit exports to China and facilitation of commercial investments in electropower.30 China’s aids to the mainland Southeast Asia countries Myanmar, Cambodia, Laos, and Vietnam have focused heavily on the construction of

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infrastructure. In this way, while the projects largely enhance the recipient country’s economy, they also allow Chinese firms to be involved. Such projects include the Mao Zedong Boulevard of Jinbian, the capital city of Cambodia, and other public work projects. While China’s investment/aids in Cambodia have exceeded US$200 million by 1997, there have been more than fifty Chinese firms involved in China-supported projects.31 Similarly, China has supported the construction of Myanmar’s largest hydroelectricity plant, which was contracted to a construction firm of Yuannan Province. In 1998 alone, Chinese firms were involved in a total of US$523 million worth of business in Myanmar, which included construction, labour export, consulting, and others. Hence, China’s aids to Myanmar have generated huge economic partnership between the two countries.32 This pattern is also seen in China’s aids to Laos and Vietnam, where Chinese funds are used to build satellite television stations, power plants, cultural facilities, cement factories, roads, and other projects for civil improvements. Tens of Chinese firms are present in these countries as well. Disaster Relief and Humanitarian Assistances China increasingly involves itself in disaster relief and other humanitarian assistance. During the 1997 Asia financial crisis, China participated in the assistance programmes for Thailand organized by the IMF and provided a US$1 billion loan.33 Together with its decision to maintain its exchange rate, China contributed to the stabilization of the regional economy.34 The Indian Ocean tsunami on 26 December 2004 was one of the most devastating disasters human history has seen. China responded to the disaster with determination and quickness. On the same day of the disaster, China’s Ministry of Commerce announced that the Chinese Government would provide relief materials and cash worth a total of 21 million RMB. A few days later, the Chinese premier announced another 500 million RMB of relief fund and materials, together with sending teams of experts and technicians to the affected countries. Such actions on the part of China were well received by the international community. AFP noted that this was the largest amount of one-time aid China has ever provided, and that the aids from China have increased to a large extent, the total amount of world aid to the affected countries. World Health Organization (WHO) noted China’s aid as “exciting”, and commented that China was committed to regional as well as world betterment. Government officials of Indonesia, Maldives, and other countries also made similar comments.35

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For China, disaster relief and other kinds of humanitarian assistance largely improve its international image and enhance its relationship with the affected country. It is certainly predictable that in the future, China will continue to provide such assistance if needs are identified in Southeast Asia and its other neighbouring countries. Mekong Basin: A New Focus The region around the Mekong River has become a new focus for China’s Southeast Asia policy. ASEAN and China are working closely to implement many development programmes and projects for the Mekong Basin within various frameworks such as the Greater Mekong Sub-region (GMS), ASEAN Mekong Basin Development Cooperation (AMBDC) and the Mekong River Commission (MRC). The Greater Mekong Sub-region cooperation programme includes Cambodia, Vietnam, Laos, Myanmar, Thailand, and China. So far, GMS has held two summits, during the second, the China’s State Report on Chinese Participation in Mekong Sub-Regional Cooperation was presented. According to the report, China has joined the Agreement on Facility Passenger and Goods Transport in Mekong Sub-Region, and provided funds for channel improvement of the Mekong and the preparatory work for the Pan-Asia Railway. It has contributed US$5 million to help regulate sections of the navigation channel within the territories of Laos and Myanmar. 36 It also signed the Agreement on Governmental Electricity Trade of the Mekong Sub-region. Indeed, China has made many comprehensive efforts: regional market integration, information highway, and biodiversity protection. It has also offered training programmes in human resource development, hygiene, telecommunications, and agriculture.37 China’s efforts have seen good results. Since the debut of the GMS cooperation programme, the six member countries have had 119 cooperation projects, with a total investment of US$5.3 billion.38 Together with these are some concrete economic and financial assistance. The five Southeast Asian countries are also the main recipient countries of China’s aids. China provided US$30 million for the construction of the section of Kunming-Bangkok highway within Laos. Since 2004, China has offered zero tariff for most products from Laos, Cambodia and Myanmar. Furthermore, China’s “Asia Debt Reduction Plan” reduced or cancelled debts for Vietnam, Laos, Cambodia, Myanmar, and two other countries. As a result, all of Cambodia’s debts due to China were cancelled.39 During the second GMS Summit, held in July of 2005 in Kunming of China’s Yunnan

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Province, Chinese Premier Wen Jiabao pledged China’s commitment to building friendly relationships with neighbouring countries. China is, he said, committed to making all surrounding countries good neighbours, good partners, and good friends. It was also then that the zero tariff offer was unilaterally made to Laos, Cambodia, and Myanmar, to take effect on 1 January 2006.40 China’s effort did not escape the attention of the Japanese press, which noted that China is using aid and projects to assert more influence on its neighbouring regions.41 CHINA’S AID TO SOUTHEAST ASIA: AN ASSESSMENT While China is itself a developing country, and also receives from developed countries as well as international organizations, its degree and scope of international aid are quite significant. In addition, China seldom attaches conditions to the aid it gives. For example, ever since it started to open up its economy, Laos has relied largely on international aids. But many countries such as Japan, Sweden, France, and Australia and organizations such as the World Bank, IMF, and ABD generally require the Lao Government to carry out reforms in order to receive the aid. Such demands, many of which require changes to the Lao political system, make the Lao Government uncomfortable when accepting the aid. As China’s aid does not come with such requirements, it is most welcomed by the Lao Government. Furthermore, China has been seriously trying to keep to its “be good to neighbours, be friends with neighbours” [yu lin wei shan, yi lin wei ban] and “friendly neighbour, peaceful neighbour, and rich neighbour” [mulin, anlin, fulin] foreign policy guidelines, seeking to form strategic partnerships with Asian countries. In general, such a grand vision of its aid programme has been largely successful. Nevertheless, many problems still exist in China’s aid programme. Many still vividly remember an incident during the tsunami disaster relief. Many food supplies from China were mistakenly caught as being expired by the Indonesian press. China’s food products have on their packages the date of production, which is of course earlier than the date anyone receives it. But some news reporters took the date as the expiry date, hence a scandal was made that China had supplied expired food to the tsunami-devastated population. Although the incident was soon clarified, it nevertheless revealed the lack of local knowledge of China’s aid managing staff. For relief materials sent to a non-Chinese speaking area, it is necessary to make sure that important information about the goods is understandable to the local population. In this case, what was noted in Chinese as date of production needs to be made clear in English and the local language. In addition, when

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there is a sudden need to procure and deliver relief materials to another country, how to ensure that the right products are procured is also important. China’s aid programme needs to tackle several challenges. Although China has been involved in aid since the 1950s, it is in a totally new reality now. The focus, scope, scale, and recipients of China’s aid have all changed, some of which have been rapid. As a result, it is a great challenge for China’s policymakers to maintain a coherent vision and design and at the same time, a high level in management and delivery of the aid to other countries. The Japanese Example China is widely believed to be in a process of economic take-off, which will make China an economic big power in the near future. Whether such a prospect poses any threat to the neighbouring countries has already become a real question. In the past, the expansion of Japanese economic power did make many countries apprehensive of Japan as a domineering power in the world economy. What Japan succeeded in doing was to bring economic aid, the ODA, to its neighbouring countries, including China and Southeast Asia. Around 1990, although it was only the second largest economy in the world, its total foreign aid had exceeded those of the United States, the largest economy in the world. In 2005, Japanese Prime Minister Koizumi announced that Japan would provide US$2.3 billion as aid to Asian and African countries in the following five years. While China has also realized the importance of aid as an instrument to build friendly relationship with, and win trust from, other countries, it appears China is still lacking a clear vision and a coherent, grand strategy. China’s aids still seem to be, first, relatively small (compared to that of Japan, for example), and second, largely based on an ad hoc fashion. Furthermore, while China also realizes the effectiveness of using aid to help Chinese firms penetrate markets in other countries, it seems to be caught by ineffective management of aid programmes that involve government agencies, firms, and agencies of the recipient country. The competitiveness of Chinese firms in the high-tech sectors, such as telecommunications, could also present a problem. Short-Term Aids and Long-Term Investment: The Balance One manifestation of China’s struggle for a coherent aid programme and grand strategy is the selection and combination of aid projects. Ideally, aids should aim at promoting the local economy, with which will then come increased purchasing power of the recipient country, including the country’s

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industrial upgrading which will need more investment and technological transfer. Such needs will more likely to be met by Chinese firms. Hence, aid programmes will eventually open up markets for Chinese firms, assuming that they are competitive enough. Hence, a grand strategy for aid should be based on such a long-term vision. While relief is necessary in times of emergency such as floods or other natural disasters, in general aid programmes should focus on projects that require purchasing of China’s technically sophisticated products, such as the steel industry and telecommunications. Such aid programmes will form the connection between China and the industrial upgrading of the recipient country, and in the future will turn into continuous demand for China’s products. China appears to have realized such a strategy of balancing shortterm relief with long-term investment. But it is not clear how such awareness can be translated into actual strategy and programmes. Material Aid and Knowledge Supply: Another Balance In terms of using education and training as a form of international aid, China can learn a great deal from Singapore. In giving international aid, Singapore has predominantly relied on education and training. Such knowledge supplies can serve important purposes. In many cases, their contribution to the economic and social development of the recipient countries is no less significant than the financial or other forms of material aid. Furthermore, such aid programmes can enhance the cultural and psychological binds between the donor country and the recipient country. In this sense, it is a kind of intellectual and/or cultural aid. China’s international aid programmes face two important constraints. First is its limited economic and financial resource, since it is itself a developing country and a large portion of the country still desperately needs development support. Second is that the development of China is generating some uneasiness among the neighbouring countries, who are uncertain about China’s international ambition once it becomes a big power. These two constraints can be significantly relaxed if China expands its “intellectual” aid in the form of training and education. For one, training and education are less costly, hence overcoming the first constraint. For another, training and education can increase the mutual understanding between China and the other countries. Such mutual understanding will increase mutual trust and reduce the uncertainties and uneasiness regarding China’s development future. China has been running classes and seminars for staff from Southeast Asian countries. But so far such programmes have largely been confined to agriculture. There

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is certainly more space to expand. But it is not clear whether policymakers in Beijing have made such commitment to the expansion of this kind of “intellectual” aid and knowledge supply. Researching Aid in China Given these many challenges facing Chinese aid programme, it is surprising that academic and policy studies on aid in China are extremely undeveloped. In the past, the scale of aid is very limited and policymakers did not feel it necessary to have sophisticated studies on aid. Now, international aid is a much larger enterprise, involving many government agencies, business sectors, and international counterparts. The lack of academic studies on aid will inevitably affect the decision making of China’s aid programme. Clearly, government organizations have yet to realize the importance of comparative and empirical studies on international aid. Furthermore, contributing to this lack of research is the paucity of data. Many of China’s aid programmes in the past were not publicized, such as the aids to Vietnam during the Vietnam War. Since the 1980s, although more data are made available, such data are of low quality. Most notably, China now increasingly combines economic aid with economic cooperation. Hence for the financial transactions that occurred, it is difficult for a research to differentiate what proportion is of aid (grant or low- to zerointerest loan), and what proportion is not. China’s scholars have conducted very limited research on aid, and among those studies that have been produced, most centred on Japanese official development aid. On the other hand, it is difficult, if not impossible, for Chinese scholars to travel to recipient countries of China’s aid such as Myanmar to examine the goals, processes, and problems of China’s aid. All these prevent good quality studies from emerging. NOTES 1. John Franklin Copper, China’s Foreign Aid (Lexington, Mass.: D.C. Heath Company, 1975), p. 1. 2. Especially in the 1970s–80s, China’s aid mainly flowed into African countries. The total number of recipient countries from China was 89, among which 49 were in Africa. The marked characteristic of China’s aid in Africa is the building of gymnasiums and friendship palaces. 3. [
] Li Wei Qin [
 ], “Taiwan’s Foreign Aid Policy” [
 !"#$%
], Taiwan Research Volume [
 !"#], no. 1 (1994): 33.

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4. Zhou Hong [
] editor-in-chief, Foreign Aid and International Relationship [
 !"#$%&] (China Academy of Social Science Press, 2002), p. 29. 5. John White, in The Politics of Foreign Aid (London: The Bodley Head, 1974), pp. 22–23. 6. Lin Xiaoguang [
 ], Japan’s ODA and China-Japan Relationship [
 !
 !"#$%&] (World Knowledge Press, 2003), p. 1. 7. The Extraordinary Ministerial Conference of Non-Aligned Countries SouthSouth Cooperation, Pyongyang Declaration and Plan of Action on South-South Cooperation, NAC/CONF.8/SSC MC/DOC 1/Rev.2,9-13,1987. 8. Donald Bobiash, South-South Aid: How Developing Countries Help Each Other (St. Martin’s Press, 1992), pp. 1–2. 9. Ibid., p. 6. 10. OECD, DAC, Twenty-Five Years of Development Cooperation (Paris: OECD, 1985), p. 171. 11. “Mao Zedong: Talking with African Friends” [
 !"#$%&'()
], People’s Daily, August 1963. 12. The Eight Principles are: First, the Chinese Government always bases itself on the principle of equality and mutual benefit in providing aid to other countries. Second, in providing aid to other countries, the Chinese Government strictly respects the sovereignty of the recipient countries, and never asks for any privileges or attaches any conditions. Third, the Chinese Government provides economic aid in the form of interest-free or low-interest loans and extends the time limit for the repayment so as to lighten the burden of the recipient countries as far as possible. Fourth, in providing aid to other countries, the purpose of the Chinese Government is not to make the receipt countries dependent on China but to help them embark on the road of self-reliance step by step. Fifth, the Chinese Government tries its best to help the recipient countries build projects which require less investment while yielding quicker results, so that the recipient governments may increase their income and accumulate capital. Sixth, the Chinese Government provides the best-quality equipment and material of its own manufacture at international market prices. Seventh, in giving any particular technical assistance, the Chinese Government will see to it that the personnel of the recipient country fully masters such techniques. Eight, the experts dispatched by the Chinese Government to help in construction in the recipient countries will have the same standard of living as the experts of the recipient country. The Chinese experts are not allowed to make any special demands or enjoy any special amenities. 13. . 14. Wolfgang Bartke, China’s Economic Aid (London: C. Hurst & Co. Ltd., 1975), p. 12. 15. John Franklin Copper, China’s Foreign Aid (Lexington, Mass.: Lexington Books, D.C. Heath Company, 1976), pp. 162–64.

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16. For details, see Xing Houyuan [
 ], “Take the Chance of Foreign Aid Reform and Accelerate Industrialization and Internationalization” [
 !"
 !"#$%&'%], International Economic Cooperation [
 !
], no. 2 (1996): 10–12, Xu Jianpin [
 ], “Foreign Economic Aid and Mutual Economic Cooperation” [
 !"#$%&'()*+(], International Economic Cooperation [
 !"#], no. 3 (1996): 14–17. 17. Ibid. 18. “Former Chinese Prime Minister Zhu Rongji Attend the Sixth 10+3 Summit” [

 !"#$%&'()*+,-./0] , X i n h u a w e b s i t e , 4 November 2004. 19. “Chinese Prime Minister Wen Jiabao Concluded Four New Achievements of China-ASEAN Cooperation” [
 !"#$ %
&'()*+,
 ], China News Press, 29 November 2004. 20. “Chinese Prime Minister’s Speech on 8th China-ASEAN Leadership Conference” [
 !"#$%&'()*+,-./0123456789:;
 !"#$%&'()], Xinhua website . 21. Ministry of Commerce Multi-Training Plan of Foreign Aid, Ministry of Commerce website . 22. Ministry of Foreign Affairs of the People’s Republic of China . 23. Ministry Commerce website , 29 June 2005. 24. UN Food and Agriculture Organization Highly Praise China’s Contribution to Food Security [
 !"#$%&' ()!*+,], , 20 May 2004. 25. Memorandum of Understanding Between ASEAN Secretariat and the Ministry of Agriculture of the P.R. China on Agricultural Cooperation, . 26. [
 ], 3 November 2002. 27. “China, Laos Cooperation Set to Further Prosper”, Xinhua News Agency, 12 May 2002. 28. “China Extends $2.67b to Philippines”, Today, 28 April 2005. 29. “China Enforce Armament in Order to Weaken U.S. Intention of Aid to Taiwan China” [
 !"#$%&'()*+] Lianhe Zaobao [
 !], 11 August 2005. 30. “China Extends $2.67b to Philippines”, Today, 28 April 2005. 31. “China Helps Cambodia Dig Well” [
 !"#$%&] Xinhua website, , 31 December 2002. 32. . 33. “Dai Xianglong: Devious Course but Efficient Cooperation” [
 !"#$
 !"#$] People’s Daily, 19 February 2001. 34. According to People’s Daily, the vice prime minister of Thailand once commented that one reason for the quick recovery of the Thai economy following the crisis

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35. 36. 37.

38. 39. 40. 41.

was because of international aids including those from China and China’s decision to maintain its exchange rate. See People’s Daily, 19 December 1998. “China in the Same Boat as Tsunami Countries” [
 !"#$%&'
 !"], , 7 January 2005. . State Report on China’s Participation in the Mekong Sub-regional Cooperation [
 !"#$%&'()*+,-],
 I , 5 July 2005. People’s website [
 ], , 3 July 2005. People’s Daily, 5 December 2002. Ministry of Foreign Affairs of P.R. China, . Xinhua website [
 ], , 4 July 2005.

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13

China and CLMV Countries: Relations in the Context of the Mekong Sub-region Mya Than

INTRODUCTION The Mekong River, the twelfth largest river in the world, is 4,990 kilometres long. Its source is in the Tibetan mountains and it passes through the southwestern part of the People’s Republic of China in Yunnan and Guangxe provinces, Myanmar, Laos, Thailand, Cambodia, Vietnam and then flows into the South China Sea. The Mekong region happens to be the poorest parts of Southeast Asia. The total population of the sub-region is more than 3121 million in 2005 and its total area covers more than 2,563 square kilometres. Out of the total riparian people in the region, more than 80 million people or 90 per cent of the total population of the Mekong Basin2 depend upon the river for their livelihood for drinking water, fish, transport, irrigation water for agriculture and forest products.3 It is estimated that 80–90 per cent of the Mekong water is used for agriculture from which 75 per cent of the population of the Lower Mekong Basin derive their income. These countries share common borders, natural resources and a long history. With combined human resource and natural resources, and the

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location of the region, being sandwiched between booming Southeast Asia and emerging China, no one doubts that the region has immense potential. Yet, like the river that runs through it, the economic potential of the Mekong region is so far only just that potential. Since the 1950s when the Mekong Committee was formed, consisting of Thailand, Cambodia, Laos and South Vietnam, as it was then known, the dream of harnessing the hydroelectric power of the mighty Mekong River has captured the imagination of politicians and planners alike. Almost fifty years later, it is estimated that only one per cent of the region’s potential hydroelectric energy is being exploited.4 The Mekong has one of the most abundant fisheries in the world. About two million tonnes of wild and cultured fish are harvested each year, which represent a value of US$1,400 million at first point-of-sale. An estimated forty million people are involved, at least part-time, in both catching and in processing the fish. Today, only 15 per cent of fish consumed in the basin are cultured, but aquaculture studies indicate that fish and shell fish being raised in the basin could be increased considerably. Moreover, the combined natural and human resources of the region instigated the planners of the Mekong region development to transform the backwater region into an economically developed area by exploiting its resources. There is another pull factor for the GMS economic cooperation. In the GMS, there are five main ethnic groups such as Chinese, Tai, Tibeto-Burman, Mon-Khmer, Karen, Hmong-Yao and Vietnamese spread over the sub-region. About 50 million Tai in Yunnan, 2 million Shans in Myanmar, 62 million Thais in Thailand, 5 million Laotians in Laos share the same language with Chinese, spread all over the Mekong region, making the regional economic cooperation easier. The majority of the population in Myanmar, Thailand, Laos and Cambodia are Buddhists. This cultural and language similarities plays a part in the formation of a sub-regional economic cooperation. Barely twenty years ago, the Mekong region was associated with bitter, seemingly unending armed conflicts, doctrinaire socialist ideologies, and an appalling lack of infrastructure. This set of negative factors resulted in an environment that was totally detrimental to business and exacerbated the region’s isolation from the rest of Southeast Asia. Even today, armed conflicts still exist in parts of the region, socialist governments still rule, and infrastructure remains poor at best. However, since the end of the Cold War and command/ controlled economic systems starting to transform into market-oriented ones in the late 1980s and the early 1990s, the image of the Mekong region has undergone a surprising change. Moreover, since 1999, five out of six riparian countries belong to ASEAN and recently, China signed the Treaty of Amity

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and Economic Cooperation (TAC) in October 2003, so the vision of the planners of the Mekong region development could become possible in the near future. As a result, numerous multinational initiatives have been launched to boost, to facilitate, and, not least, to cash in on the seemingly unlimited economic potential of the region. With these initiatives the region has even taken on a new name, the Greater Mekong Sub-region (GMS), a term concocted by the Asian Development Bank (ADB). In fact, the GMS is one of the Growth Triangles (GT) — sub-regional growth zones — established in Southeast Asia. The rationale of the GT concept is to exploit the economic complementarities of the geographically contiguous areas to achieve accelerated economic development through the inflow of foreign investment, development of infrastructure, joint development of common natural resources, and/or the promotion of industries for the export market. Hence, the main objective of the GMS is to jointly develop natural resources and infrastructure by exploiting geo-political interest and geographical proximity for the development of the Mekong basin countries with three priority areas; transport, power and telecommunications. In other words, the general objective of the GMS, according to ADB, is to initiate a synergistic growth among the riparian countries by serving to boost cross-border economic cooperation to allow free flow of goods, capital and people by developing infrastructure, as in any other regional or sub-regional economic groupings. Hence, the objective of this chapter is to depict and analyse the relationship between CLMV and China and its role in developing the Mekong region. The introduction is devoted to the background history of the development of the Mekong region. The economies of China and CLMV will be discussed in Section 2, and in Section 3, the relationship between China and CLMV will be presented. In Section 4, participation of China and CLMV together in regional and sub-regional cooperation frameworks will be addressed. Problems and prospects are highlighted in the conclusion. THE ECONOMIES OF CHINA AND CLMV Of the six GMS countries, China, Laos and Vietnam are officially Marxist Socialist states practising one-party political system. In other words, these three countries are ruled by communist parties. Each of the three is transforming from a centrally-planned economic system to more of a marketoriented one, albeit under different labels: The Chinese approach is described as a “Socialist Market Economy”; in Myanmar “Open-door Policy”; in Laos it is the “New Economic Mechanism (NEM)”; in Cambodia it is “rehabilitation

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and reconstruction programme”; and in Vietnam, it is “Doi Moi” or “Economic Renovation”. Despite differences in the pace and scope of reform, the essential elements are similar — promotion of foreign investment, deregulation in domestic and foreign trade, price and enterprise reforms, and reform of the agrarian and financial sectors. Politically, Cambodia has been trying to establish a multi-party democracy since the coalition government was formed between the pro-Sihanouk party and the former communist party after the UN-sponsored general elections in 1992. In other words, it could be said that Cambodia is the only country among CLMV which tries to adopt democracy in practice. Myanmar is still under military rule, and while it has promised to establish a multiparty democracy, that goal seems a long way off. Thailand is a booming democratic country which practices full market economy and a full democratic country in the region. With the exception of Thailand, the Mekong region’s economies are based on agriculture and are characterized by low per capita incomes. Thailand is in many senses the odd one out in this grouping with a per capita GDP (PPP) of US$7,010, which is two to three times higher than that of the other economies. Yet, this statistic is misleading in that the Thai economy is so heavily centred on Bangkok, which is estimated to account for about 35 per cent of Thailand’s national product. The parts of Thailand which are located in the Mekong basin capture areas chiefly in the North and Northeast, are much poorer than the national average would suggest and these areas would more easily fit the characteristics of the other GMS members. Indeed the Mekong riparian economies, excepting the Bangkok region of Thailand, are in roughly the same category as other “emerging growth areas” of Asia such as eastern Indonesia, southern Philippines, parts of India and the interior of China. Competition for foreign investment in low-wage manufacturing over the next twenty years will likely be centered on these emerging areas. Salient economic indicators are shown in Table 13.1. All economies of the region, with the exception of Thailand, (or Yunnan and CLMV) are primarily agricultural economies with low per capita income. All together, total GDP accounts for about US$271 billion in 2004 (at current market price) with GDP per capita income (PPP) varying from US$1,027 in the case of Myanmar, US$1,720, in the case of Laos, US$2,060 of Cambodia, US$2,300 of Vietnam, US$4,580 of China, to US$7,010, in the case of Thailand in 2003. In terms of GNI (GNP), per capita income also varies from US$250 (Myanmar) to US$1,940 (Thailand). Economic growth in the GMS in recent years has been very impressive, with output in the economies increasing at an average annual growth rate of

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Table 13.1 Basic Indicators on the Greater Mekong Sub-region (2004) Yunnan Population (2005)# Area (Sq. km, thousands)# % cultiv. Land % forest land Total GDP (US$ billion)# GDP per cap (US$)# GDP/cap

44.0^ 394.0 7.3 24.9 44.0^ 814^

(PPP US$)# 4,580* GDP growth (%)# 6.1 Share in GDP (%)# Agriculture 23.8! Industry 45.6! Services 30.6! Exports (US$ mil)** 95,225 Imports (US$ mil)** 86,967 Inflation (%)# 1.2*

Myanmar

Laos

Thailand Cambodia Vietnam

56.0

5.9

65.0

13.8

83.2

676.6 15.8 41.3

237.0 3.9 23.8

513.1 41.0 22.8

181.0 17.4 55.7

331.7 21.6 28.0

10.5

2.4

163.5

4.9

45.4

191

423

2536

358

554

1,027 3.6

1,720 6.5

7,010 6.0

2,060 7.7

2,300 6.3

42.9 17.3 39.7 3,111 3,454 24.94

50.2 24.6 25.1 540 1,057 10.8

10.2 45.8 44.0 97,408 95,353 2.8

36.8 27.9 35.4 2,589 3,539 3.9

21.1 38.5 40.5 25,779 33,241 11.1

Notes: # ASEAN Statistical Pocket Book 2005, ! FOR 1998, @ FOR 1994, *China, **IMF, DOTS 2005, ^ Estimate. Sources: Asian Development Outlook 2004, ADB; Key Indicators 2004, Asiaweek 16 February 1996; Yunnan Statistical Yearbook 1991–98, IMF; Direction of Trade Statistics 2004; EIU Country Report Myanmar, May 2005; WTO Report, 2005.

6.3 per cent, making it one of the world’s fastest growing regions during the year 2003. The table shows that the total exports and imports of the whole Mekong sub-region in 2004 accounted for about US$451 billion, including Yunnan, China. The foreign trade figures will go up substantially to US$890 billion if one adds China’s exports and imports instead of only Yunnan’s. As all but one of the six participating riparian countries of the region are transforming from a rigid centrally planned economy into a market-oriented system, they are open to foreign trade and investment — in varying degree. Borders have been thrown open and cross-border trade has mushroomed so much so that in some places unofficial trade is estimated to equal or exceed official trade. Thailand was already a successful market economy when Cambodia, Laos, Myanmar and Vietnam (CLMV) and China started their transformation process.

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GMS, as a sub-region, has a large pool of relatively educated and disciplined labour force, and there exists a strong comparative advantage in labour intensive industries. Moreover, the resource rich economies are already plugged into the world’s fastest growing economies of East Asia like China and the ASEAN nations which are complementary with their economies. The dominant drawback of this GMS is the lack of infrastructure. Based on the 1995 performance of the Mekong region, the ADB expects the nominal GDP of the region to expand six-fold in the next twenty years to about US$1,250 billion (in 1995 dollars). By 2020, according to the ADB, the GMS will have a population of about 350 million, half of which will be living in cities; a labour force of nearly 20 million and a per capita GDP around the same level as Malaysia in 1997, that is, about $4,700. Table 13.2 shows the social indicators of GMS countries from Human Development Report 2004. Looking at the Human Development Index (HDI),5 the CLMV countries in general have very low HDI among 175 countries. The adult literacy rates are impressive except for Laos and Cambodia. However, information technology (IT) infrastructure in terms of personal computers and Internet users are very low except for Thailand and China. It may take time for CLMV countries to catch up with the rest of the ASEAN countries in IT. RELATIONSHIP BETWEEN CHINA AND CLMV VIS A VIS THE MEKONG REGION Before we evaluate the status of China-CLMV economic cooperation in the framework of the GMS, let us discuss the rationale for the Mekong region’s economic cooperation. The building blocks or motivating factors for the GMS arrangement, political, social and economic, can be divided into two groups: push factors and pull factors. The push factors include the collapse of the Soviet Union and CMEA, fear of protectionism, the U.S. embargo and competition for foreign direct investment (FDI). The pull factors are geographical proximities, existence of old trade routes, historical links, cultural and ethnic ties, language affinities, thawing of political tensions as a result of the end of the Cold War, economic reforms carried out in formerly centrally planned economies, emergence of regional and sub-regional groupings and imminent membership of all the Southeast Asian countries in the GMS in ASEAN.6 The role of the relationships among the riparian countries, particularly China and CLMV, is significant in developing the Mekong region. These relationships will be evaluated from political and economic perspectives.

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130 96 143 127 70 109

Human Dev. Index

— 35.9 38.6 22.9 13.1 37.4

Population under poverty Line (%) 70.9 57.4 54.3 57.2 69.1 69.0

Life expectancy at birth (year) 90.9 69.4 66.4 85.3 92.6 90.3

Adult literacy rate (%)

Source: Human Development Report 2004, ADB Key Indicators 2003.

Yunnan/China Cambodia Laos Myanmar Thailand Vietnam

Country

68 59 59 48 73 65

Combined gross enrolment ratio for pri., sec. & ter. School (%)

Table 13.2 Social Indicators of GMS Countries

1.90 0.15 0.33 0.11 2.78 0.98

PC use

0.27 0.02 7.76 1.85

4.60

Intern users

PC in use and Internet users (per 100 popn)-

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CHINA-CLMV POLITICAL RELATIONS The relationship between China and CLMV in the political sphere is warm and cordial in the sense that three out of the sub-group of GMS are socialist countries (China, Laos and Vietnam) ruled by their respective communist parties. Since the end of the Cold War, the sub-region has achieved relative peace and stability. Myanmar is ruled by the military regime and the relation between China and Myanmar has been very warm since 1988 when the present military regime took over power. China gives strong political and financial support, while the United States and EU impose economic sanctions. Most probably, according to some critics, China is eyeing for oil and gas that it desperately needs as its economy has been growing strongly for almost three decades. Although Cambodia is trying to transform into a democratic country through free and fare elections, the leadership belongs to leaders of the country’s former Communist Party. The leaders of the ruling party have, naturally, a warm relationship with China. Although China and Vietnam had cross-border armed clashes in the late 1970s and unsettled dispute over Spratley Islands, the relation between China and Vietnam is back to normal. All in all, China-CLMV relationship is more than good enough in developing the Mekong Sub-region. However, construction of dams in Yunnan’s part of Mekong might become a “hot potato” in the relationship between China and downstream countries due to possible environmental impacts. Several social groups complained that Yunnan’s construction of two dams affected the fish habitat, which in turn affect the livelihood of people of the downstream countries. It is reported that 80 per cent of Cambodians depend on the Mekong waters. In fact, since China’s fellow riparian countries are members of ASEAN, China-ASEAN political and security relations are considered the same as that of China and the rest of GMS members, if not better. Hence China-CLMV relations could also be considered as China-ASEAN relations. With the economy performing strongly, China tried to improve the all round relationship with its fellow riparian countries by signing the ASEAN Treaty of Amity and Cooperation (TAC) in October 2003.7 At the same time, a joint declaration of ASEAN and China on Strategic Partnership for Peace and Prosperity was signed by leaders of ASEAN and China at the Bali Summit in Bali. This shows that China-ASEAN cooperation in political and security areas has matured over the years (ASEAN Annual Report, 2003–04). Moreover, being a dialogue partner, China is a member of the Regional Forum where ASEAN and its related political and security issues are discussed.

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Furthermore, ASEAN-China consultations on the Protocol to the South East Asia Nuclear Weapons Free Zone (SEANWFZ) treaty are continuing as part of ASEAN’s effort to urge the five Nuclear Weapons States to accede to the Protocol to the SEANWFZ.8 In addition, as a follow-up to the Joint Declaration on Cooperation in the Field of Non-Traditional Security Issues adopted at the ASEAN-China Summit in November 2002 and a MOU on the above Joint Declaration was signed in January 2004. China and ASEAN countries cooperated in dealing with drug trafficking with the Beijing Declaration signed in August 2001 between China, Laos, Myanmar and Thailand.9 The Joint Declaration and MOU aim to cooperate on issues such as information sharing on combating transnational crimes, strengthening capacity building and enhancing relationships among law enforcement agencies.10 In addition, the foreign ministers of the member states of ASEAN and the People’s Republic of China signed the Declaration on the Conduct of Parties in the South China Sea in November 2002. In sum, political relations between China and CLMV seem to be stronger and healthier since the end of the Cold War. ECONOMIC COOPERATION BETWEEN CHINA AND CLMV IN THE MEKONG REGION The closer relations between China and CLMV were made possible due to China’s opening up since 1978. Moreover, its “go-West” and “go-out” policies introduced during the late 1990s and 2000 speeded up economic cooperation with neighbours, particularly CLMV countries. China started to cooperate with its Western neighbours when Thailand invited it to join the “Golden Quadrangle” based on Thailand’s concept of “transforming battle fields into market place”.11 This section will focus on economic cooperation between China and CLMV in the context of GMS and it will be divided into three sub-sections: Intra-regional cooperation in trade (including border trade; investment cooperation among the members; and tourism cooperation between China and CLMV. In the Mekong region, two upstream countries such as Yunnan and Myanmar share 16 per cent and 2 per cent respectively of the total Mekong basin area. The downstream countries such as Laos, Thailand, Vietnam and Cambodia share 35 per cent, 18 per cent, 11 per cent and 18 per cent of the Mekong basin respectively. That is, CLMV’s share in total area of Mekong basin is 66 per cent and if Yunnan’s share is added, the total of CLMV’s and Yunnan’s share would be 82 per cent. Moreover, the share of China and

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CLMV in GMS’s total trade in 2003 is more than 60 per cent without adding the border trade and at the same time, their share in total investment that flowed into GMS was 99 per cent. This means that the development of GMS depends mostly on the relationship between China and CLMV countries. Overall, this good relationship will be proved here by analysing the economic relationship in terms of trade, investment and tourism, and participation in regional and sub-regional frameworks. INTRA-REGIONAL COOPERATION IN TRADE: CHINA AND CLMV Let us look at the intra-sub-regional trade between China and CLMV in the framework of the Mekong region. Intra-regional trade is more important to some riparian countries than their trade with other countries outside the region. Yunnan, Myanmar, Laos, Cambodia, and to a lesser extent Vietnam, depend heavily on trade within the region. Thailand is less dependent on intra-regional trade because of its well-developed export trade to the rest of Asia and the industrialized countries. Table 13.3 shows the intra-GMS (formal) trade in 2004. According to the table, Thailand and China are the largest trading countries in the region in terms of intra-regional trade. If cross-border informal trade is included, intra-regional trade volume would be larger. The reason is that the most interesting feature of the economic renaissance of the Mekong riparian countries is not, as in the typical East Asian newly industrializing country, the growth of exports to industrialized country markets based on low-wage manufacturing. Rather, it is in the explosive growth of cross-border trade within the Mekong region. The table reveals the total intra-GMS trade value of each member countries and combined total intra trade of China and CLMV for 1995 and 2004. It is interesting to find that the growth rate of China-CLMV intratrade between 1995 and 2004 (25.9 per cent) is much faster than intra-GMS trade during the same period (15.8 per cent). This indicates that trade relations between China and CLMV are growing very fast. Trade between China and CLMV are shown in Table 13.4 between 2000 and 2004. It indicates that exports of CLMV countries to China increased 158 per cent and their imports from China increased 128 per cent between 2000 and 2004. This means exports from CLMV grew faster than their imports from China. In total trade between China and CLMV, the latter’s total trade with China increased 25.9 per cent. This suggests that trade relations between China and CLMV countries are very favourable and it will grow further.

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6,564.2

21,852

1,106

354.9

508 n.a. 120.2 1,117 15,288 4,819

China

n.a. 482 1.6 0.1 751 305

Cambodia

273.4

833.4

1.4 114 n.a. — 560 158

Laos

1,162.1

3,062

0.1 1,146 — n.a. 1,900 16

Myanmar

Source: IMF, Direction of Trade Statistics Yearbook 2005.

China + CLMV

Cambodia China Laos Myanmar Thailand Vietnam Mekong / Total

Country

—

22,451

820 17,344 743.7 1,843 n.a. 1,700

Thailand

7,535.3

9,847

499 6,743 146.3 147 2,312 n.a.

Vietnam

Table 13.3 Intra-Mekong Basin Trade 2004 (In US$ millions)

52,600 China + + CLMV 2004 31,789

14,035 China + CLMV 1995 4,002

1,054 19,618 1,012 3,107 20,811 6,998

Mekong (2004)

Mekong (1995) 703 5,288 489 890 4,952 1,397

Total

Total

25.9

15.8

4.6 15.7 8.4 14.9 17.3 19.6

Av. Ann. Growth. (95–04) (%)

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Table 13.4 China-CLMV Trade

Country

2000

2001

2002

Gr. Rate % (2000–2004)

2003

2004

438250 295 98 908 3179 4480

593232 452 101 939 4261 5753

138 176 197 89 177 158

412836 26 11 170 1663 1870

561422 30 13 207 2732 2982

149 –97 117 66 144 128

851086 321 109 1078 4942 6450

1154654 482 114 1146 6993 8735

143 44 185 85 163 153

Exports China Cambodia Laos Myanmar Vietnam Total (CLMV)

249195 164 34 496 1537 2231

266696 206 54 498 1805 2563

325711 252 54 725 2150 3181 Imports

China Cambodia Laos Myanmar Vietnam Total (CLMV)

225174 59 6 125 1119 1309

243567 35 7 134 1186 1372

295440 25 10 137 1287 1459 Total Trade

China (Total) Cambodia Laos Myanmar Vietnam Total (CLMV)

474369 223 40 621 2656 3540

510263 241 61 632 3092 4026

621151 277 64 862 3437 4640

Source: IMF, Direction of Trade Statistics Yearbook 2005.

It is interesting that in 1995, the share of China’s and CLMV’s total intra-trade in total inter-GMS trade was 28.5 per cent only, however, in 2004, its share increased to 65 per cent. This also indicates that trade cooperation between China and CLMV is improving each day and there is potential for more trade in future. This is because of the favourable political climate between China and CLMV, and both China and CLMV are also members of other regional and sub-regional cooperation arrangements. Based on the 1995 performance of the Mekong region, the ADB expects the GDP of the region to expand six-fold in the next twenty years to about US$1250 billion (in 1995 dollars). By 2020, according to ADB, the GMS will have a population of about 350 million, half of which will be living in

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cities; a labour force of nearly 200 million and a per capita GDP around the same level as Malaysia in 1997. In 1999, among the riparian countries, external trade of Laos, Cambodia and Myanmar depended more on other riparian countries since their trade with other participating countries as percentage of their trade with the world accounted for about 59 per cent, 31 per cent and 27.8 per cent respectively. The rest, such as China, Thailand, and Vietnam rely on their trade with countries outside the region. However, in 2003, Laos, Myanmar, Vietnam and Thailand increased their share in intra GMS trade as a per cent of their total trade with the world increased significantly; Laos’ share increased from 59 per cent to 67 per cent, Myanmar’s from 29 per cent to 42 per cent, Thailand’s from 6 per cent to 10 per cent and Vietnam’s from 12 per cent to 15 per cent between 1999 and 2003. At the same time those of China and Cambodia declined although their trade with fellow riparian countries increased. BORDER TRADE BETWEEN CHINA (YUNNAN) AND CLMV For a more complete picture of trade relations between China and CLMV, border trade between the two are discussed in this section. Table 13.5 shows the border trade between Yunnan and the rest of the Mekong riparian countries from 1992 to 2001 taken from Yunnan’s official statistics. All the riparian countries of the Mekong River have improved border trade relations among themselves since the late 1980s due to the fact that all the riparian countries except Thailand transformed from command/ control economies into the market-oriented system and there was the thawing of political tensions in the region due to the end of the Cold War. There are three or four methods used in conducting Yunnan’s border trade with its neighbours. They are formal or normal border trade, informal border trade, illegal trade, barter trade and transit trade. However, statistics in Table 13.5 show only formal border trade.12 Even though Thailand does not have a common land border with Yunnan, its bilateral border trade with China is conducted across Mekong River. As a result, according to Table 13.5, Yunnan’s total border trade grew from US$311.5 million in 1992 to US$574.6 in 2000 at an average annual rate of 8.0 per cent. In other words, Yunnan’s border trade with its fellow riparian countries increased about two times. Out of Yunnan’s five fellow riparian countries, Myanmar is the largest border trade partner with an average total trade volume of about US$400 million, accounting for 73.8 per cent of Yunnan’s total border trade volume during the period 1992–2000. At the same time, the average share of

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221.4 3.9 225.5 72.8

7.4 0 7.4 2.4

Export Import Total Share

Export Import Total Share

— — — —

Export Import Total Share

1992

262.4 119.1 381.6 83.0

7.2 2.2 9.5 2.1

— — — —

1993

309.3 111.2 420.4 81.6

11.4 1.5 12.9 2.5

0.01 0.0 0.01 @

1994

392.1 1.0 490.1 75.6

28.1 5.6 33.7 5.2

0.032 0.0 0.032 @

1995

258.0 12.3 381.0 77.4

Myanmar 278.3 276.4 84.4 28.4 362.7 304.8 72.2 74.5

0.052 0.0 0.052 @

1998

8.8 6.5 14.4 2.9

0.035 0.0 0.035 @

1997

10.1 3.4 13.9 3.4

Laos 13.5 5.5 19.0 3.8

Cambodia 0.061 0.0 0.061 @

1996

0.084 0.0 0.084 @

1999

246.0 53.5 299.5 66.9

10.2 5.4 15.3 3.4

Table 13.5 Yunnan’s Formal Border Trade with GMS Countries (US$ millions)

293.0 69.9 362.9 60.6

13.4 5.9 19.3 3.6

0.254 0.0 0.254 @

2000

251.1 97.2 348.7 —

14.1 4.3 18.3 —

0.121 0.0 0.121 —

2001

1.4 43.0 5.0 (73.8)*

7.4 — 10.6

57.7 0.0 57.7

Av ann gr (%)

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65.3 0 65.3 21.9

311.5

Export Import Total Share

Trade 460.0

54.1 4.3 58.4 12.7

8.1 2.4 10.5 2.3

515.4

50.8 5.5 56.3 10.9

25.73 0.03 25.8 5.0

616.0

53.3 8.9 62.2 9.6

29.4 0.06 30.0 4.6

487.0

62.4 6.3 68.7 14.0

Vietnam 27.5 51.4 8.2 3.6 35.7 55.0 7.1 13.5 Total Yunnan’s 449.1 405.4

19.1 3.9 22.9 4.7

28.8 2.9 31.7 7.8

439.6

100.3 0.0 100.3 22.4

18.6 5.9 24.5 5.5

574.6

140.0 20.0 160.0 26.7

23.6 8.0 31.6 5.3

—

— — — —

36.4 6.9 43.3 —

(47.3)*

10.0 — 11.9 (15.4)*

12.1 33.9 13.8 (5.1)*

Note: @ = Less than 0.1%, * (1992–2000) average Source: “The Construction of the ASEAN-China FTA & Yunnan’s Opening to Southeast Asia (in Chinese language), 2004, Kunming, (Tables 5-3, 5-5, 5-6, 5-8 & 5-10).

13.0 0.48 13.5 4.4

Export Import Total Share

Thailand 25.1 6.6 31.7 6.3

Table 13.5 — cont’d

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Myanmar’s total border trade to its total overseas trade with China was 62.3 per cent, which suggests the significance of Myanmar’s trade with Yunnan. The second largest border trading partner is Vietnam, which accounts for about 15.4 per cent of Yunnan’s total border trade whereas Thailand’s share in Yunnan’s trade is around 5.1 per cent — the third largest border trade partner. After establishing the China-ASEAN-FTA and China-Thailand FTA in 2002, the volume of trade between Yunnan and Thailand increased significantly in recent years. Overall, the outlook for border trade among the Mekong riparian countries is promising mainly due to the opening up of the economies of former political enemies and China’s “look West” and “look outward” policy and the China-ASEAN Free Trade Area (CAFTA) and its “Early Harvest” programme. This is also true for Yunnan-Myanmar border trade since China-Myanmar economic cooperation has improved recently, particularly after the U.S.-led Western countries’ economic sanctions. However, Yunnan’s chronic trade surplus with Myanmar creates unfavourable trade relations for Myanmar with Yunnan and an average annual rate of growth of Myanmar’s border trade with Yunnan was the slowest among Yunnan’s border trade partners. COOPERATION IN CROSS-BORDER INVESTMENT Foreign direct investment flow into the region is growing since Mekong’s formerly planned economies, namely, Cambodia, China, Laos, Myanmar, and Vietnam, opened up their economies to the outside world and introduced liberal and attractive foreign investment laws in the later part of the 1980s. Before that period, these countries from the Mekong region, with the exception of Thailand, closed their economies to foreign investment. It is the Asian countries, not the West, that are the largest investors in the region, with the exception of Thailand. However, FDI inflow into the countries in the region slowed down since the regional financial crisis started in 1997. Since most of the largest investors on the Mekong countries are East Asian countries including the original ASEAN member countries, almost all of the riparian countries are affected. Due to FDI inflow into China and the resurgence of Thailand’s economy, the Mekong riparian countries’ FDI, as a whole, is growing fast at average annual rate of 20.7 per cent between 1991 and 1999. With the exception of Thailand, most investment in the region has been directed at tourism and extraction of natural resources. During the meeting of leaders from Europe and ASEAN (ASEM) held in Bangkok in March 1995, many participants from both sides were interested in funding infrastructure projects in the Mekong region, including the railway line

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linking Europe and Asia, proposed by Malaysia. However, the financial crisis in the region and inclusion of Myanmar in ASEAN delayed the materialization of those interests.13 Table 13.6 shows the FDI inflows of Mekong participating countries from outside and inside the region from 1992 to 2003. Regarding intraregional FDI, Thailand is the biggest investor in the Mekong region followed by China (Table 13.7). So far Myanmar, Laos, Cambodia and Vietnam have invested very little in the fellow riparian countries mainly due to their weak economies. Thailand is the largest investor in Laos with US$2,296.6 million (as of end 1995) and the second largest in Myanmar with US$1,340.22 million (as of end January 2005) after Singapore and United Kingdom. Thailand is also the one of the largest investors in Vietnam with US$700 million (as of November 1996). China’s FDI in Myanmar is under-estimated; its FDI in Myanmar as of February 2003 accounted for US$203.5 million only. This is because of China’s unregistered FDI in Myanmar. For example, it is reported that China’s beer factory, cigarette factory and casinos are now operating in Mongla, a border town on the Myanmar-Yunnan border. China has also invested in Laos and Cambodia. Myanmar has invested a little in Laos. In short, there is intra-regional investment in the region even though the amount is small compared to international standards. Although FDI laws of GMS countries are relatively liberal and attractive, and there exists abundance of natural and human resources in these countries,

Table 13.6 Foreign Direct Investment in the Mekong Riparian Countries (US$ millions) Country

Cambodia China Laos Myanmar Thailand Vietnam Total (Reporting)

1992

1995

1999

2000

2001

2002

2003

33 151 126 142 141 139 130 11,156 35,849 38,753 40,715 46,878 52,743 53,510 8 95 79 34 24 5 20 172 277 216 208 186 89 91 2,113 2,068 6,213 3,327 3,540 841 954 385 2,349 1,609 459 273 397 622 26,012 65,723 93,758 46,996 51,042 54,214 55,327

Source: ADB, Asian Development Outlook 2004.

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Growth Rate (1992–2003) 137 6.4 8.7 –5.9 –7.5 4.5 7.1

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Table 13.7 Intra-Mekong Foreign Direct Investment (US$ millions) Country

Myanmar

Thai#

Yunnan

Laos

Vietnam

Cambodia*

Yunnan Cambodia Laos Myanmar Thailand Vietnam Total

203.50 — — n.a. 1,340.22 0.0 1,543.7

525.2 4.4 4.7 0.7 — 0.7 535.7

n.a. — — — 33.5 — 33.5

31.9 — — 0.0 2,296.6 3.9 2,338.6

92.2 — 5.7 0.0 700.0 — 797.9

72.9 0.6 — 0.03 0.9 — 74.4

Note: Myanmar as of 30/1/2005, Thailand for 1986–1994, Laos as of end 1995, Vietnam as of Nov 13, 1996, Yunnan as of 1994, Cambodia as of end December 1995. * Only for (4/9/1994–27/1/1995) period. Source: Country sources and ASEAN Statistical Yearbook 2003.

FDI inflows are very slow due to lack of infrastructure and inefficient bureaucracy. Top investors in these countries are the developed members of ASEAN but their FDI inflows are also slow ever since the regional financial crisis of 1997. TOURISM IN CHINA AND CLMV IN GMS The fact that the Mekong area hosts some of the world’s greatest cultural treasures and is still perceived as a “last frontier” makes the region a major historic and natural tourist attraction. The Mekong countries are aware that tourism plays an important role in generating much needed foreign currency and contributing to economic growth and employment. Although the six countries constituting the Mekong region already have varying degrees of established tourism, the potential associated with a distinct regional grouping surpasses that of any individual country. It is also one of the first industries to include all riparian Mekong countries which will serve the region as a single destination for tourists. This could mean new vacation packages, airfare deals, and easier access for travel to and within the Mekong area. Thus, a new industry is emerging as part of the larger Mekong Growth Region: tourism. Since the early 1990s, tourist arrivals in most Mekong countries have increased significantly. Given the short period since the opening of the borders of the formerly centrally planned economies of the region and the lack of infrastructure and supporting services, the performance of the

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tourist industry in this region is impressive. This is partly because there is an institutional support from several sources from the regional level as well as the national level. At the regional level, the Working Group of Greater Mekong Subregion Tourism Sector (TWG) with the support of the ADB, the Agency for Coordination Mekong Tourism Activities (AMTA) and the Pacific-Asia Travel Association play a significant role in promotion and cooperation of tourism in the Mekong region. Their activities include marketing, training, management of natural and cultural resources, facilitation of travel, among others. At the national level, there are national organizations promoting tourism in their respective countries, such as the National Tourism Authority of Lao PDR (NTAL), the Ministry of Hotel and Tourism of Myanmar, the Tourism Authority of Thailand (TAT), the Vietnam National Administration of Tourism (VNAT) and similar tourism organizations in Cambodia and China. To have some idea of the extent of tourism in the Mekong region, Table 13.8 presents tourist arrivals in the region by year and by country. Tourist arrivals in the Mekong region between 1992 and 2003 are projected at more than 18 million in which Thailand’s share accounted for 63 per cent of the total. Tourist arrivals in the region are expected to grow at an average annual rate of 10.4 per cent. A study projected an average growth of about 7 per cent per annum in tourist arrivals, or about 23 million in the year 2007.14 This high growth projection is due to the transformation of formerly centrally

Table 13.8 Tourist Arrivals Data and Projections in Mekong Countries (’000s) Year

Thailand

Yunnan

Myanmar

Lao

Vietnam

Cambodia

Total

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

5,136 5,761 6,167 6,952 7,192 7,832 8,362 8,893 9,423 10,483 11,014 11,543

132 405 522 597 752 839 946 1,052 1,159 1,266 1,373 1,480

153 155 185 203 314 313 349 387 423 460 497 534

87 103 146 347 403 480 567 654 742 829 917 1,004

440 600 1,018 1,351 1,607 1,929 2,238 2,546 2,854 3,163 3,472 3,780

75 118 177 220 261 312 359 406 453 501 548 595

6,206 7,142 8,215 9,688 10,529 11,704 12,821 13,938 15,056 16,173 17,290 18,407

Source: ADB 2001, vol. 5.

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planned economies such as Cambodia, Laos, Myanmar, and Vietnam into a market-oriented system, expansion of air routes and promotion activities. Some of the projected high-growth economies are Cambodia, Laos, Thailand and Yunnan Province of China. In Laos, there has been a significant increase of tourist arrivals since 1992 when the government started to implement the policy promotion tourism. The number of foreign visitors grew from 87,000 in 1992 to 480,000 in 1997, an increase of about 40 per cent. According to the statistics from the NTAL, 346,000 foreign tourists visited Laos in 1995 and the number increased to more than half a million in 1998. The tourism sector contributed US$80 million in 1998 compared with US$40 million in 1997. Myanmar has recorded the lowest tourist arrivals among other riparian countries, mainly due to political and security problems. Several human rights groups imposed tourist sanctions on Myanmar because of alleged human rights violation records in the country. Between 1994–52 and 2001–02, an average of 267,180 tourists arrived Myanmar by air, by sea and by land. On average, tourists stayed seven days and spent about US$80 per day. The tourism sector earned more than US$67 million in 1996/97, according to the official source (CSO 1997) partly due to the fact that Myanmar took the initiative by announcing 1996 as “Visit Myanmar Year”. As in other transitional economies of the mainland Southeast Asia, Vietnam’s Doi Moi opened up its economy in the late 1980s. Since then, the tourist sector grew significantly in terms of foreign visitors and earnings from tourism. According to data from VNAT, arrivals of foreign visitors increased significantly from 93,000 in 1988 to 1.8 million in 1999 with an average annual growth of about 30 per cent. In 2000, the number of tourist arrivals grew to 2.15 million, mainly due to “software” improvements such as adoption of visa-free status to tourists from selected countries, cuts in visa fees, simplification of visa categories, improved access with new air linkages between Vietnam and major cities in Asia; active participation in regional tourism cooperation schemes; improvement in skills of tourism personnel; and hardware improvement such as availability of accommodation and other tourism facilities. Yunnan Province of China performed remarkably well in the tourism sector. Tourist arrivals grew significantly from 131,462 in 1992 to 1,266,262 in 2001 with an increase of 29 per cent per annum. It is a surprise achievement for Yunnan, a land-locked and backwater province in the southwestern part of China. Introduction of market-oriented reforms, transportation networks, training of tourist guides and growing tourist related facilities might have contributed to this growth in the tourism sector. The majority of the tourists

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come from Hong Kong, Macau, Taiwan, and overseas Chinese formed 45 per cent of total tourists in 1993. And 14.8 per cent of total tourists in Yunnan came from Thailand, 12.8 from Singapore, 5.3 per cent from Japan and 3.5 per cent from the United States in 1993.15 Cambodia’s tourist arrivals between 1992 and 2003 were very impressive; they increased from 75,000 in 1992 to 595,142 in 2003 — an average annual increase of 48.8 per cent per year. The transportation network is improving year after year, accommodation is also expanding and human resources in the tourism sector improved in the late 1990s. These factors might have contributed to the high growth in the tourist arrivals, along with reduction of travel restrictions and visa regulations. In 1993, the majority of tourists who arrived were from France (16.7 per cent), followed by Australia (13.1 per cent), China (11.1 per cent) and Japan (7.7 per cent). Tourism in Cambodia is playing an important role in the country’s economy. There are a few points to make. First, it is important to note that intraMekong region tourism is gaining momentum and Thais and Chinese are increasingly travelling to their Mekong neighbours, as Table 13.8 suggests. Second, country plans for tourism promotion in Cambodia, Laos, Myanmar and Thailand are based on Buddhist religious, cultural and historic heritage, whereas Yunnan is attracting tourists with its ethnic culture and natural

Table 13.9 Tourist Arrivals by Country (% of the Total) Country Australia China France Germany Hong Kong Japan Korea Malaysia Singapore Taiwan Thailand UK USA Vietnam Others

Thailand@ Myanmar# 3% 8% 3% 4% 3% 13% 5% 12% 6% 7% n.a. 6% 5% — 25%

1% 2% 6% 6% — 7% 2% 3% 3% 8% 10% 2% 2% — 48%

Laos*

Vietnam**

Yunnan^

Cambodia^

5% 4% 9% 4% — 7% — — — n.a. 19% 9% 11% 11% 25%

— 27% 5% — — 6% — — — 9% — 3% 12% n.a. 37%

— n.a. — — 45%!! 5.3% — — 12.8% !! 14.8% — 5.3%

13.1% 11.1% 16.7% — — 7.7% — — — — 6.6% — 13.4%

Source: National sources: @1998, #2003/04, *1998, **1999.

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beauty. Third, as far as tourist arrivals in the region are concerned, the Japanese are the largest groups of tourists visiting most of the Mekong riparian countries. However, there exist several constraints in tourism in the Mekong region with the exception of Thailand. They include lack of publicity of tourist sites, lack of adequate accommodation and basic facilities, lack of legal framework for tourism development, and weakness in private sector participation. There are also many aspects of tourist infrastructure apart from basic facilities — transport, quality standards, safety, security, and travel and customs regulations — that still remain obstacles to rapid development of the industry. Unless these issues are addressed, there will be a slowdown in tourist arrivals and hence earnings from tourism will decline. CHINA, CLMV AND REGIONAL AND SUB-REGIONAL INTEGRATION It has been fourteen years since the establishment of the Greater Mekong Sub-region Cooperation (GMS) and there is an improvement, albeit at a slow pace, in implementing the goals of the GMS envisaged by the ADB and the government leaders of the sub-region. The development of GMS may be attributed to the improvement in relationships among the member countries, including CLMV (Cambodia, Lao PDR, Myanmar and Vietnam) and China in security, political, social and economic aspects. Being the members of several regional and sub-regional groupings, their relationship reinforced the improvement of the already improved relationship between CLMV and China. This, in turn, improves the development of the GMS. At the regional level, CLMV’s achievement is membership in ASEAN since 1999 in three instalments; Vietnam became a member in 1995, Laos and Myanmar in 1997 and Cambodia in 1999. By joining ASEAN, CLMV automatically became members of ASEAN Free Trade Area (AFTA) which uses the Common Effective Preferential Tariffs (CEPT) scheme to enhance intra-ASEAN economic cooperation to become a production base geared for the world market. CLMV, as members of ASEAN, are also involved in ASEAN+1 (ASEAN and China) or the Comprehensive Economic Cooperation Framework Agreement between China and ASEAN (ACFTA) which was established in 2002. It is also a free trade area (FTA) with an early harvest arrangement offered by China. Moreover, CLMV as members of ASEAN, are members of

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ASEAN+3 (ASEAN with China, South Korea and Japan). Although ASEAN+3 is still a loose organization, the currency swap was set up to be used in times of emergencies in 2000 and Surveillance Programme was established in 2001. In the same year the Chiang Mai Initiative (CMI) was outlined with a set of financial self-help and support mechanisms among thirteen countries. The wider regional economic cooperation arrangement that CLMV participate in is the Asia Cooperation Dialogue (ACD) which was established in 2002. There are eighteen countries from East Asia, Southeast Asia, South Asia and West Asia. The original members include Bahrain, Bangladesh, Brunei, Cambodia, China, India, Indonesia, Lao PDR, Republic of Korea, Malaysia, Myanmar, Pakistan, Philippines, Qatar, Singapore, Thailand and Vietnam. The objective is to promote interdependence among Asian countries and transform into Asian community. It looks for cooperation in seventeen areas including agriculture, energy, poverty alleviation, e-commerce, infrastructure tax, tourism, etc. At the sub-regional level, CLMV is part of the Greater Mekong Subregion Economic Cooperation (GMS) established by Asian Development Bank in 1962. It comprises six riparian countries including Yunnan of China, Cambodia, Laos, Myanmar, Thailand and Vietnam. At the second GMS summit in Kunming in 2005, Quanxi Province was included as a component of GMS. The objective of GMS is to help strengthen the economic and social well-being of people in the Greater Mekong Sub-region. The Mekong River Commission (MRC) was created in 1995 out of the Mekong Committee (Committee for Coordination of Investigation of the Lower Mekong Basin) with the downstream countries of Cambodia, Lao PDR, Vietnam and Thailand. It is the inter-governmental organization with the aim of sustainable and fair utilization of water and other resources and protection of ecological environment in the Mekong basin. Although China and Myanmar are not members of MRC, both countries signed an agreement on commercial navigation in Mekong basin in 2001 and 2003 respectively. China and Myanmar attained the status of observer and dialogue partners only. In addition, four members of GMS, namely Lao PDR, Myanmar, Thailand and China, had formed the Golden Quadrangle (also known as the Growth Quadrangle of Mainland Southeast Asia) in 1993, although the idea was mooted by Thailand in 1991 with the aim of “turning battle field into market place”. There exists another sub-regional economic cooperation in which CLMV are members — the Ayeyarwady-Chao Phraya-Mekong Economic Cooperation

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Strategy (ACM-ECS). It was initiated by Thailand in 2002 with the objective to form another FTA. The first ACMES summit was held in 2004 in Bagan, Myanmar. Thailand gives out loans for developing infrastructure to transform border areas into economic zones in Cambodia, Laos and Myanmar. Later in 2005, Vietnam became a member of ACM-ECS. In short, CLMV’s and China’s participation in above regional and subregional economic, social and cultural cooperation arrangements which strengthen the relationship between the two groups which in turn, boosted the development in GMS. In other words, CLMV and China are part of East Asia’s most rapidly integrating sub-region. CONCLUSION: PROSPECTS, ISSUES AND CHALLENGES The achievements of GMS include trust and confidence-building among riparian countries which were formerly enemies. Here, China-CLMV relations play an important role in this case. As mentioned above, several cooperation agreements are signed between two or more countries among them and important infrastructure projects are provided. More importantly, the economic cooperation among participating countries increased in terms of trade, particularly cross-border trade. Since Yunnan and CLMV became members of GMS, economies perform significantly well in terms of GDP and its growth rates. Since then, the economic structure has improved, except for Myanmar. Another province of China, Guangxi, which borders with Vietnam, became a member in 2005. This will boost the trade with formerly Indochinese countries due to favourable communications. Because of market reforms and political stability, these countries attracted FDI, especially in China. The inflow of China’s FDI in CLMV countries are growing, although it is slow. Moreover, as the relationship among the member countries improved, the tourism sector is booming, particularly in China and Cambodia. This is due to not only peace and stability in this sub-region, but also the rising income in these countries. Here, we should look at the role of China as the agent of change driven by a desire to open up the southwestern provinces of China to trade with Mekong riparian countries. For example, China is undertaking the current navigation improvement projects such as blasting away of the rocks and shoals along the Thai-Laos-Myanmar section of the river.16 Moreover, China is giving out loans and technical assistance to CLMV countries to improve infrastructure, for example, roads and hydropower stations. This China-CLMV trade partnership and China-Thailand FTA would lead to growth in GMS.

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Given the improving political relation between the two, there are prospects in economic cooperation which boost the socio-economic well-being of China and CLMV which in turn, will lift poverty out of the Mekong region in the medium term. However, not everything is rosy in China-CLMV relations as there exist some issues and challenges. Due to improvement in trade relations, the flood of cheaper Chinese goods in CLMV and Thailand would make some producers bankrupt although these “Made in China” goods have not been completely assuaged. Another issue relates to some of the characteristics of CLMV countries. First, due to the historical baggage of CLMV, governments continue to take the control-oriented approach, and bureaucracy in these countries has not changed. Second, bureaucracies in these transitional economies of the region are designed to prevent abuse but not to be efficient. As a result, bureaucracy creates obstacles in the delays for approval and implementation of projects, uncertainties over contracts and property right, and corruption. Third, state-owned enterprises are still stifling competition which constrains economic efficiency. Furthermore, China and Myanmar are still not members of the Mekong River Commission (MRC). Without the coordination from China and Myanmar, MRC’s development and infrastructure projects may not succeed as planned and tend to be concentrated in the downstream Mekong countries. Cross-border smugglings, insurgencies along the border, drug and human trafficking and spread of HIV/AIDS in China and CLMV countries also create obstacles for developing the Mekong region. Moreover, environmentalists harshly criticized China that the construction of dams and navigation improvement projects affected the environment and livelihood in downstream countries. As far as challenges facing the grouping are concerned, there are at least three. The first challenge is inadequate infrastructure. In most Mekong riparian countries, there are poor roads, power, telecommunications and water supplies problems. These can raise the costs of projects since investors will have to provide back-up power, water and other utilities. “In addition to the need for ‘hard’ infrastructure, there is also a need to address the important area of ‘soft’ infrastructure, for example removing the non-physical barriers restricting the movement of goods and people across borders.” Last but not least, CLMV and China should take bold measures to facilitate further economic cooperation and integration among those regional and sub-regional cooperation frameworks mentioned before, in order to achieve strong growth and maintain development momentum.

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NOTES 1. The population of GMS in 2005 was more than 300 million because GMS added one more province of China, Guangxi, in 2005. 2. Mekong basin is the catchment area or watershed of the Mekong river itself, including tributary and distributary streams, and the immediate surrounding land. 3. Goh, E., “China in the Mekong River Basin: The Regional Security Implications of Resource Development on the Lancang Jiang”, IDSS Working Paper no. 63, Singapore, 2004, p. ii. 4. Mya Than, “A River Runs Through It: Peace Brings the Promise of Growth to the Mekong”, Asia Insights, Asian Pacific Foundation of Canada, vol. 1, November 1997. 5. HDI is used by UNDP to measure average achievement in three basic dimensions of human development: A long and healthy life, knowledge, and a decent standard of living. 6. Mya Than, “Economic Co-operation in the Greater Mekong Subregion”, AsianPacific Economic Literature 11, no. 2 (1997): 40–57, Oxford University Press. 7. China is the first country outside of Southeast Asia to accede to the TAC. 8. Mya Than, op. cit., p. 72. 9. Saw, S.H. et al., ASEAN-China Relations: Realities and Prospects (Singapore: Institute of Southeast Asian Studies, 2005). 10. Ibid. 11. Mya Than, The Golden Quadrangle of Mainland Southeast Asia: A Myanmar Perspective, ISEAS Working Paper no. 5, ISEAS, Singapore, May 1996. 12. Mya Than, “Myanmar’s Cross-Border Economic Relations and Cooperation with the People’s Republic of China and Thailand in the Greater Mekong Subregion”, Journal of GMS Development Studies, ADB, Manila, 2005 ©. 13. Mya Than, “Economic Co-operation in the Greater Mekong Subregion”, op. cit., pp. 40–57. 14. Ibid. 15. Mya Than, “A River Runs Through It”, op. cit., Table 13.8. 16. Chia, P.T., “Sino-Thai Trade on the Mekong River: The Development of Chiang SAEN Port as the Gateway to the Economic Quadrangle”, in Regional Economic Cooperation: EU and GMS Development Strategies. Collection of papers and proceedings of the Regional Conference 2004 on “Regional Economic Cooperation: EU and GMS Development Strategies”, 2–4 July 2004, Mae Fah Luang, Chiang Rai, Thailand, 2004.

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14

China’s Economic Relations with ASEAN: Developments and Strategic Implications Sheng Lijun

EVOLUTION OF CHINA-ASEAN RELATIONS China for the first time officially recognized the ASEAN grouping in 1975 after China was admitted into the United Nations in 1971, and ASEAN member states started to switch their diplomatic recognition from the Republic of China (ROC) to the People’s Republic of China (PRC). The official relationship between China and ASEAN as a grouping was not possible before all ASEAN member states established diplomatic relations with China. During his visit to Thailand, Malaysia and Singapore in November 1978, Chinese leader Deng Xiaoping expressed China’s wishes to develop relations with all ASEAN countries. From the 1980s, China intensified its effort to establish diplomatic relations with all the remaining ASEAN states that had not established or restored diplomatic relations with China. In July 1985, China and Indonesia signed an MOU to restore direct trade with each other as a precursor of restoration of their full relations. In his visit to Thailand in November 1988, Chinese Premier Li Peng announced four principles in establishing, restoring and developing relations with the ASEAN states. After

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restoring and establishing diplomatic relations with Indonesia on 8 August 1990 and with Singapore on 3 October 1990, China pushed for official ties with the ASEAN grouping. On 19 July 1991, Chinese Foreign Minister Qian Qichen attended the opening session of the Twenty-fourth ASEAN Ministerial Meeting (AMM) in Kuala Lumpur as a guest of the Malaysian Government, where he held the first informal meeting with the ASEAN foreign ministers and expressed China’s interest in cooperation with the ASEAN as a grouping. The latter responded positively. At the invitation of the Chinese Vice-Foreign Minister Tang Jiaxuan, the ASEAN Secretary-General Dato’ Ajit Singh led an ASEAN delegation for a visit to Beijing in September 1993, and agreed to establish two joint committees, one on cooperation in science and technology, and the other on economic and trade cooperation. An exchange of letters between the ASEAN secretary-general and the Chinese foreign minister on 23 July 1994 in Bangkok formalized the establishment of the two committees. At the same time, ASEAN and China agreed to engage in consultations on political and security issues at senior officials level. In the same year, ASEAN and China agreed to engage in political consultations at the senior officials’ level. The first ASEAN-China Senior Officials Consultation (SOC) was held in April 1995 in Hangzhou, China. China participated in the first ASEAN Regional Forum (ARF) held on 25 July 1994 in Bangkok as a Consultative Partner of ASEAN. In July 1996, ASEAN accorded China full Dialogue Partner status at the Twenty-ninth AMM in Jakarta, moving China from a Consultative Partner, which it had been since 1993. ASEAN and China instituted an ASEAN-China Joint Cooperation Committee, which convened its inaugural meeting in Beijing in February 1997. An ASEAN-China Cooperation Fund was established to support development cooperation activities between ASEAN and China. By early 1997, there were already five parallel mechanisms for dialogue between ASEAN and China. China participated in a series of consultative meetings with ASEAN, which include the ASEAN Regional Forum (ARF), the Post Ministerial Conferences (PMC), the Joint Cooperation Committee (JCC) Meeting and the ASEAN-China Business Council Meeting. By 2005, a total of forty-six such mechanisms, at different levels in sixteen fields, including twelve at ministerial levels, had been set up.1 In comparison, ASEAN-U.S. cooperation had been marked by only fifteen such mechanisms in their twenty-eight years of “dialogue relations”. In December 1997, the leaders of ASEAN and China had their first informal summit (ASEAN+1) and issued a Joint Statement of establishing partnership of good neighbourliness and mutual trust oriented towards the

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twenty-first century, thus putting into place the framework and charting the course for the all-round growth of their relations. Guided by the Joint Statement, political relations grew rapidly to a higher level. Between 1998 and 2000, China signed framework documents on bilateral relations or announced cooperation programmes with each of the ten ASEAN Member Countries. Political relations between China and ASEAN countries have since developed fast, highlighted by the frequent exchange of visits by top leaders of the respective countries. Since 1994 when it established official relations with the first non-socialist party in Southeast Asia (the Malaysia National Front), by 2005, the Communist Party of China (CPC) has built official relations with thirty-nine political parties there, including both socialist and non-socialist parties, in office and out of office. In 2001, leaders of both sides identified agriculture, information industry, human resource development, mutual investment and Mekong River Basin development as the five priorities for cooperation in the early part of the new century. In the same year, China proposed an ASEAN-China free trade area within ten years’ time. Consequently, a Framework Agreement was concluded in 2002 to establish a free trade area by the year 2010.2 China’s security relations with ASEAN countries in the 1990s were marred by territorial disputes in the South China Sea, especially with the Philippines over the Mischief Reef and Scarborough Shoal, and with Vietnam over their sea and land borders. But by 2000, the tension had cooled down significantly. China and Vietnam signed the Treaty on the Land Border on 30 December 1999. In 2000, the two countries signed a historic agreement demarcating maritime territory in the Gulf of Tonkin. On 15 March 2000, senior officials from China and ASEAN met in Thailand to discuss for the first time their respective draft Codes of Conduct for the South China Sea. At their Summit in Phnom Penh in November 2002, ASEAN and China signed the Declaration on the Conduct (DOC) of Parties in the South China Sea3 and, as a follow-up, convened Senior Officials Meeting on its implementation on 7 December 2004 in Kuala Lumpur.4 Relations between China and the Philippines has much improved since late 1990s and reached a new height with the state visit to China by Philippine President Gloria Macapagal Arroyo in early September 2004. After the visit, the two countries, for the first time between China and an ASEAN member state, conducted a joint seismic study in disputed areas in the South China Sea. Vietnam joined them in 2005. China and ASEAN countries also cooperate on transnational nontraditional security threat such as dealing with drug trafficking, with the

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Beijing Declaration signed in August 2001 between China, Laos, Myanmar and Thailand. At the ASEAN-China Summit in Phnom Penh in November 2002, China and ASEAN signed “The Joint Declaration of ASEAN and China on Cooperation in the Field of Non-Traditional Security Issues”,5 which is implemented through an MOU (and an Annual Plan since 2004) on Cooperation in the Field of Non-Traditional Security Issues, signed in Bangkok in January 2004.6 China has also improved its military ties with individual ASEAN members, with high-level visits by their military leaders, military training and assistance of weapons and military technology, naval port visits, and joint naval exercise of search and rescue. An important milestone in the development of ASEAN-China relations was China’s signing of a key ASEAN security protocol, “The Treaty of Amity and Cooperation” (TAC)7 and their declaring each other as Strategic Partners for Peace and Prosperity at the ASEAN-China Summit in October 2003 in Bali. At their summit in Vientiane in November 2004, ASEAN and China issued a Plan of Action to implement this strategic partnership.8 With the forging of the strategic partnership, bilateral cooperation was further strengthened. In March 2004, the ASEAN Informal Foreign Ministers’ Meeting issued a Chairman’s Statement on the question of Taiwan reaffirming ASEAN’s commitment to the One-China policy. Later in September 2004, all the ASEAN member countries unanimously recognized China’s full market economy status. At the beginning of 2005, China and ASEAN launched the “Early Harvest” programme as part of the ASEANChina free trade arrangement. In July 2005, China announced the expansion of the scope of the special preferential tariff treatment for Lao PDR, Cambodia and Myanmar. China has expressed its willingness to work with ASEAN for its early accession to the Protocol to the Treaty on Southeast Asia Nuclear WeaponsFree Zone (SEANWFZ).9 In 2005, ASEAN and China set up a joint Eminent Persons Group (EPG) to draw up detailed plans to guide the development of their relations in the coming fifteen years. ASEAN-China cooperation advanced fast in other areas. At their summit on 6 November 2001 in Brunei Darussalam, ASEAN and China declared to focus their cooperation on five priority areas in the early part of the twenty-first century, namely agriculture, information and communications technology (ICT), human resource development (HRD), the Mekong Basin development, and two-way investment. For this purpose, they signed an MOU on Medium and Long-Term Plan of Agricultural Cooperation on 2 November 2002 in Phnom Penh and an MOU on Cooperation in

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Information and Communications Technology (ICT) on 8 October 2003 at the Bali Summit. ASEAN and China implement the Mekong Basin development programmes and projects within various frameworks such as the Greater Mekong Sub-region (GMS), ASEAN Mekong Basin Development Cooperation (AMBDC) and the Mekong River Commission (MRC). China has contributed a sum of US$ 5 million to help regulate some sections of the navigation channel within the territories of Laos and Myanmar. In the area of public health, China has pledged 10 million RMB in support of the ASEAN-China cooperation on SARS prevention and control. It also established a China-ASEAN Fund for Public Health. An ASEANChina Health Ministers’ Meeting was set up in 2005. ASEAN and China signed an MOU on cultural cooperation in 2005. Cooperation in tourism between ASEAN and China is conducted through meetings of ASEAN+3 National Tourism Organizations and ASEAN+3 Tourism Ministers, which include research on tourism and information technology, seminars on hospitality and tourism, issuing tourism publications, establishing tourism networks, and setting up a Centre for Tourism Resource Management. Chinese tourists have now replaced the Japanese as the Number One tourist market for ASEAN. ASEAN received 4.4 million Chinese tourists in 2004 and the trend is upwards. By comparison, 3.5 million Japanese visited ASEAN that year with flat growth over the last decade.10 In the area of youth, ASEAN and China have established the Senior Officials Consultation Meeting on Youth in May 2004 and the ASEANChina Ministers for Youth Affairs Meeting in September 2004. ASEAN and China have also convened the ASEAN-China Business Young Leaders Summit on 23–28 May 2004 in Guangxi, China. China and ASEAN also cooperate actively through a series of mechanisms and ministerial meetings under the framework of ASEAN+3 on a wide range of political, security, economic, and social issues. ECONOMIC RELATIONS ASEAN-China trade expanded rapidly, with an average growth rate of 20.8 per cent from 1990 to 2003. In 2003, it reached US$78.3 billion, an increase of 42.9 per cent over the previous year. In 2004, it was over US$109.9 billion with a growth rate of nearly 40 per cent, with ASEAN becoming China’s fourth biggest trade partner, and China the fifth biggest partner of ASEAN.11 Mutual investment has also expanded. From 1991 to 2000, ASEAN investment in China increased at an average annual rate of 28 per cent. In

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1991, ASEAN investment in China was only US$90 million, which increased to US$26.2 billion by 2001, accounting for 6.6 per cent of total FDI utilized by China, and further increased to US$38.22 billion by the end of 2004. In November 2002 the leaders of ASEAN member countries and China signed the Framework Agreement on Comprehensive Economic Cooperation, which provides for an ASEAN-China Free Trade Area (ACFTA) by the year 2010 for Brunei Darussalam, China, Indonesia, Malaysia, the Philippines, Singapore and Thailand, and by 2015 for Cambodia, Lao PDR, Myanmar and Vietnam (CLMV). The Protocol to Amend the Framework Agreement on Comprehensive Economic Cooperation was signed between ASEAN and China in October 2003 to further regulate the acceleration of tariff reduction and elimination for products under the Early Harvest Programme (EHP) and finalize the Rules of Origin. The EHP has been implemented since 1 January 2004. At the Eighth ASEAN-China Summit in November 2004, ASEAN and China signed the agreements on trade in goods (TIG) and dispute settlement mechanism (DSM) under the Framework Agreement on Comprehensive Economic Cooperation. The agreement on TIG has been implemented since 20 July 2005, subject to the finalization of each country’s internal procedures, while the agreement on DSM will provide support to the smooth implementation of the ACFTA. Both sides are now working to conclude at an early date an agreement on trade in services and one on investments under the Framework Agreement. ASEAN and China signed an MOU on Transport Cooperation on the sidelines of the ASEAN-China Summit in November 2004. The MOU will strengthen ASEAN-China transport cooperation in a more holistic and integrated manner, and lay a solid foundation for medium-to-long-term collaboration to support ACFTA. So far, three projects have been implemented, and an ASEAN-China maritime transport agreement is being considered. ASEAN and China are now working on an MOU on Quality Inspection and Quarantine in support of ACFTA. ASEAN and China, through the ASEAN+3 mechanism, have achieved progress in promoting regional financial cooperation initiatives by establishing a network of Bilateral Swap Arrangements (BSAs) under the Chiang Mai Initiative (CMI) monitoring capital flows, strengthening the Early Warning System, taking steps to develop domestic and regional bond markets, enhancing the effectiveness of economic reviews and policy dialogues and exploring other modalities of regional collaboration and support mechanism.

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STRATEGIC IMPLICATIONS The strategic implications of the fast development of China-ASEAN relations should not be exaggerated. This development started from a very low base. It is fast if compared vertically with what it was fifteen years ago. But, if compared horizontally, that is, compared with ASEAN’s relations with other extra-regional powers such as the United States and Japan, China’s influence is still far from tipping the regional strategic balance between major powers and therefore the strategic implications of the development of China-ASEAN relations should not be exaggerated. The pace has been fast for the past fifteen years, but when it approaches near the tipping point of balance of power, it will slow down. This is because not only other extra-regional major powers will start to put more effort into the region to maintain the balance, but also regional states will also be prudent in developing their relations with China, and with other extra-regional powers like the United States, Japan and India, to keep the balance. For the foreseeable future, China does not have the capability to tip the current balance of power in the region. Should it push too fast and too deep, this effort may backfire. WEAK ECONOMIC BASIS China’s clout in Southeast Asia is less than it is described to be by the mainstream media. In terms of investment, by the end of 2004, accumulated investment by Chinese companies in ASEAN, as registered in China’s Ministry of Commerce, was only US$1.165 billion (compared with US$38.22 billion of ASEAN investment in China). Even if we include those unregistered ones, the figure will also likely be moderate.12 U.S. investment in Southeast Asia stood at US$85.4 billion. From 1995 to 2003, China’s investment in ASEAN comprised 0.29 per cent of the total foreign investment in ASEAN, in sharp comparison with 28.83 per cent for EU, 16.47 per cent for the United States and 12.9 per cent for Japan.13 Chinese government investment and economic aid to ASEAN countries is also dwarfed by those from Japan and the United States as well. According to the figures released by China’s State Council and Ministry of Commerce, by the end of 2004, China’s total accumulated overseas investment, including investments by both the government and companies, is US$ 44.8 billion for 149 countries and regions. As much as 74.6 per cent out of the total (or US$33.42 billion) went to Asia.14 But if we take a closer look, we will find that out of this US$33.42 billion, 68 per cent went to Hong Kong and 32 per cent went to other Asian economies, including ASEAN.15 In this 32 per cent,

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if we leave out those heading for North Korea, Taiwan, Japan and other Asian countries, what is left for ASEAN cannot be much. According to the scattered figures from China’s Ministry of Commerce, it is US$625 million for Singapore, US$182 million for Thailand and US$123 million for Malaysia and US$160 million for Vietnam.16 In 2004 alone, China’s overseas investment in Asia is US$3 billion, which comprised 54.6 per cent of its total overseas investment. But, out of this US$3 billion, the lion’s share (US$2.63 billion) went to Hong Kong and only US$0.37 billion went to other Asian economies, of which US$62 million was for Indonesia and US$48 million for Singapore.17 With so little investment and economic aid, China’s real influence should not be over-exaggerated. Though from 2005, China has increased its government economic aid (including government investment) to ASEAN countries, particularly to Indonesia, Cambodia, the Philippines and Myanmar, a massive economic aid/investment in ASEAN countries, either by Chinese companies or Chinese government, to match that of Western countries, is unlikely. This is because the bulk of the Chinese official aid (estimated to be a third or even half of the total) is still earmarked for North Korea. Therefore there is not much left for ASEAN countries if Beijing still wants to increase its aid to Africa (as Chinese President Hu Jintao had promised in his recent visit to African countries in May 2006) and Latin American countries. Chinese companies at this stage of economic development generally still prefer to invest domestically than overseas for various reasons (such as higher profit and less risk at home than overseas) and that is why we see massive increase of China’s trade with other countries, but not much investment overseas by Chinese companies. What features prominently in the China-ASEAN economic relations is not the investment and economic aid, but the rapid growth of their bilateral trade, at an annual rate of 20.8 per cent from 1990 to 2003, and over 30 per cent from 2001. In 2003, it reached US$78.3 billion, an increase of 42.9 per cent over the previous year. In 2004, it was over US$109.9 billion with a growth rate of nearly 40 per cent, with ASEAN becoming China’s fourth biggest trade partner, and China the fifth biggest partner of ASEAN.18 But these trade figures can be deceiving. The devil is in the details. First, process industries by foreign companies (referring to “foreign-owned and foreign-invested companies”) in China accounted for 55 per cent of China’s total export in 2004. In 2000–04, the export by foreign companies in China increased from US$119.4 billion to US$338.6 billion, that is, an increase from 47.9 per cent to 57.1 per cent in China’s total export. Their

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import increased from US$117.3 billion in 2000 to US$324.6 billion in 2004, an increase of 52.1 per cent to 57.8 per cent in China’s total import. Their total import/export during the period increased from US$236.7 billion to US$663.2 billion, an increase of 49.9 per cent to 57.4 per cent. They make up 77 per cent of the top 200 exporters in China, and 62 per cent of the top 500 importers.19 There has been heavy double accounting as China processes only a fraction of the finished products. One U.S. report in the 1990s put the profit rate for China at US17 cents for every U.S. dollar China exported. One Chinese study in 2003 shows that China produces 75 per cent of the toys in the world, but only retains 1/70 of the total profit.20 The New York Times in 2006 reported that “the biggest beneficiary” of China’s increased export is not China. “A Barbie doll (China exported to the United States) costs US$20, but China only gets about 35 cents of that.” “Because so many different hands in different places touch a particular product, you might as well throw away the trade figures (of China’s export).”21 This also in one way or another applies to China’ trade with ASEAN, most of which is through foreign companies in China. They accounted for 60.6 per cent of China’s trade with ASEAN in 2005. For the ASEAN side, the figure is even higher. The increase in the bilateral trade was therefore mainly the intra-industrial trade within and between the foreign companies in China and Southeast Asia and entrepôt trade.22 In this regard, double accounting can be serious as many products, especially electronic products, may cross borders twice or more, therefore grossly inflating the two-way trade figure. This double accounting is estimated to be as high as 30 per cent or even higher of the total trade between China and ASEAN. In the China-Singapore trade, which makes up the lion’s share of the China-ASEAN trade, entrepôt trade accounts for 46 per cent of China’s export to Singapore, and 40 per cent of Singapore’s export to China.23 A large part of China’s trade with ASEAN ends up in Western consumer markets. Chinese companies find it difficult to compete in ASEAN markets. First, they are mainly medium and small companies that do not have huge funds to effectively compete with foreign companies that are already firmly established in ASEAN markets. Secondly, they are not coordinated among themselves and not integrated well with the ASEAN market. Most of them operate alone without much cooperation in Southeast Asia, lack sufficient knowledge and research of the ASEAN market,24 often operate in a “hit-and-run” fashion for immediate and once-for-all profits at the expense of their overall long-term interest and

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reputation, thus rendering themselves more vulnerable to the competition of both foreign and local companies. Thirdly, it is China’s Yunnan Province and Guangxi Autonomous Region that have shown the strongest enthusiasm in pushing into the ASEAN market. The better-developed coastal provinces still focus on the Western market and take the ASEAN market as an alternative when they cannot expand further in the Western market. Take the year of 2001 for example. The trade with ASEAN countries made up the largest portion of the total foreign trade of Guangxi and Yunnan (35.6 per cent), but was only a combined US$1.6 billion, or only 3.8 per cent of China’s total trade with ASEAN (US$41.6 billion). China’s Guangdong Province traded US$15.4 billion with ASEAN countries, which made up 37 per cent of China’s total trade with ASEAN of that year.25 However, to Guangdong Province, China’s top exporter, this was only 8.47 per cent of its total foreign trade.26 Its trade focus was on the United States, Japan and other Western markets. It is the same case for other developed Chinese provinces and cities, such as Shanghai, whose trade with ASEAN comprised only 8 per cent of its total foreign trade of the same year.27 This shows that those competitive big Chinese companies still do not take ASEAN as its main market and essential trade partners. China also lacks in-depth research, close watch and rich information of developments in the ASEAN market, with the exception of a few ASEAN countries. A successful and large-scale penetration by Chinese companies into Southeast Asia is difficult at the moment. This point is also borne out with a closer look of the bilateral trade growth, which in absolute term appears very impressive, but not so much if viewed as a proportion of the total trade. For example, from 2000–05, China’s trade with ASEAN grew at an annual rate of well over 30 per cent. However, China’s total foreign trade also increased at an annual rate of over 30 per cent over the same period (a bit lower than its trade with ASEAN). In other words, this growth in China-ASEAN trade can well be said to be a normal one (or perhaps a bit higher than normal), especially when one considers that this bilateral trade started from a low base and foreign companies in China accounted, for example, for 60.6 per cent of China’s trade with ASEAN in 2005. This trade comprises 8.3 per cent of China’s total foreign trade in 2000,28 8.2 per cent for 2001, 8.8 per cent for 2002, 9.1 per cent for 2003,29 and 10.5 per cent for 2004,30 but comes down to 9.14 per cent for 2005.31 So, there is growth, but not spectacular growth, especially if we consider that China’s total trade with Asian countries reached US$664.9 billion in 2004 (its trade with ASEAN was US$109.9

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billion in 2004),32 an increase of 34.2 per cent over the previous year and comprised 57.6 per cent of China’ total foreign trade, while trade with ASEAN comprised 10.5 per cent.33 The year 2005 witnessed a sharp reduction in growth of the China-ASEAN trade. It only grew by 23.1 per cent to US$130.37 billion,34 in sharp contrast to its previous high growth rate (42.9 per cent for 2003 and 40 per cent for 2004). In the same year, China’s trade with India grew by 38 per cent35 and its trade with Russia grew by 37.1 per cent.36 If we view from the ASEAN side, the same situation also exists. Take China’s largest ASEAN trade partner Singapore, for example.37 In 2005, it recorded the highest trade with China at S$67.1 billion, which dwarfed many other ASEAN countries. Nevertheless, this figure would not appear so overwhelming if we consider that Singapore’s total foreign trade of the same year stood as high as S$716 billion.38 The author has no intention to deny the fast growth in trade and its positive impact on the ASEAN-China relations, of which the author is fully aware, but would like to alert readers of the danger of accepting the figures at face value without proper perspective. There has also been exaggeration of the economic significance of the ACFTA and excitement over it on the part of the Chinese. This FTA is the first one to China, but not to some ASEAN countries, which still have far more extensive economic ties with the United States, Japan and EU than with China.39 China’s trade with ASEAN will continue to grow and may reach US$200 billion by 2010 as China expects. But this growth, even if achieved, will most likely still be in a similar proportion to the overall growth of China’s foreign trade and does not make ASEAN an exceptional case of rapid growth. Though ASEAN countries as a whole have increased their exports to China, their exports to Western markets have decreased over the past years, partly due to competitive Chinese exports there. Both China and ASEAN have adopted export-oriented strategies and their economies are mostly competitive rather than complimentary except for Singapore.40 A sound China-ASEAN economic relationship in future will depend on how fast China can upgrade its economic structure to trim down its foreign trade competition with ASEAN economies and how much more the Chinese market can take in ASEAN’s own products. This is a big question. China is now making an effort to move from an export-and-investment-led growth strategy to one balanced by healthy consumer spending.41 If successful, this re-orientation of its development strategy will greatly improve China’s economic relations with ASEAN countries. However, this change will not be abrupt.

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ASEAN “PULLS” vs. CHINA “PUSHES” China’s diplomatic success with ASEAN is often by chance, notwithstanding its diplomatic skills. For example, this success has much to do with the U.S. obsession with terrorism and its relative negligence of the region. It also has a lot to with the 1997 financial crisis and consequently ASEAN’s intention not to be taken for granted and its initiatives to engage China for a constructive balance of power in the region. Very often, people only see Chinese “pushes” into the region without seeing ASEAN’s “pulls”. Without such “pulls”, China’s “pushes” will not go far and may backfire. Take warming in China-Indonesia relations for example. They have recently declared each other as strategic partners. This may have a lot to do with Indonesia’s (its Muslims’) frustration with the excessive U.S. pressure on it against terrorism and consequently its intention to use China to balance the U.S. pressure. Its overture to build defence ties with China and to buy Chinese weapons can be interpreted as leverage for the United States to lift its arms embargo on Indonesia. For Myanmar and Cambodia, who have close relations with China, it is largely because, in the case of Myanmar, the United States chose not to engage with its government and not to trade with and invest in Myanmar. U.S. trade sanction and embargo against Myanmar still stands. In the case of Cambodia, China is the top investor and trade partner. The United States, because of political consideration, did not, and still does not, massively trade with and invest in Cambodia. If the United States changes its policy and put sufficient resources into wooing these two countries, its relations with Myanmar and Cambodia will improve and China may not be able to keep its primacy in these two countries. China’s direct influence over the central government of Myanmar is rather limited, as shown in the case of the home arrest of former Myanmar Prime Minister Khin Nyunt. China had no information before his arrest and little influence over the government re-shaping afterwards. Its influence lies more in Myanmar’s northern border areas than with the central government, which has been trying to keep China at a respectful distance and balance it off with overtures to India and Thailand. Beijing often feels unsure of what Yangon has in mind. Myanmar leaders often keep silent to conceal their differences with China and keep a distance from Beijing (while leaders of North Korea often choose to argue with Beijing over their differences). The visit by Myanmar Prime Minister Soe Win to China in February 2006 and its agreement to sell trillions of cubic metres of gas to China through future pipelines mark a boost in bilateral relations.42 But this has more to do with Yangon’s severe sense of insecurity (such as its obsession with both regime stability and possible U.S. military attacks) than China’s

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influence. In other words, this boost is built more on U.S. “pushes” than on China’s “pulls”. As for Singapore, Beijing feels that it is inclined more towards the United States than being neutral and may occasionally give Beijing some unpleasant surprises on the issue of Taiwan, U.S. military presence in Southeast Asia and East Asia integration. Thailand appears to have good relations with Beijing. But Beijing is aware that it also has good relations with other big powers including its alliance with the United States. Beijing very often feels unsure of Bangkok’s intentions under strong U.S. influence. On the issue of joint naval exercises for search and rescue operations between the two countries, Bangkok resisted and hesitated for a long time and only agreed, at the last moment, to have a very limited, low-profile and symbolic one in late 2005 with a PLA naval fleet that was passing (not special visit) Thailand on its way back from its joint naval exercises with Pakistan and India. China’s relations with Vietnam have improved with many interactions taking place on all levels. But with the territorial disputes in the South China Sea still unresolved and with historical baggage, Vietnam is deeply wary of a rising China. It may cooperate with China on minor issues and areas, but always holds its own firmly on important issues, especially on its relations with the United States and Japan, which has always been a concern to Beijing. Despite strong lobby by China, Vietnam repeatedly affirmed its support for Japan to become a permanent member of the U.N. Security Council, though China has replaced Japan as Vietnam’s top trade partner in 2004.43 As for China’s good relations with Malaysia, the two countries have similar views on many international and regional issues, for example, East Asia integration. But this does not mean that Malaysia is under China’s influence. The fact that the leaders of the two countries hold similar views does not mean they do so out of the same interests. Malaysia, out of its own interest, intends to engage more closely with China for economic benefits, higher international and regional profile and a favourable regional balance of power vis-à-vis other powers. In other words, it is not China that calls the shots. A closer look shows that in many ASEAN countries, the drive for better relations with China is still narrowly based. For example, in Malaysia and Indonesia, this drive comes mainly from certain sectors of the business circle. In the Philippines, even the business circle, including many Filipino-Chinese small and medium businessmen, hold strong reservations over Chinese economic competition, let alone other more influential sectors of the society, such as the military, church, intellectuals, police, etc. This is in sharp contrast to the U.S. relationship with the Philippines (and with some other ASEAN

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countries) where relations are not only long-established but also rest on wide and substantive social bases with solid political, economic, military and social bonds. This relationship is not only built at the government level but also on extensive private sector and non-governmental levels, such as among their NGOs. On the other hand, China’s relationship with many ASEAN counties remains mainly at the high governmental level (such as frequent visits by Chinese leaders) and has not yet gone down deep and substantively to the middle and lower levels of the societies. “LEADERS’ DIPLOMACY” This “leaders’ diplomacy” carries prominent media value and exposure, but lacks sufficient substance if this “media friendship” among the leaders does not deepen and broaden to the middle and lower levels of ASEAN societies. When it goes down, many economic, social, and even ethnic and religious problems will erupt, for which neither Beijing nor ASEAN states seem to be fully prepared. The Chinese companies penetrating ASEAN markets will face more of such troubles than American and Japanese companies. This is not only because the former is a newcomer and the latter have been firmly rooted locally for years with a lot of experience with local public relations, but also because Chinese exports generally compete against the local economy while American and Japanese exports are more complementary. Exports of China and ASEAN are very similar. A study of 2003 showed that in 2002, China’s export to the U.S. market overlapped Indonesia by 83.5 per cent, Thailand by 76.1 per cent, Philippines by 57 per cent, Malaysia by 54.5 per cent, and Singapore by 44.2 per cent.44 With this awareness, China is now making effort to avoid the areas where they compete with local companies and choose to invest and trade more in areas that are mutually complementary such as raw materials, energy resources and infrastructure. However, there is also a limit since Chinese companies have to, sooner or later, expand into other areas competitively, thus heightening the fear of the Chinese economic threat. Managing this competition without affecting state-to-state relations will be a difficult challenge to both sides. Without a strong and harmonious economic basis, the relations between China and ASEAN will experience many humps on the road ahead. More Chinese companies in Southeast Asia will also bring more Chinese migrants, including more illegal ones. This, if not handled well, may cause alarm among local people and worsen ethnic tensions.

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CHINA’S LURE China’s attractiveness to ASEAN still lies heavily, however, in its booming market. For example, from December 2001 to September 2005, China’s annual import stood at an average US$500 billion and created about ten million employment opportunities for other countries and regions. From 2006, China’s import may increase hugely and is expected to reach US$1 trillion by 2010.45 China-ASEAN trade may reach over US$200 billion by 2010.46 This huge demand of import by the Chinese market provides a strong incentive for ASEAN countries (at least some) to have a fairly good relationship with China in order to get a better niche in the booming Chinese market, earlier than other countries. Such a good political relationship may transform into immediate economic and trade benefits. For instance, China may be more willing to share out more benefit, earlier than with other countries, from its market to those countries that keep such a good relationship. ASEAN, for the past years, have benefited from huge trade surplus with China, which stood around nearly US$20 billion. This is not purely marketdriven, but also strongly politically-motivated through policy setting: Beijing is willing to keep such a huge trade deficit in order to have a good relationship with ASEAN. For some ASEAN countries, what sounds strange but true is that it is sometimes because their exports overlap highly with those from China that they intend to keep good political relations with China. This is because this good political relationship can transform into favourable economic deals and trade arrangements where China would be more considerate of how their exports compete with the others and may therefore make compensation, either in the same areas where their exports compete with each other or in other areas where the ASEAN countries enjoy trade advantages. For example, in negotiating ACFTA, to persuade certain ASEAN countries that were unwilling to conclude the Framework Agreement and the Early Harvest Programme (despite the benefits it brings, some of its clauses may still subject certain products of one or two ASEAN countries, but not all, under stronger Chinese competition), China expressed its willingness to sign separate bilateral agreements in other trade areas with those ASEAN countries to more than offset their potential losses that may occur from signing these documents. STRATEGIC AND POLITICAL BASIS The strategic and political basis for China to accelerate its push into Southeast Asia is even weaker than the economic basis. Though there is less public talk of the “China threat”, the suspicion and distrust of China

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remains deep-rooted and may grow if the rising China rushes deeper into Southeast Asia. As both Chinese and international scholars pointed out, ASEAN countries are not bandwagoning with, but “hedging” against China, engaging China while developing robust ties with other extra-regional powers to balance China.47 China’s defence relations with ASEAN militaries are still very limited and will likely remain so for years to come despite China’s strong interest in enhancing such ties. This is due to ASEAN’s distrust of China and its concern not to unduly upset other extra-regional major powers.48 China’s military is now strong in sea-denial but not in the power-projection that would effectively extend a massive strategic deterrence across the whole Southeast Asia. Scholars have pointed to the rising appeal of China’s soft power in Southeast Asia.49 However, a distinction should be made: I define soft power into “high soft power and “low soft power” like scholars define politics into “high politics” and “low politics”. China has recently succeeded in enhancing the appeal of its “low soft power” (such as cultural, language and ethnic linkages) but rarely in “high soft power” (such as political and social systems and ideologies). It is the high part of soft power that is essential in forming a close partnership or alliance between countries. For example, people in both Taiwan and mainland China speak the same language and take on the same culture, but do not identify with each other politically because they do not share the high part of the soft power. In terms of regional international relations, the Chinese “pushes” into Southeast Asia have already alerted other major powers, especially Japan, into stronger response to offset these Chinese advances in the region. It is true that ASEAN offers to engage China to avoid the past Cold War mistakes for the sake of regional peace and security. It also wants China’s political backing to play its role as the primary driving force in regional affairs. However, the strong Chinese “pushes”, even though not necessarily through any evil design, have already made ASEAN countries feel that ASEAN’s standing as the driving force may be compromised. Over the years, it is often China that came up with many initiatives such as the ACFTA, “China-ASEAN strategic partnership”, “commemorative summits”, China-ASEAN expo in Nanjing, forming Eminent Persons Group (EPG) for China-ASEAN relations and many others. ASEAN was only responding. China is diplomatically skilful in mapping out these initiatives and proposals, which ASEAN is not very keen about, but has no reason to turn down. Very often it feels it has been thus led by China down the road, and pushing towards the tipping point of regional strategic balance. With severe internal challenges, such as uneven economic and political developments among the member states (for example, the

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growing “two tiers” of ASEAN) and complexity of ASEAN integration (ASEAN Community), ASEAN needs “a breathing space” to pull itself together to consolidate itself as the driver in regional affairs. China, if by being proactive with too many initiatives, could make ASEAN feel more challenged to maintain the leadership. What is worse, these proactive initiatives could make some ASEAN countries feel that the regional strategic balance could be tipped. The ASEAN countries’ efforts to keep this balance is reflected in the East Asia Summit (EAS) of December 2005, for which, they, with the exception of Malaysia, supported India’s participation in the EAS,50 and many supported Japan’s proposal to include Australia and New Zealand to join in. To keep the driver’s seat from external powers, ASEAN decided not to hold the second EAS summit in Beijing as China asked for, but only (and also subsequent summits) in ASEAN countries. China used to favour the EAS as leading the East Asia regional integration. Malaysian Prime Minister Mahathir Mohamad made the proposal to initiate the EAS at ASEAN+3 Summit in 2000. Singapore supported the proposal and suggested to have the summit every five years, to be hosted in turn by China, Japan and South Korea. In 2001, the East Asia Vision Group, formed in 1999 on the proposal by South Korean President Kim Dae-Jung, presented a formal report to establish the EAS to the thirteen ASEAN+3 countries. In early 2003, Malaysia asked to host the first East Asia Summit, a request that was formally endorsed by ASEAN countries at their summit at the end of 2004. China was happy with the development as it was so far, but was taken by surprise when ASEAN suddenly decided to take in more countries (Australia, New Zealand and India) for the EAS membership. As one strategist in the think-tank of China’s Ministry of Foreign Affairs pointed out, this enlargement of membership challenges China’s previously favourable position in the EAS process.51 PROSPECTS: TANGO TOGETHER BUT WATCH EACH OTHER’S STEPS Beijing has evidently read the message from the East Asia Summit and readjusted its approach towards ASEAN. Historically, a sensible strategy for a big power is to build a long-term and solid moral and economic basis and wait to be invited in, like the United States was invited into West Europe following the end of World War II, rather than to force its way through. The best diplomacy is to arouse enthusiasm among countries by dealing with them in a way that makes them feel important and appreciated and engaging

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them without making them feel manipulated, and making them feel their success is of their own initiative and to their own interest, winning them over to your way of thinking without causing offence. That is how China had been working with ASEAN with reasonable success, but met with backfire when it forgot this motto. China-ASEAN relationship has developed fast over the past fifteen years. But it started from a very low base. The development is fast if compared vertically with what it was fifteen or ten years ago. But, if compared horizontally with ASEAN’s relations with other extra-regional power like the United States and Japan, this development is still far from tipping the regional strategic balance. While China has gained influence in Southeast Asia in recent years, ASEAN’s relations with other extra-regional majors remain robust and a regional strategic balance is thus maintained. For some time to come, China will not have strong economic, social and strategic basis to support its push over the tipping point of the strategic balance for regional primacy. If China stays before the tipping point, the picture will still be rosy in the relationship between China and ASEAN. Should China attempt to push beyond the tipping point, the picture may change as this push may succeed in pushing ASEAN and other extra-regional major powers together into stronger resistance. Hence, China will likely continue to “tango” with ASEAN, but watch its steps carefully. It is expected to be more attentive, more cautious and subtle in its “comfort diplomacy” towards ASEAN. It may, for the time being, shift its focus from pushing for earlier East Asian integration to its bilateral relations with ASEAN, that is, ACFTA, and with individual ASEAN countries. It will continue to stress on economic relations and lowprofile but substantive diplomacy. It may not intend to “walk fast” but “walk stable” and even “stand stable”, emphasizing on consolidating what it already has as the basis for further development in future. It will also seek to broaden the social basis in ASEAN countries for a stable bilateral relationship as shown in the recent visits by Chinese leaders Wen Jiabao and Jia Qinglin to Southeast Asia in 2006. The United States and other major powers like Japan and India will stay in the regional tango in their own ways and watch carefully each step China takes. The immediate U.S. post-Cold War Asia-Pacific strategy resembles a “hand” reaching towards China, with five “fingers”, that is, its ally relations or partnerships with Japan, Korea, Taiwan, ASEAN and Australia.52 China’s primary strategic objective in its relations with these countries at this stage is to resort to multilateralism and economic diplomacy to soft balance any unfavourable U.S. advances and change those “fingers” into a triangular relationship, with the third countries taking a balanced position in between.

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This soft balancing strategy has worked with some success with regard to ASEAN, South Korea and even America’s traditional ally Australia, but not for Japan and Taiwan. For Japan, China’s primary goal has long been to encourage Tokyo to keep a distance from Washington and thus form a triangle, with the potential of Japan moving closer to Asia than to the West. The strengthening of U.S.Japan alliance, which started from 1996 and culminated with the Koizumi government, crashed Beijing’s such expectation. This disillusionment, after so many years of hard work to woo Japan over, also accounts for Beijing’s harsh attitude towards the Koizumi government. In comparison, China does not worry much about India’s recent enhanced relations with the United States and its growing presence in Southeast Asia. This is largely because of Beijing’s confidence that New Delhi will keep a triangular relationship instead of a two-versus-one game (such as U.S.-Japan versus China). This accounts for China’s acceptance of India into Southeast Asia. For China, India’s entry into Southeast Asia may change the dynamics of the existing two-versus-one game (of U.S.-Japan versus China) in Southeast Asia by forming another triangle, at least not a three-versus-one game. China certainly likes to see the hand-shaped U.S.–Asia-Pacific strategy, pointing directly at China, to be compromised by more such triangles, behind which China can take cover. In this regard, China, as noted above, has so far made reasonable success. But the next question is, “how will these triangles evolve?” To China, ASEAN is a key point. It wants a closer relationship with ASEAN not only to soft balance unfavourable U.S. advances into the region but also to make sure of a more favourable Indian presence in the region and to promote Japan’s distancing from the United States and its “return by itself to Asia”, thus forming another triangle between the United States, Japan and China. NOTES 1. See the speech by Singapore Ambassador to the United States, Chan Heng Chee, at Asia Society Texas Annual Ambassadors’ Forum & Corporate Conference on 3 February 2006, Straits Times (Singapore), 15 February 2006, pp. 28–29. 2. For the text, see ASEAN Secretariat official website, . 3. For the text, see ibid., . 4. For details of the meeting, see ibid., . 5. For the text, see ibid., . 6. For the text, see ibid., . 7. For the text, see ibid., .

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8. 9. 10. 11.

For the text, see ibid., . For the text, see ibid., . See Note 1. “ASEAN Centre of Contemporary Chinese Studies in Offing”, People’s Daily online (English edition), 27 August 2005. “Hu Jintao: Zhongguo yaxi’an nianmaoyi’e wunian nei kepo 2000 yi meiyuan” [Hu Jintao: China-ASEAN Annual Trade May Reach US$200 in Five Years], Lianhe Zaobao [United Morning News] (Singapore), 27 April 2005. These figures are from China’s Ministry of Commerce. Also see “Zhongguo qiye touzi dongmeng shichang cunzai wenti ji duice fengxi” [Chinese Companies Invest in ASEAN Markets: Analysis of Problems and Policies], in China’s official China-ASEAN FTA website, (12 November 2005). “Zhongguo-Dongmeng touzi, laowu hezuo qude jingzhan” [China and ASEAN: Progress in Investment and Labour Service Cooperation] in ibid., (14 January 2006). This article put the officially registered investment by Chinese companies in ASEAN as low as US$1.14 billion. These figures are from the ASEAN Secretariat, quoted from ibid. Also see “Dongnanya: Zhongguo qiye ‘zouchuqu’ de zhongdian diqu” [Southeast Asia: A Key Area for Chinese Companies ‘Going Out’”, Guoji gongcheng yu laowu [International Projects and Labour] (China’s Ministry of Commerce), no. 10, 2005, quoted from China’s official website of China-ASEAN-FTA, (5 March 2006). The News Office, the State Council of the PRC, “Zhongguo de heping fazhan daolu” [China’s Peaceful Development Road], Renmin Ribao [People’s Daily] (overseas edition) (Beijing), 23 December 2005, . These figures are also available from the official website of China’s Ministry of Commerce, . Ibid. Ibid. Ibid. “ASEAN Centre of Contemporary Chinese Studies in Offing”, People’s Daily online (English edition), 27 August 2005. “Hu Jintao: Zhongguo yaxi’an nianmaoyi’e wunian nei kepo 2000 yi meiyuan” [Hu Jintao: China-ASEAN Annual Trade May Reach US$200 in Five Years], Lianhe Zaobao [United Morning News] (Singapore), 27 April 2005. “Maoyi daguo anran shice, zhongguo wehe meiyu dingjiaquan?” [A Trade Power under Challenge: Why China Cannot Decide the Price?] China Daily (Chinese edition) (Beijing), 19 August 2005. According to China Minister of commerce Bo Xilai, these foreign companies accounted for 58 per cent of China’s total export in 2004. See his press conference on 11 April 2006, .

12.

13.

14.

15. 16. 17. 18.

19.

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20. News Report, China CCTV Channel 4, 17 January 2003. 21. David Barboza, “Some Assembly Needed: China as Asia Factory”, New York Times, 9 February 2006. 22. Zhu Wenwei, “Zhongguo dongmeng huwu maoyi shichang jiang jingyibu kaifang” [China and ASEAN Will Further Open Their Markets of Goods], Zhongguo Maoyibao [China Trade] (Beijing), 12 January 2006. 23. Xu changwen, “Zhongguo yu xinjiapo jingmao hezuo kuaisu fazhan” [China and Singapore: Rapid Development in Their Economic and Trade Cooperation], Zhongguo Jingji Shibao [China Economic Times), 7 April 2006, available on . 24. For details, see “Yingxiang zhongguo yu dongmeng jingmao fazhan de yinsu ji duice” [China and ASEAN Economic and Trade Development: Unfavourable Factors and Countermeasures], in China’s official China-ASEAN FTA website, (19 December 2005). 25. Shi Benzhi and Dai Jie, eds., Lancangjiang-Meigonghe ciquyu hezuo yu zhongguodongmeng ziyou maoyiqu jianshe [Lancang River-Greater Mekong sub-Regional Cooperation and the Building of China-ASEAN FTA] (Beijing: China Commerce and Trade Press, 2005), pp. 239 and 254. However, according to statistics from Guangdong Province, the total trade of that year was US$14.958 billion. 26. Guangdong Provincial Statistics Bureau, Guangdong tongji nianjian 2003 [Statistics Yearbook of Guangdong Province 2003] (Beijing: China Statistics Press, 2003). 27. Shanghai duiwai jingji maoyi nianjian 2002 [Shanghai Yearbook of Foreign Economy and Trade 2002] and Shanghai duiwai jingji maoyi tongji nianjian 2002 [Shanghai Statistics Yearbook of Foreign Economy and Trade 2002]. 28. Forging Closer ASEAN-China Economic Relations in the Twenty-First Century, a report submitted by the ASEAN-China Expert Group on Economic Cooperation, October 2001, p. 1, . 29. See Zhongguo-dongmeng nianjian [China-ASEAN Yearbook] (Beijing: Xianzhuang Publishing House, 2005), p. 217. 30. My own calculation. 31. “2010 nian zhongguo-dongmeng maoyi’e jiangda 2000 yi meiyuan” [ChinaSEAN Trade will Reach US$200 by 2010] Xin Jing Bao [The Beijing News] (Beijing), 10 January 2006, from (11 January 2006). 32. “ASEAN Center of Contemporary Chinese Studies in Offing”, op. cit. “Hu Jintao: China-ASEAN Annual Trade May Reach US$200 in Five Years”, op. cit. 33. The State Council of the PRC, op. cit. 34. Xinhua News Agency, 17 March 2006, cited in China’s official China-ASEAN FTA website, . 35. Paranjoy Guha Thakurta, “China could Overtake US’s India Trade”, Asia Times (Bangkok), 15 March 2006.

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36. Xinhua News Agency, 17 March 2006, . Their two-way trade for 2005 was US$29.1 billion. 37. Singapore has been China’s largest ASEAN trade partner for many years, though occasionally overtaken by Malaysia. 38. Straits Times, 18 January 2006, p. 1. Total China-ASEAN trade in 2004 was US$109.9 billion. 39. “Dongmeng yu quwai liufang maoyi yilai chengdu jiasheng” [ASEAN’s Trade Dependence in Increasing with 6 Extra-Regional Countries], in Guoji Shangbao [International Business Daily] (China Ministry of Commerce), from China’s official web-site for China-ASEAN FTA, (12 April 2006). 40. See John Wong and Sarah Chan, “China-ASEAN Free Trade Agreement: Shaping Future Economic Relations”, Asian Survey 43, no. 3 (May/June 2003): 507–26. 41. Stephen S. Roach, “The Untold China Story”, Newsweek, 8 May 2006, p. 35. Exports and investments now account for about 75 per cent of Chinese GDP. Ibid. 42. See Pallab Bhattacharya, “Yangon-Beijing Gas Deal — Tri-nation Pipeline at Stake”, The Daily Star (Bangladesh), 14 January 2006. Li Zhongfa, “Wen Jiabao zongli yu miandian zongli Suo Wen zai renmin dahuitang juxing huitan” [Premier Wen Jiaobao and Myanmar Prime Minister Soe Win Held a Meeting in the People’s Great Hall], Xinhua News, 14 February 2006; Liao Lei, “Guojia zhuxi Hu Jintao huijian miandian zongli Suo Wen tan zhongmian youhao guanxi” [Chinese President Hu Jingtao Met with Myanmar Prime Minister Soe Win and Talked About China-Myanmar Friendship], Xinhua News, 15 February 2006. 43. He Sheng, “Riben wei qianzhi zhongguo jiji gudong benguo ziben jingjun yuenan” [Japan Encourages Its companies to Move to Vietnam in Order to Constrain China], Shijie Xinwen Bao [World News] (Beijing), 11 April 2006, from China’s official China-ASEAN FTA website . 44. See Chi Hung Kwan, “Why ASEAN did not Seek a Stronger Yuan: Apprehension over the Spread of Currency Appreciation Pressures”, China in Transition (Research Institute of Economy Trade and Industry, Japan), 3 October 2003, p. 2. . 45. The State Council of the PRC, op. cit. 46. “ASEAN Center of Contemporary Chinese Studies in offing”, op. cit. “Hu Jintao: China-ASEAN Annual Trade May Reach US$200 in Five Years”, op. cit. 47. For further reading, see “Contending Perspectives: Southeast Asia and American Views of a Rising China”, Colloquium Brief, Strategic Studies Institute, U.S. Army War College, 2006. 48. See Sheng Lijun, “An Overview of ASEAN-China Relations”, and Michael Richardson, “ASEAN-China Maritime Security Cooperation”. Both are in Saw

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52.

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Swee-Hock, Sheng Lijun and Chin Kin Wah, eds., ASEAN-China Relations: Realities and Prospects (Singapore: Institute of Southeast Asia Studies, 2005). See for example, Joseph S. Nye, Jr., “The Rise of China’s Soft Power”, Wall Street Journal Asia, 29 December 2005. Mohan Malik, “EAC: More an East Asian Cacophony?”, Straits Times, 3 January 2006, p. 19. Wei Min, “Zhongguo Dongmeng guanxi ji dongya hezuo de huigu yu zhanwang” [China-ASEAN Relations and East Asia Cooperation: Review and Prospects], from (22 April 2006). The author is an associate professor at China Institute of International Studies, Beijing. See Sheng Lijun, “China and The United States: Asymmetrical Strategic Partners”, The Washington Quarterly 22, no. 3 (summer 1999): 147–64.

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Strategic Dimension of ASEAN-China Economic Relations Eric Teo Chu Cheow

INTRODUCTION ASEAN-China relations appear to be successfully entering a new phase, as both sides emphasize a mutually-enriching relationship. Of particular importance are China’s reduction of its “threat” to its southern neighbours, as well as its “soft power” projection, so as to stabilize the region, before effectively contributing to economic and financial cooperation across Southeast Asia. Firstly, China, in its “peaceful rise”, has inexorably succeeded in reducing ASEAN’s threat perception of Beijing, thus contributing to regional peace and stability; this could probably be the foremost contribution of both China and ASEAN (reciprocally) towards laying down the foundation of the future East Asian Community, as this project would never have been possible in the 1960s and 1970s, when there was significant mistrust between Beijing and the ASEAN capitals. Secondly, China’s attempts in reducing its “threat” have in fact, also increased its “soft power” projection across Southeast Asia through its cultural prowess and an active but more discreet diplomacy; this is currently bearing fruit within ASEAN, at least much more effectively than the more heavyhanded American diplomacy. Southeast Asian governments and public opinion

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seem to have by and large accepted China, an emerging Chinese role in Asian politics and economics and its cultural position, thanks also to the special role played by the Chinese diaspora in the region. Lastly, ASEAN and China have increased their economic and regional cooperation in four areas, which could clearly lay down the foundation and basis of the future East Asian Community. The roles of Beijing and ASEAN capitals, based on a foundation of peace and stability, and in pursuing greater economic cooperation, could even form the core of East Asian Community-building, as what Beijing hopes to achieve through its “Ten+1” initiative with ASEAN. These three aspects have indeed formed the strategic dimension of China’s long-term relations with ASEAN. TOWARDS A MUTUAL RELATIONSHIP OF REGIONAL TRUST AND CONFIDENCE Lowering the “China threat” and establishing mutual confidence and trust between China and ASEAN appear to be Beijing’s first priorities, especially in the last fifteen to twenty years of their relationship. There has been notable success, as Beijing sends out clear “overtures” to ASEAN and as the latter reciprocate the former. There has been a distinct warming of ASEAN-China relations from a historical perspective with an undoubted shift away from the “China threat” syndrome within ASEAN. Mutual perception is all-important in Sino-ASEAN relations; Southeast Asians’ threat perception of China has in fact shifted in three ways.1 Firstly, China used to pose two sorts of threats to Southeast Asia. From a historical perspective, there was a communist threat from Beijing in the 1960s and 1970s, as experienced by Indonesia, Thailand, Malaysia, Singapore, Philippines and Myanmar. Beijing also represented a war threat, as was the case of Vietnam in 1979, when Chinese troops crossed the Sino-Vietnamese border to teach Vietnam a lesson over its invasion and occupation of neighbouring Cambodia. This “ideological” and security threat aspect has inexorably broken down since the 1960s and 1970s. Added to these two historical dimensions, Southeast Asian countries have also lately witnessed a major perception change of China in the 1980s and 1990s, from what was termed a “China threat” (in economic, trade, investment, social/employment terms) just four to five years ago, to one of a “benign” China with ample opportunities (for ASEAN). However, this factor may yet shift again as China’s trade deficits with ASEAN countries decrease, and may

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even turn into surpluses this year, thus re-raising the “China (economic) threat” spectre again, if not handled soundly. Three factors have come into play in ASEAN-China relations. Firstly, Beijing’s pragmatic policy of political stabilization has been assuring to ASEAN countries, instead of its former “ideological destabilization”. In fact, in a TIME magazine interview,2 Singapore’s Minister Mentor Lee Kuan Yew recounted his admiration for Deng Xiaoping (as the “most admired man” in his career) when he pragmatically curtailed Beijing’s financial and moral support for regional communist parties (which had pledged to overthrow the elected leaders in the region then) after consulting with Lee in Singapore in his first tour to non-communist Southeast Asia in 1978. Lee commented that it was Deng’s pragmatism and realism, even though he had a strong communist ethos, that had touched him profoundly and increased his admiration for him (Deng) and his resolve in modernizing China. China is now in fact perceived not as an obstacle, but as an opportunity to ASEAN, thanks also to Beijing’s political decision to hold up (or not competitively devalue) the Renminbi during the 1997–98 Asian crisis, as well as to the latest “bonus” of surplus trade “accorded” to ASEAN countries by Beijing. Lastly, this shifted or reduced threat perception of China (to ASEAN) is also due to Beijing’s new, active and “sophisticated diplomacy”, from Deng Xiaoping to the Jiang Zemin-Zhu Rongji team, and then on to the present Hu Jintao-Wen Jiabao team. Four areas of Beijing’s present foreign policy “sophistication” would include a less pompous, but more pragmatic foreign policy; its growing economic diplomacy; its promotion of international integration; and finally, a struggle for multi-polarity in the world today, in the face of “American hegemony”. All these factors have assured ASEAN countries of a more “benign China” in its outlook and national strategy, and have thus helped reduce the previous “China threat”. China is indeed increasingly being perceived not only as a “benign power”,3 but also as a responsible actor on the world and regional stages. This has been a fundamental change in ASEAN thinking on China, which ensures a dose of stability in the region as well as a mutuallybeneficial relationship, which should in turn contribute soundly to the East Asian Community-building process in the longer term. Beijing’s novel political posturing and assurances have thus been key in shoring up Chinese credibility and acceptance in the region, especially in reducing the “China threat” spectre, which Chinese leaders now perceive as their foremost priority in diplomacy and international strategy today, amidst China’s “peaceful development”.

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Key to this perception shift in ASEAN has been China’s strategic policy of “down-playing ideology, and moving towards pragmatism”,4 which ASEAN countries have detected in both China’s domestic policies and external relations. ASEAN countries appreciate the “normalization” of Beijing’s relations with the region. It is as though, coupled with a greater “sophistication” in its foreign policy and posture, Beijing has deliberately changed its overall strategic engagement with Southeast Asia. It has not only abandoned the communist insurgency or war threats of the past, but adopted an active policy of “strategic friendship” with ASEAN countries. Ideology has been abandoned both domestically and externally, as the vehicle of relations with its neighbours, which has greatly assuaged the fears and concerns of Southeast Asian countries. For example, China and ASEAN established “joint security cooperation in the South China Sea recently in February 2006 at an ASEAN-China joint meeting in Sanya, Hainan in China. Secondly, ASEAN governments and the elite have probably been impressed by Beijing leaders’ pragmatism in governance as China seeks to create stability and equilibrium for its own economic and political development. China’s slogan of “stability, development, reforms” has gone down well with ASEAN leaders, as well as Beijing’s stress on the symbiotic relationship between China’s own internal and external stability. The unprecedented smooth transition from the Jiang-Zhu to the Hu-Wen team, despite what Western liberals charge China of having “no democracy”, was another plus-point, not lost on, but an assurance for, the ASEAN elite. The common feeling in Southeast Asia is that they could now do business with a more pragmatic generation of Chinese leaders and the “new China”.5 But, armed with a certain success in its diplomatic and strategic prowess, Beijing seems intent on pursuing a more active diplomacy around its “southern periphery” in Southeast Asia, including using its own version of “dollar diplomacy” and defence cooperation. CHINA’S “SOFT POWER” PROJECTION IN ASEAN But the fundamental questions remains if there really is a concept of “soft power” in Beijing’s strategic and diplomatic thinking today, which may markedly differ from the original concept of “soft power” by Joseph Nye6 (with regard to American soft power). How does China perceive its use of “soft power” as a stratagem of its foreign policy and in building the future East Asian Community? How successful has Beijing been in using this “soft power” concept in an area of real strategic importance to China’s interests, viz Southeast Asia?

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Commensurate with China’s rise as an economic and political power is the concurrent rise of its “soft power” in Southeast Asia. Chinese culture, cuisine, calligraphy, cinema, curios, art, acupuncture, herbal medicine and fashion fads have penetrated into the regional culture.7 The three important aspects in this “soft power Chinese advance” into Southeast Asia, are its cultural advances, its economic branding, and the crucial role of ethnic Chinese in Southeast Asia. Fascination for popular Chinese culture amongst ASEAN youth in film, pop music and the television has been noticeable, even though such popular culture may in fact emanate from Hong Kong (films, actors, actresses and “canto-pop”) or Taiwan (like the “Meteor Garden” television series or boybands, such as F4 or 5566), and not necessarily China. Joint “Chinese” film production, such as “Hero” or “Crouching Tiger, Hidden Dragon” (which “pool” together acting talents from China, Taiwan and Hong Kong) have hit international box-offices and given Chinese culture a big boost. Mainland Chinese cinema idols like Zhang Yimou and Gong Li are beginning to command an artistic following, although they still lack a popular following. But mainland Chinese consumer brands (like Hai-er, TCL or Huawei) are becoming increasingly popular in ASEAN societies, especially for lowerend electronic and telecommunication products, in Indonesia and the Philippines today. The rise of Chinese consumer products in Southeast Asia, especially amongst their poor indigenous population, would undoubtedly contribute to lessen the previous “China threat” even further as well as to help spread Chinese “soft power”, much like the existing American and Japanese “soft power” which spread, thanks to worldwide branding of their products. More importantly in Southeast Asia today is the rise in the role and influence of ethnic Chinese. Resolutely anti-communist and anti-Beijing in the past, this group has swung towards a “more benign China”,8 as these communities ride on the coat-tails of this emerging China. In Thailand, there is undoubtedly a rise in Thai-Chinese power and influence not only in commerce and business as it had always and traditionally been the case, but also in politics (with PM Thaksin Shinawatra and his ruling Thai Rath Thai Party), the bureaucracy, and the intelligentsia. Indonesia has “rehabilitated” its Indonesian-Chinese community, as the Lunar New Year or “Imlek” has since 2003 been designated an official Indonesian public holiday; the public “Metro TV” even has some of its news bulletins (“xin wen”) read in Mandarin. In the Philippines, Filipino-Chinese movies have captured top prizes in the annual Metro-Manila Film Festival in 2003 and 2004. There are also more “chinovelas” (Chinese serials) on local television stations in the afternoon,

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and Taiwanese boy-band F4 was Philippines’ biggest craze, its songs filling Manila’s mega-malls. Vietnam is undoubtedly following the “China model” economically and even politically, as returning viet kieu (or overseas Vietnamese) are leading Vietnamese economic recovery, like overseas Chinese fifteen years ago. In Malaysia, Chinese tycoons are playing an increasingly prominent role in leading the current economic boom and its business connections with China, and may even “inspire” some reforms to Malaysia’s bumiputra (proMalay) policy, as the debate goes on. In Southeast Asia, and in parallel, the “pai hwa” (or anti-Chinese) sentiment has subsided to a large extent, and many ethnic Southeast Asian Chinese now want to “re-discover” their (Chinese) culture and identity, in line with the emerging China to the north; for example, Mandarin classes have been blossoming in ASEAN countries. One of the most significant changes in Southeast Asia has been the attitude of ethnic Chinese, who have become less biased, less anti-communist and less anti-Beijing. But this “overplay” of their “China connection” could be a double-edged sword, if they do not “share” or better distribute their acquired wealth locally (in their countries), especially if they are perceived to have prospered from their “China connection”. Therein lies a potential danger for both the ethnic Chinese (as they seek a better integration with their Southeast Asian “homeland”) and Beijing, which must be aware of such a potential “ethnic Chinese” danger in ASEAN.9 A particularly telling sign of how successful China’s “soft power” strategem has been thus far, as well as the advances made by the ethnic Chinese communities in Southeast Asia, could be seen in how Southeast Asian leaders have accepted or acknowledged their Chinese “lineage” and ancestry recently. Singapore leaders, like Lee Kuan Yew, had claimed Hakka ancestry as far back as in the 1970s. Thai Prime Minister Thaksin Shinawatra significantly paid tribute to his ancestors amidst great pomp and publicity at Meiyuan in Guangzhou, the first time that a Thai Prime Minister has unabashfully admitted such “an ancestral line to China”. Former Philippine President Corazon Aquino had earlier admitted to tracing some of her Chinese ancestry back to Fujian Province, just as present President Gloria Macapagal-Arroyo, former Presidents Megawati Soekarnoeputri and Abdurrahman Wahid, and even Malaysian Prime Minister Abdullah Badawi are believed to have some “Chinese blood” (though not acknowledged publicly and officially) as well. As the “China threat” perception is progressively reduced, Southeast Asian leaders are now apparently more relaxed to admit or talk about their Chinese ancestry (for their domestic consumption within Southeast Asia),

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which is a significant development in the overall “threat psyche” of Southeast Asia and Southeast Asians. This in part is also due to the advance of Chinese “soft power” and an increasing “normalization of the China or Chinese factor” in Southeast Asian politics. China’s influence, clout and “soft power” have undoubtedly grown in Southeast Asia. This could be a prelude to the dawning “China century”, especially as China takes on the United States in international geo-politics and geo-economics. But the “ultimate battleground” between the two world powers would still be inadvertently in East Asia, and more precisely, in Southeast Asia itself, as the Americans have to one day decide to either concede to growing Chinese “soft power” or challenge it directly. China’s “peaceful rising”, sufficiently successful till now, would clearly consolidate Beijing’s place as a regional and international power in Asia, thanks to the firm support, and even complicity, of its Southeast Asian neighbours in ASEAN. This is where ASEAN and China could play complementary roles in building the future East Asian Community together, as confidence-building measures have so far been undertaken by Beijing and successfully accepted by ASEAN under present circumstances. In fact, Beijing’s increasing prestige, clout and its rising nationalism10 constitute a crucial factor in China’s current sound relations with its Asian neighbours, which seem to be standing in awe before a “rising China” in their midst. They undoubtedly hope to extract the most benefits possible from such an emerging phenomenon, just as Beijing seeks to reduce the threat perception from them that might accompany its own rise. In a way, this phenomenon could be likened to another historical event, as China and some Southeast Asian nations commemorate the 600th anniversary of Admiral Zheng He’s first voyage to the “Western seas”, with a “treasure boat” (with a purported eleven-metre rudder) which had brought Zheng to Southeast Asia, it was no wonder that the smaller Southeast Asian kingdoms had stood in awe before the mighty Chinese armada;11 today, again Southeast Asian countries stand in awe before the “peaceful rise” of contemporary China. Another historical reminder in the same vein may have been the “tributary system”, which for 400 years, the Ming and Qing emperors of China had instituted across Southeast Asia. The present “bedfellow” relationship between a rising China and its smaller neighbours is thus premised on a mutually beneficial relationship, which both sides seek to promote and implement; “in bed with the panda” has thus become a pragmatic reality for both China and its neighbours. Chinese “soft power” rise has also been key to Beijing’s improved relations internationally and with its neighbours. Of particular importance in contemporary Beijing thinking is

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China’s theory of “peaceful rising” (or currently amended to “peaceful development”), so as to placate concerns by Beijing’s smaller Asian neighbours, who may fear such a “rising” in their midst.12 Only in such a “trustful” context could ASEAN and China play effective roles in East Asian Community-building in the future, especially in building a “soft power” and benign leadership role in the East Asian region, based on mutual economic and cultural enrichment. HISTORICAL BASIS OF CHINA’S “SOFT POWER” PROJECTION IN SOUTHEAST ASIA Some regional analysts have pointed out that China’s “soft power” is not comparable to American “soft power”, as defined by Nye, simply because Beijing’s “version” (if there is one officially, which is also doubtful) is more akin to “using power softly”13 than the more “unilateralist projection of power” by Washington under the present administration. This interpretation gels perfectly with the “non-definition” by the Chinese (at least officially) of how they perceive their own “soft power” projection or its use as a tool of diplomacy and international strategy. It is for this fundamental reason that Beijing’s “soft power” will remain in parenthesis, as opposed to Nye’s more “established” definition of American “soft power”, which is now widely acknowledged as such. However, Chinese academic circles and even its officialdom admit, though cautiously, that they have a perception of “using power in a different way” from the Americans, as they “rise” first as a regional, and then a world power, in the coming years. This is also commensurate with two other diplomatic imperatives of Beijing. Firstly, it should go hand-in-hand with China’s “peaceful development” theory,14 which now officially replaces the previous “peaceful rise” advocacy, as highlighted by the recent December 2005 White Paper released by the State Council in Beijing. Moreover, it also gels with the extensive diplomatic campaign that is now launched officially to “downplay” the “China threat”15 idea that has been surfacing in the United States, Europe and in the immediate periphery of China. Historically and philosophically, this “soft power” concept could have also emanated as a result of Washington as well. In 1998, it was believed that the State Council in Beijing prepared a concept paper (for internal discussions and debate) how best Beijing should counter what Chinese leaders seriously believed then to be attempts of an “American containment of China”. It was then analysed and concluded that one of the most salient measures that had to be taken from this perspective would be to launch a massive

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“counter-campaign” in a region deemed too strategic for China, viz Southeast Asia, so as to avoid this American “containment” and take the initiative locally of projecting its own “soft power”. Moreover, there were two reasons for Beijing to focus its action on this region. Firstly, China had an immense historic vocation and influence in Southeast Asia, through its previous tributary system,16 which many Chinese academics see as some form of Chinese “soft power” exerted in this region even before Western colonialism, which was perceived as “less benign” a form of power projection than China’s “soft” tributary system. Secondly, Beijing felt that Washington was facing immense pressure in Southeast Asia following the Bush Administration’s “unilateralist” policies and posture after 11 September 2001.17 It was perhaps this decisive State Council conceptualization most probably with Politburo backing thereafter, that then gave rise to the present concept of “soft power” or “using power softly”, to oppose the Americans in Southeast Asia. Under the tributary system, the Chinese (under the Ming and then Qing dynasties) had believed in “balancing” the “external and internal stabilities” (wai wen and nei wen),18 much akin to Chinese traditional medicine and acupuncture. It was believed by the Ming and then carried through by the Qing emperors that China’s “internal stability” of China could only be achieved if there was “external stability” on its periphery; similarly, China’s immediate external environment could only be stabilized when it acquires internal stability within its empire. This symbiotic wai wen versus nai wen concept dominated the 450-year-old tributary system, established from the sixteenth till the beginning of the twentieth century. Trade, respect and stability were thus very much a part of the imperial tributary system, as the exploits of Ming explorer Zheng He whose 600 years of his first voyage in 1405 under Emperor Yongle or Zhu Di “to the Western Seas”, meaning Southeast Asia and beyond, were commemorated by China as well as in Southeast Asia.19 In fact, Professor Eisuke Sakakibara of Keio University and former Japanese vice-minister for finance, had highlighted the “re-emergence” of China, at a lecture in Kuala Lumpur in November 2003, since China was already the de facto pre-eminent power in Asia till the 1850s.20 In this regard, China could be re-emerging and thus re-creating a system akin to its former “imperial” Ming/Qing system and environment in Asia, though in a more benign and discreet way today. Even if this system cannot and will not be revived for obvious geo-strategic reasons, there could be traces of this “tributary mentality”21 behind this “soft power” system of China’s contemporary regional relations.

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Moreover, in a publication by Beida’s (Beijing University) Institute of International Relations in 2003 on “China’s Security Environment”,22 a novel perspective of China’s “new” security environment was put forward. The interesting and significant aspect was a reminder in the opening chapter, of China’s ancient tributary system, which was deemed to have fashioned Beijing’s relations with its immediate Asian neighbours, and hence, its emerging regional role today. More importantly, the “tributary” mentality seemed to be pervasive among China’s Asian neighbours as well,23 especially the former tributary states, as they see benign Chinese “soft power” projected onto them whilst benefiting (as previously) from this particular “special relationship” with Beijing, based on three cardinal points, as follows: •

•

•

Firstly, China considered itself the “central heart” [zhongxin] of the region. The tributary system thus assured China of its recognition and respect as the zhongxin of a stable security environment. Secondly, China needed this stable external environment immediately surrounding the Middle Kingdom, so as to ensure its own internal stability and continued prosperity. Thirdly, the Chinese emperor, at the “heart”, would in principle give more favours to tributary states or kingdoms than it should receive from them; for his “generosity”, the emperor gets their respect and goodwill.

Practically, the Chinese emperor would accord trade privileges to the tributary states, after accepting their respect and goodwill, which was how Beijing regulated its commercial interests with Southeast Asia then, as their big regional power. In a way, this could be deemed the first WTO in the world’s commercial history, even before the colonial empires were established by Western powers. Zheng He’s seven voyages had this enormous and lucrative maritime trade vocation as well for the Ming emperors (as China had to fight Japanese pirates who were usurping China’s trade relations with Southeast Asia,24 a reminder that Sino-Japanese conflictual relations in Southeast Asia and already begun six hundred years ago in Southeast Asia!), besides stabilizing the external stability or wai wen aspect for the Chinese emperor. From the royal Qing archives according to BeiDa’s publication,25 the well-established system recorded meticulously all the tributes received from regional countries to the Chinese court. Korea had to pay tribute once a year, the Ryuku Kingdom (present-day Okinawan islands) once in two years, Annam (Northern Vietnam) once in three years, Siam (Thailand) once in four years, Sulu (in Southern Philippines) once in five years, and Burma (Myanmar) and Laos, once every seven to ten years. The Melakan Sultanate (over Malaysia), as well as the successive Javanese Kingdoms and Empires

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were not “officially” tributary states, though they had extensive relations of trade-versus-protection from imperial China (especially against the “encroaching” Siam, as in the case of Melaka). The BeiDa publication even calculated the number of times these tributary kingdoms had effectively paid tribute to Beijing, from 1662 till early 1900s (as recorded officially in the Qing archives). But the thinking or mentality behind this tributary system seemed to be already borne out by certain recent geo-political trends, emanating from China and in accordance with its theory of “peaceful rising” as well as its successful projection of its “soft power” across Southeast Asia. More importantly, such a system could not be relevant in the twenty-first century, if not for China’s spectacular rise within the Asian trading and economic system and if the former “tributary countries” in Southeast Asia had not accepted Beijing’s eminent role in the present-day system of trade and political influence.26 Undoubtedly, Beijing’s “soft power” has succeeded to some extent in “winning over” Southeast Asia again, similar to the tributary days of imperial China. This “soft power” projection by China and its relative acceptance or “acquiesance” by ASEAN is thus a fundamental building block of regional relations for building the East Asian Community of the future. Not only would it stabilize the region, but it could constitute the crux of regional relations, as China continues to emerge as a regional and world power. There would be no return to the historic “tributary system”, but China’s “projection of power softly” could help constitute the basis of a future East Asian Community, especially based on the trade and economic aspects of cooperation, as was already the case under its tributary system begun 700 years ago during the Ming and Qing dynasties. More importantly, it could even constitute one of the pillars in building the East Asian Community of tomorrow. ECONOMIC AND FINANCIAL COOPERATION BETWEEN ASEAN AND CHINA AS A BUILDING BLOCK TOWARDS THE FUTURE EAST ASIAN COMMUNITY The advance of this Chinese “soft power” in Southeast Asia could best be witnessed in ASEAN and China commonly advancing the following economic, financial and social areas of “mutual interest”, which would in turn constitute the building blocks of the future East Asian Community that China and ASEAN would be seeking to build: • •

Spectacularly increasing Sino-ASEAN trade ties, to build the “ASEANChina Free Trade Agreement; Increasing Chinese investments into the region;

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Growing bilateral assistance to ASEAN countries; and Important regional assistance to the ASEAN region.

Moreover, the 26 December 2004 tsunami disaster and the subsequent relief and humanitarian operations provide the Beijing government and the Chinese people the opportunity of increasing their assistance (financial, technical, and in kind) to affected countries of Southeast Asia, like Indonesia, Thailand and Malaysia. Premier Wen Jiabao’s attendance and presence in Jakarta for the Tsunami Summit on 6 January 2005 was particularly significant,27 as it highly profiled China as a regional power, alongside PM Junichiro Koizumi’s Japan and John Howard’s Australia. At the heart of this ASEAN-China economic cooperation would be the “Ten+1” ASEAN-China Free Trade Agreement (ACFTA), which symbolizes the core of East Asian Community-building; in fact, the Chinese have always seen the “Ten+1” as the core of a pan-Asian FTA in the longer term, which could one day “embrace” Japan and South Korea too within the ASEAN+3 framework. (1) Spectacular Increase in Sino-ASEAN trade China’s trade has increased manifold with ASEAN countries and has even “conceded” trade surpluses to ASEAN economies,28 just like to Taiwan. In fact, all ASEAN economies are estimated to have maintained trade surpluses with Beijing in 2004, although not officially published. These trade surpluses have in turn helped ASEAN economies to chalk up spectacular growth rates in 2004, from Singapore (8.1 per cent) and Vietnam (about 8.5 per cent) to Malaysia (about 7 per cent) and Thailand (6–6.5 per cent). In fact, Beijing’s total trade with the world reached US$851 billion in 2003 and is estimated to have exceeded US$1 trillion in 2005. Asian economies’ total trade surpluses with Beijing in 2003 was therefore “compensated” by Beijing’s own trade surpluses with Western trading partners, to the tune of more than US$120 billion each way. Although these surpluses with Asia were contracted more with South Korea and Taiwan (respectively, US$23.0 and US$40.4 billion) in 2003, ASEAN economies have also benefited from China’s big thirst for Asian imports in the last three years, as its domestic economy picks up and domestic demand increases. Within ASEAN, for example, Malaysia contracted a huge trade surplus of US$8 billion for a total trade of US$20 billion with China in 2003; in 2004 and 2005, these trade flows increased even further between the two countries, and maintained a huge surplus again in Malaysia’s favour. On the other hand, Thailand, which was accorded an “Early Harvest” privilege for

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fruits and vegetables by China, has found that Chinese fruits and vegetables are now threatening the livelihood of Thai farmers, which explains why it had to stall FTA negotiations for the time being. But with the less-developed ASEAN economies, it appears that China’s trade strategy is to facilitate a quick development of these economies, especially of Indochina, so as to promote social and economic stability in China’s “southern periphery”. In this regard, Beijing accorded Most Favoured Nation (MFN) status to Vietnam, Laos and Cambodia, even before they enter the WTO.29 Cambodia has since entered the WTO framework in the autumn of 2004, and Vietnam hopes to do likewise by the end of this year. This Chinese “concession” to the less-developed economies was highly regarded as a significant economic gesture by Beijing to these ASEAN countries. But China’s “soft power” also extended to the less-developed of the “original” ASEAN core of five, as cheap Chinese exports are now flooding the lower-end markets of the Philippines and Indonesia. Chinese TCL and Huawei are giving poor segments of the Indonesian and Filipino populations the means to possess a mobile phone when none of them could afford a Nokia, Motorola or Ericsson; just as U.S. “soft power” was spread through Coca Cola, Levi jeans and products of U.S. consumerism, cheap Chinese goods now help to spread Chinese consumer “soft power” in Southeast Asia with some success, thereby also lowering the “China threat” perception amongst the indigenous populations there. In another example, the Central Market in Vientiane sells numerous cheap Chinese electronics brands like Jinshen, Kedibo and Jinling, which consumers in wealthier ASEAN countries may have never seen. China’s border trade with Vietnam has blossomed beyond expectations. In the related area of services, China’s economic prowess was demonstrated through a recent episode involving an incident of strip searching a “so-called Chinese female national by the Malaysian police”. The incident was deemed so significant for Malaysian tourism (as Chinese tourist arrivals dropped by half in 2005 from 2004) that the Home Affairs Minister had to embark on a China trip to assure Chinese tourists that they were not specifically targetted by the Malaysian Police. Similarly, the Philippines have mounted publicity campaigns to woo Chinese tourists to its beaches, just as it was reported that in 2003, some 1 million Chinese travelled abroad to Southeast Asia on the “Sin-Ma-Thai” (or Singapore-Malaysia-Thailand) tour packages, reaping substantial financial benefits for the recipient countries, as Chinese tourists have shown to be as willing to spend as Japanese tourists in Southeast Asia. Singapore’s interest in building two “integrated resorts”, or integrated casino complexes could have also been partly motivated by China’s “inherent” gamblers’ market, as Macau

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has been reaping substantial windfalls from its casino business since mainland tourists are now allowed to spend generously in the SAR. Indeed, Beijing’s gesture and determination in completing an ASEANChina Free Trade Agreement (ACFTA) by 2010 has been highly appreciated by ASEAN countries. The goods segment of this FTA has been finalized late 2004 and Sino-ASEAN negotiations on services and investments have begun this year, with the promise of implementing a “complete” FTA between the two by 2010. In fact, two spectacular ASEAN-China Trade Exhibitions have already been held thus far, the latest round being in late 2005. ASEAN economies also recognize that it was this crucial decision (to start ASEAN-China FTA negotiations) at the ASEAN Summit in Phnom Penh, Cambodia in 2002 that had sparked ASEAN-Japan and ASEANSouth Korean FTAs talks; Beijing has thus been perceived by ASEAN as a useful catalyst for building the future East Asian Community30 through a web of FTAs (or the Beijing-proposed East Asian Free Trade Agreement or EAFTA), a leadership role which China managed to snatch from Japan in the economic field, despite Japan’s massive cumulative financial contributions to Southeast Asia. Similarly, China maintained its trade prowess vis-à-vis ASEAN at the recent Kuala Lumpur ASEAN and “ASEAN+3” Summits, “forcing” Japan to offer more financial incentives to ASEAN countries for social and cultural objectives. (2) Increasing Chinese Investments into the Region China is believed to have injected some US$2 billion in investments thus far into Southeast Asia, which is definitely dwarfed by Japan’s cumulative investment efforts. China has in fact recently announced a change in its overseas investment policy, as it encourages its state companies and private sector to invest in projects in developing countries, which could help procure natural resources and energy for China’s own development, or “complement” China’s own manufacturing chain. The Chinese Government has promised to reduce red-tape in moving Chinese capital more easily into overseas investments for developing economies, once these two developmental criteria are met.31 Amongst the ASEAN economies, the chief beneficiaries of this “new” investment policy change would include Indonesia, Myanmar, Philippines, Vietnam and Laos, as well as the more developed economies of Malaysia and Thailand. Chinese investments towards ASEAN are expected to increase in the coming years, not only in terms of new investments, but also as Chinese companies buy into existing companies or investments.

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Indonesia’s oil and gas industry is of particular interest to Beijing, as the latter seeks to secure energy resources for its future development; an Indonesian banking source confirmed that Chinese power companies could help build electric “gencos” and a grid across Jawa Island in exchange for long-term supply of Indonesian gas and oil. China’s US$360 million stake (purchased from Repsol) four years ago could now lead to other acquisitions in Indonesian oil and gas by CNOOC, Petrochina and Sinopec. It is still rumoured that CNOOC could eventually hope to buy Unocal’s Asian oil and gas assets from Chevron (after the CNOOC bid failed owing to U.S. Congressional opposition), thus putting Chinese oil interests in premier position in Myanmar. Elsewhere, Beijing’s “assistance” in establishing an industrial base in Bokeo Province in the north of Laos is now trumpeted as an enormous Chinese economic contribution to this land-locked country. More Chinese manufacturing facilities could indeed be set up on the periphery of China’s borders with ASEAN countries so as to benefit from cost effectiveness and cheaper labour, as long as transport and logistics support could be adequately garnered between these countries and China. In a way, they could also help satisfy growing demands in the lower end of the Chinese market in its poorer and less-developed western areas, which definitely have a growing taste for cheaper (though less refined) goods.32 A Chinese “manufacturing base” is also being reportedly established in Cambodia, with the Mekong River serving as a transport conduit throughout the Indochinese states, whereas Myanmar could conveniently serve as another Chinese manufacturing base for exports back to China, given its present embargo by Western interests and the fact that it was China, which had built Mandalay Airport (at friendship price) to serve as Yunnan Province’s access point to the outside world. Vietnam’s active cross-border trade would also warrant greater Chinese cross-border manufacturing activities on Vietnamese soil, in order to benefit from the growing commercial dynamism of the emerging “Vietnamese dragon”. (3) Growing Bilateral Assistance towards Southeast Asia China has until recently been a beneficiary of international economic and financial assistance, but it is today progressively joining the ranks of a “contributor of assistance” to Southeast Asia. Four examples illustrate this strengthening Chinese position in ASEAN. Besides possibly agreeing to building “gencos” (generating companies) and the electricity grid on Jawa Island in exchange for long-term supplies of Indonesian gas to China, Beijing would be using this “investment” partly as

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a bilateral assistance to Indonesia, given that a part of it may in fact come as a Chinese grant to Jakarta. Besides, Chinese power companies would accord “friendship prices” to Indonesia, which no commercial Western or Japanese firm could ever match. More recently, Beijing is helping to build a dam, a bridge and some toll roads in Indonesia as part of its “Overseas Development Assistance”. Beijing had also consented to give a US$400 million package of grants and loans for the construction of a northern railway link from Manila. This deal was sealed and spectacularly announced during the official visit of President Gloria Macapagal-Arroyo to Beijing in October 2004, apparently “in exchange” for some security cooperation agreement in the South China Sea.33 As a third example, Beijing has become Laos’ second biggest donor after Japan34 and may even surpass Japan in the coming years. Its assistance has in fact increased steeply over the past few years, thus even threatening the premier donor status of Japan across Indochina. China’s donor presence has inevitably challenged the previous “logical” position of Vietnam (as Vientiane’s principal “guarantor”) and caused concern in neighbouring Thailand, which has always perceived Laos as somewhat of an “economic appendage” to Bangkok. Lastly, Beijing is also pouring assistance into the ASEAN countries, to further Chinese-language education. China’s technical and scientific cooperation programmes now target schools and universities in Northern Thailand, Laos, Cambodia, Myanmar and Vietnam, and especially if they provide Chinese language education as well. “Chinese schools” are now very popular in Northern Thailand and mainland teachers are now being sent to Laos, with big “Chinese schools” in Vientiane and Pakse, funded by the Beijing Government.35 This educational programme should help promote China’s “soft power” and diplomacy further and complement its overall assistance packages. (4) Important Regional Assistance to ASEAN Countries China’s contribution to regional development has also increased enormously, as it seeks to play an active role in regional-building; four instances of Chinese active regional involvement would prove this point. Beijing has already been very active in the Greater Mekong Sub-region (or GMS),36 which groups Cambodia, Laos, Myanmar, Thailand, Vietnam and the Chinese province of Yunnan, clearly rivalling Japanese influence and clout there. Beijing has now decided to provide regional assistance to “complete”

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the GMS rail network, just as Japan has been providing technical and financial assistance through the ADB to build the road and airport networks there. The recent Kunming GMS Summit (in Yunnan) in early July 2005 (the second such summit in the GMS’ history) sealed the Chinese role and clout even further in the Indochinese region; PM Wen Jiabao played host to the GMS’ prime ministers, with promises of huge Chinese assistance and cooperation to the smaller Indochinese countries, as a regional package. Beijing’s best collaborator today is probably Thai Premier Thaksin Shinawatra, whose pro-China policies have undoubtedly comforted and emboldened Chinese action across the GMS, to the detriment of Japan and even the United States. Secondly, during the SARS epidemic, Beijing actively contributed US$1 million to help ASEAN countries overcome the ravages of the deadly disease; this Chinese commitment was pledged by Premier Wen in person when he attended the ASEAN SARS Summit in Bangkok in July 2003. China is also believed to be testing a SARS vaccine, which, if successful, could be another boost to Sino-ASEAN ties. Similarly, for the avian flu epidemic, Beijing has pledged increased collaboration with its ASEAN neighbours in 2004 to contain this virus; more cooperation efforts could be expected from Beijing, especially for Vietnam, Thailand, Malaysia and Indonesia. Similarly, China has pledged financial and medical support to help Southeast Asian countries fight avian flu, from Indochina to Indonesia. Thirdly, as stated earlier, the recent tsunami disaster saw Beijing coming to the aid of affected countries in Southeast Asia, especially Indonesia, in terms of donating blankets, food, tents and medical supplies; China has officially pledged US$83 million in assistance. For Thailand, where twentytwo Chinese nationals have so far been confirmed dead, Beijing has pledged free DNA testing in its laboratories to the Thai Government. Moreover, Premier Wen again flew in person to the Jakarta Tsunami Summit to pledge China’s full commitment to the humanitarian relief and re-construction work of tsunami-affected countries. Wen was also publicly deflecting criticisms that China had been slow in playing a major or effective role in assisting the affected countries. More importantly are China’s “exports” in terms of human capital,37 which may indeed help “build” Southeast Asia, as economic, financial, technological and assistance cooperation increase with Southeast Asia. It is reported that as part of its “soft power” projection, Beijing is conceptualizing a “developmental policy” for Southeast Asia (as well as a priori in Central Asia, amongst others), along the lines of other big nations such as the United States, European Union and Japan. Along with this new “developmental

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policy”, Beijing would then be “exporting” its human capital resources across Southeast Asia in four areas, which would in turn better “link” Southeast Asia to China, as follows: •

•

•

•

Chinese manual workers (especially in the region’s richer and more developed economies like Singapore, Malaysia as well as in the lessdeveloped countries where such workers “follow” technical assistance projects formulated by Beijing); Chinese expatriates (for its state-owned companies and MNCs, as they move “outwards” into Southeast Asia, as well as for technical and developmental assistance to the less-developed economies of Southeast Asia); Chinese students at all levels from primary to tertiary who now study in the more developed Southeast Asian countries, like Singapore and Malaysia, as they want to master the English language; and Chinese tourists and cultural exchange programme recipients, who undoubtedly create more people-to-people exchanges and bring revenue or expertise to Southeast Asia.

These four waves of “Chinese expatriation” would undoubtedly be perceived as a means of technology transfer and regional assistance from China to Southeast Asia, as this trend accelerates in the near future. It should thus help build the foundations of the future East Asian Community. China’s economic, financial, technological and human resource cooperation with ASEAN has increased its economic linkages across Southeast Asia, as the “Ten+1” takes off, at least for manufactured goods. In turn, this should lay a good foundation for the future East Asian Community, with ASEAN and China taking the lead, and with Japan and South Korea, or even India, joining in one day in the longer term. CONCLUSION Once the threat perception is stabilized and Beijing’s “soft power” projection is an acquis in Southeast Asia, China has indeed been leading efforts to consolidate ties with ASEAN countries by playing a pivotal role in “coalescing” the region in order to “balance” one day the European Union or the United States-led Free Trade Area of the Americas. Undoubtedly, strategic calculations prime, especially in actively countering American and Japanese attempts to “lead” or organize the Asia-Pacific region according to their objectives. Beijing is thus expected to commit even more funds and regional assistance to its smaller and less-developed ASEAN neighbours in order to “secure”

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ASEAN to its side in the future, especially after it played a key role recently in helping to launch and shape the East Asia Summit in Kuala Lumpur in December 2005.38 The roles of ASEAN and China are now shifting from the strategic (“no threat”) domain to the “soft power” aspect, as well as consolidating greater economic and financial cooperation. This thrust should develop even further in the coming years as China continues to emerge as a regional and world power. NOTES 1. Eric Teo Chu Cheow, “ASEAN+3: The Roles of ASEAN and China”, in ASEANChina Relations: Realities and Prospects, edited by Saw Swee-Hock, Sheng Lijun and Chin Kin-Wah (Singapore: Institute of Southeast Asian Studies, 2005). 2. TIME Magazine, 12 December 2005. 3. Eric Teo Chu Cheow, “China’s Soft Power Rising in Southeast Asia”, on PACNET, CSIS-Pacific Forum, Honolulu, Hawaii, USA, 3 May 2004. 4. ———, “ASEAN Counting on China”, Japan Times, 22 March 2003. 5. ———, “Three Strategic Challenges for ASEAN and China: The Greater Mekong Sub-Region, the Go West Policy, and the Role of Ethic Chinese in Sino-ASEAN Strategic Relations”, in China and ASEAN: Changing Political and Strategic Ties (Centre of Asian Studies, The University of Hong Kong, Hong Kong SAR, China, 2005). 6. Joseph S. Nye, “The Decline of American Soft Power”, Foreign Affairs (May/June 2004). 7. Eric Teo Chu Cheow, “China’s Rising Role, Soft Power and Influence in Asia”, Politique Etrangere 4 (2004). 8. ———, “ASEAN+3: The Roles of ASEAN and China”. 9. ———, “Three Strategic Challenges for ASEAN and China. 10. ———, “How to Stabilize China, According to Hu”, Japan Times, 1 April 2005. 11. ———, “600 Years on, China Plays Zheng He Card”, TODAY newspaper (Singapore), 15 July 2005 and Eric Teo Chu Cheow, “Zheng He’s Voyages Leave Legacy”, China Daily, 30 July 2005. 12. ———, “China’s Asian Strategies”, Japan Times, 15 October 2004. 13. Fareed Zakaria, “The US Can Out-Charm China”, Newsweek, World View, 12 December 2005. 14. Eric Teo Chu Cheow, “Solidifying China’s Regional Partnerships”, China Daily, 15 May 2004. 15. ———, “China’s Bid to Reduce the China Threat”, Peace Forum, FICS, Taipei, 18 January 2006. 16. ———, “China Revives Tributary Ties in Regional Ties”, Straits Times (Singapore), 27 November 2003.

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17. ———, “Breakwalls on US Tide” (paragraph on Singapore Senior Minister Lee Kuan Yew’s caution against the United States to be beware of unilateralism), Japan Times, 5 June 2003. 18. ———, “An Ancient Model for China’s New Power”, International Herald Tribune, 21 January 2004 and Teo, “China’s Soft Power Rising in Southeast Asia”. 19. ———, “Zheng He’s Voyages Leave Legacy”. 20. Eisuke Sakakkibara, former Vice-Minister of Finance of Japan and now Professor at Keio University in a speech made at an Institute for Strategic and International Studies-Malaysia (ISIS) Forum at the Nikko Hotel, Kuala Lumpur, 4 December 2003. 21. Teo, “China’s Rising Role, Soft Power and Influence in Asia”. 22. Zhang Xiaoming, “China’s Peripheral Security Environment” (Beijing: China International Publishing Agency, 2002) (in Chinese). 23. Eric Teo Chu Cheow, “Asian Security and Re-Emergence of China’s Tributary System”, in China Brief Vol. IV/18, Jamestown Foundation, Washington D.C., 16 September 2004. 24. See Chapter 8.5 in History and Civilization of China (Beijing: China Cultural Publishing Agency, 2003). 25. Zhang, “China’s Peripheral Security Environment”. 26. Eric Teo Chu Cheow, “Asian Nations Hitch their Wagons to China Star”, on Opinion Online, Australia, 6 June 2005. 27. ———, “After the Tsunami Disaster: Human Security is Key”, on PACNET, CSIS-Pacific Forum, Honolulu, Hawaii, USA, 21 January 2005. 28. ———, “Chinese Diplomacy Towards Ethnic Southeast Asian Chinese”, Taiwan Perspective, 8 November 2004. 29. ———, “An Ancient Model for China’s New Power”, International Herald Tribune, 21 January 2004. 30. ———, “Towards an East Asian Community”, Internationale Politik und Gesellschaft 4 (2002), Friedrich-Ebert Stiftung, Bonn, German, autumn 2002, and Teo, “Asian Nations Hitch their Wagons to China Star”. 31. From Chinese media, such as People’s Daily, China Daily and others, 2005. 32. In publications of the Asian Development Bank (ADB) in Manila, Philippines, and ADB Institute (ADBI) in Tokyo, Japan, about the Greater Mekong Subregion (GMS). 33. Chinese and Filipino media in October 2004. 34. From JICA sources based in Vientiane, Laos. 35. Whilst in Pakse, South Laos, on holiday in December 2004, I visited the Chinese Chamber of Commerce in this small town and was invited to tea by a Chinese-Laotian official, who was delighted to speak Zhaozhou dialect with me and then revealed that Beijing had contributed immensely to Chinese education in Laos and in his town.

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36. Eric Teo Chu Cheow, “Mekong Summit Faces Up to Challenges”, China Daily, 12 July 2005. 37. ———, “China’s Rising Role, Soft Power and Influence in Asia”. 38. ———, “Geo-strategic Imperatives of the East Asia Summit”, on PACNET #55, CSIS-Pacific Forum, Honolulu, Hawaii, USA, 16 December 2005.

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16 ASEAN-China ER Biblio

358

11/7/06, 4:44 PM

Index

359

Index A Accelerated Tariff Elimination, 98 agency cost, 170, 171, 187, 188 Agency for Coordination of Mekong Tourism Activities, 287 Agreement on Accelerated Tariff Elimination under the Early Harvest Programme, 95 Agreement on Commercial Navigation on Lancang River, 105 Agreement on Trade in Goods, 96 Agribank, 162 agricultural productivity, 29 agricultural products Early Harvest programme, 91 agricultural taxes elimination of, 56 agriculture, importance of, 29 aid definition of, 251, 252 technical training as form of, 257, 258 air pollution, 28 alternative fuel, 247 anti-dumping measures, 123–26 anti-subsidies duties, 124 arbitral tribunal, 127, 128 ASEAN Bond Corporation, 33

17 ASEAN-China ER Index

359

ASEAN Bond Fund, 33 ASEAN Centre of Contemporary Chinese Studies, 314 ASEAN Competitiveness Study, 34 ASEAN-China bilateral investment, 204 ASEAN-China bilateral trade commodity structure of, 75 intra-industry trade indices, 76, 77 shift in structure of, 74 ASEAN-China Business Council Meeting, 296 ASEAN-China cooperation, 7 future East Asian Community, 328– 35 human resource development, 298 information and communication technology, 298 ASEAN-China Cooperation Fund, 9 ASEAN-China Economic Forum: Economic Cooperation and Challenges Ahead, 1 ASEAN-China economic relations, 1, 11, 146–65 strategic dimensions, 318–38 strategic implications, 295–317 ASEAN-China energy cooperation, 226–49

11/7/06, 4:45 PM

Index

360

ASEAN-China EPG Report, 65 ASEAN-China Expert Group on Economic Cooperation, 79, 315 ASEAN-China financial cooperation, 7, 166–202 final stage, 196, 197 market or policy driven, 197 ASEAN-China Free Trade Agreement (ACFTA), 4, 6, 38, 39, 59, 86– 111, 112 background, 113–14 conciliation, 127 contingency measures, 121, 126 contingency measures, under, 121– 23 dispute settlement, 126–32 dispute settlement procedures, 126– 28 driving Asian bond market, 7 Early Harvest Programme (EHP), see Early Harvest Programme formally proposed by Zhu Rongji, 163 framework agreement, 91–93 implications of non-bilateralism, 138, 139 international treaty, as an, 132 legal nature, 136–38 maximum period for safeguard action, 126 mediation, 127 more WTO in nature, 140 negotiation on framework, 90, 91 negotiation on investments, 104, 105 non-tariff trade barriers, 119, 120 norm no roster of arbitrators, 127 normal liberalization arrangement, 117 other dispute mechanisms, 128, 129 proposal, 87 quantitative restrictions, 119, 120 regional integration, in, 107

17 ASEAN-China ER Index

360

retention of contingency policies, 5 rules of origin issues, 120, 121 significance, 130 tariff liberalization arrangements, 118, 119 tariff reduction and elimination programme, 115 tariff reduction programme, 115, 116 tribunal, 5 ASEAN-China Free Trade Area, 72, 78, 79, 150, 253, 300 rules of origin, 96 ASEAN-China investment cooperation, 203–25 constraints, 223 ASEAN-China Joint Cooperation Committee, 296 ASEAN-China political relations, 88 ASEAN-China relations regional trust and confidence, 319– 21 ASEAN-China Senior Officials Consultation, 296 ASEAN-China services deals Cambodia, in, 158, 159 ASEAN-China services trade and investment, 162 ASEAN-China Summit, 87, 88, 106 eighth, 92, 300 November 2001, 89 ASEAN-China trade, 299, 300 characteristics, 214 export similarity index between China and ASEAN, 81 increase in, 88 ASEAN-China trade in services, 157, 158 ASEAN-China Trade Negotiation Committee (TNC), 91 ASEAN-China trade relations, 67–85 1950s to 1970s, 68, 69 advantages, 78, 79

11/7/06, 4:45 PM

Index

361

ancient times, 68 bilateral trade indices, 73 disadvantages, 82 impact of political issues, 82 origin, 67–69 progress, 69–78 prospects, 78–82 trade value, 70, 71 tributary relation in ancient times, 83 ASEAN Declaration, 133, 144, 145 ASEAN Economic Community (AEC), 32, 150 economic integration, 33 roadmap, 46 ASEAN, export of natural resources, 4 ASEAN Foreign Minister Conference, 253 ASEAN Framework Agreement on Services (AFAS), 6, 33, 146, 150, 151 sector commitments, 151 ASEAN Free Trade Area (AFTA), 87, 110, 150, 190 ASEAN full air services liberalization, 48 ASEAN-Japan Comprehensive Economic Partnership (AJCEP), 107 ASEAN investments China, in, 204 ASEAN-Mekong Basin Development Cooperation, 87, 105, 299 ASEAN member states bilateral negotiation with China over elimination of products from tariff lines, 97 ASEAN Ministerial Meeting 24th, 296 ASEAN oil-producers, 46 ASEAN Products City (Dongmeng Shangcangcheng), 61 ASEAN regional development cooperation, 34 ASEAN Regional Forum (ARF), 88

17 ASEAN-China ER Index

361

ASEAN Secretariat, 34 ASEAN Treaty of Amity of Cooperation (TAC), 38, 46 ASEAN Vision, 2020, 33 ASEAN+3, 3, 32, 88, 175, 176, 178, 180, 196 ASEAN+3 FTA non-participation of Japan and Korea, 92 ASEAN+3 National Tourism Organizations, 299 ASEAN-4, 82, 92, 100, 105 members, 85 ASEAN-5, 26, 105 FDI inflows, 206 market for China, 25 members, 85 size of bond market, 183 ASEAN-6, 92, 97, 117, 118 members, 84 Asia Cooperation Dialogue (ACD), 291 Asian bond definition of, 180, 181 Asian Bond Fund (ABF), 179 designed to address weak demand, 184 Asian bond market, 6, 7, 178 cross-border issuance, 179, 180 current obstacles, 181 global perspective, 171, 172 impact of history, 169 indexed investment, 195 infrastructure, 169 infrastructure of, 190 largely untapped, 167 legal tradition, 169 macro-economic policy, 170 market liquidity and scale issues, 181, 182 premature, 169, 170 progress within ASEAN+3 framework, 175, 176 structural characteristics, 169

11/7/06, 4:45 PM

Index

362

Asian Bond Market Initiative (ABMI), 178, 185 Asian countries financial structure of, 167, 168, 169 Asian Currency Unit, 178 Asian Debt Reduction Plan, 262 Asian Development Bank (ADB), 7, 105, 178, 258, 271 Asian-EU Summit Meeting (ASEM), 49 Asia-Europe Business Forum, 87 Asian financial crisis, 14, 260 recovery, 14 Asian foreign reserves, 173 Asian Investment Agreement (AIA) amendment in 2001, 111 Asian Monetary Fund, 7, 175 Asian Monetary Unit, 177, 196 benefits, 192 Asian overseas investments, 173 Asia-Pacific Economic Cooperation (APEC 21), 32 Asia-Pacific FTA, 42 Association of Southeast Asian Nations (ASEAN) advantage of location, 38 ambiguous legal personality, 139 balance of payments surplus, 41 business, challengers for, 61 business network with China, 50– 66 challenges, 33–37 China’s diplomatic success with, 306–308 China’s economic transformation, contribution to, 52 commodity structure of countries, 80 development of closer ties with China, 60, 61 economic relations with China, significance of, 62, 63 energy output, 228

17 ASEAN-China ER Index

362

expansion of business scope in China, 64 export-similarity indices, 212 exports to China, 8 extension of China’s business interests, 59 external challenges, 37–45 external relation practices, 135 FDI flows to China, 204 FDI inflows, 205 foreign direct investment in China, 7 geographical proximity with China, 1 guarantee against nationalization and expropriation, 219 imports, 211 information communication technology, 3 internal strength, 45 international legal personality, 133, 134 investors in China, 52 lobbying tactic, 35 oil resources, 43 regional assistance to, 333–35 regional buffer role, 4, 43 rising numbers visiting China, 158 role of services, 149, 150 schemes unfulfilled, 2 shortcomings, 134 source of natural for China, 78 success, 32 top exports, 210 total exports, 209 trade with China, 101, 102 trading partner with China, 5 upsurge in services trade, 149 Australia-China FTA, 38 Australia-Malaysia FTA, 38 Australia-New Zealand Closer Economic Relations Trade Agreement (CER), 38

11/7/06, 4:45 PM

Index

363

automobile industry, China, 13, 14 Ayeyarwady-Chao Phraya-Mekong Economic Cooperation Strategy (ACM-ECS), 291, 292

B Bahrain, 44 Bandung Conference, 68 bank-based financial system versus market-based financial system, 170 banking, 153 China’s commitments under GATS, 154 Bank of China, 19, 160 Bangkok-Kunming highway, 258 Bangladesh-India-Myanmar-Sri LankaThailand Economic Cooperation (BIMSTEC), 9 Baogang, 51 barter trade, 59 “Beijing consensus”, 40 BeiDa publication, 327, 328 bilateral dispute settlements, 131 Bilateral Swap Arrangements, 300 bilateral swaps Chiang Mai initiative, 176 BIMSTEC FTA, 41 bond issuances, 7 bond market Asian see Asian bond market bond meeting purpose of, 200 bond trusteeship, 200 border trade China and CLMV countries, 281, 282 British Broadcasting Corporation (BBC) World Service Poll, 40 Brunei conformity to specific requirements, 142 business enterprises evolution, 50–52

17 ASEAN-China ER Index

363

business networks ASEAN and China, 50–66

C Cagamas Berhad, 201 Cambodia Highly Sensitive List, 97 investment target of China’s SME’s, 61 services trade with China, 158 capital account liberalization in China, 189 capital account liberalization, 7 capital account surplus, 19 capital flow ratio, 174 capital flows between Asian economies and US, 171 CapitaLand, 160 joint venture with Chengdu Zhixin Industrial Group, 160 Carrefour, 58 Central America Free Trade Agreement (CAFTA), 40 Central Region, development of, 57 Centre for Tourism Resource Management, 299 Changchun Automotive, 63 Charoen Pokphand (CP), 3, 53–61, 64 expansion of sale agents’ network, 55 focus on organized retail, 57 joint venture partner in government-owned companies, 54 listing on stock exchanges, 53 nature of business, 53 reformation of China’s rural sector, 53 venture with Wal-Mart, 57 workforce in China, 5 see also Chia Tai; Zhengda Jituan

11/7/06, 4:45 PM

Index

364

Chiang Mai initiative, 7, 176, 291, 300 Chia Tai, 53 China aid to Southeast Asia, 250–68 ASEAN’s contribution to economic transformation, 52 ASEAN visitors to, 158 Asian financial crisis, 14 attraction of FDI, 221 attractiveness to ASEAN, 309 automobile industry, 13, 14 balanced growth, striving for, 18 benefit from joint ventures, 8 bond market, 186, 187 capital account liberalization, 189 capital twin surpluses, 20, 22 close proximity with ASEAN, 1 commitments under GATS, 6, 153 commodity structure, 80 concessions on specific goods, 95 development of closer ties with ASEAN, 60, 61 diplomatic successes in ASEAN, 306–308 domestic demand, 24 economic growth, 2 economic growth and inflation, 13 economic relations with CLMV countries, 277, 278 energy output, 228 environmental problems, 29 evolution of business enterprises, 50–52 exports, 19 exports to Southeast Asia, beginning of, 68 FDI flows from, 224 FDI flows to ASEAN-5, 205 flexible exchange rate mechanism, 19 focus in aid, 253 foreign direct investment, 13 foreign reserve holding, 15

17 ASEAN-China ER Index

364

foreign reserves, 59 foreign trade in global economic integration, 27 forex reserves, 30 FTA with Gulf Cooperation Council (GCC), 108, 109 GATS progress report, 154 GDP increase, 22 global business development, 62, 63 government prudential supervision, 7 gross domestic product, 2, 12 high growth, 2, 12–15 history of opening up, 50 home-grown entrepreneurship, 51 imports, 211 influence in Southeast Asia, 301, 301–306, 302 labour force, 21 link in production networks, 15 major imports, 215 mammoth market, 153 market for Indonesian wood, 72 Middle East, relations with, 8 Ministry of Commerce, 79 more balanced policies, 15 Most Favoured Nation (MFN) Treatment to states, 92 need for ASEAN’s natural resources, 7 oil from Middle East, 227 oil reserves, 227 opening up and reform policy, 69 origin of oil imports, 229 outward FDI, 217 over-production, 17 pattern of trade balance, 26 peasants, 29 perception of world order, 130 political relations with CLMV countries, 276, 277 private enterprises in, 200 rise as a soft power, 40

11/7/06, 4:45 PM

Index

365

rising consumerism, 3 rising international economic profile, 18–21 rising role, 338 role of services in, 152 share of FDI in ASEAN-5, 207 signing of Treaty of Amity and Cooperation 270, 271 Socialist Market Economy, 271 “soft power”, 325–28 “soft power” projection in ASEAN, 321–25 sources of growth, 21–27 strategic basis for push into Southeast Asia, 310, 311 top exports, 210 total GDP, 18 trade balance, 26 trade deficit, 26 trade surplus, 20 trade with ASEAN, 89, 101 trade with CLMV countries, 278, 279 under-developed financial market, 19 upsurge in services trade, 149 urban growth, 3 using government funds to involve business participation, 256, 257 WTO commitments, 152, 153 China aid assessment, 262, 263 characteristics, 255, 256 focus on infrastructure building, 258 long-term vision, 264 China aid programme research on, 265 China aid programmes, 250 focus, 253 China-ASEAN economic relationship achievement, 140, 141

17 ASEAN-China ER Index

365

China-ASEAN Eminent Persons’ Group (EPG), 63 China-ASEAN expo, 310 China-ASEAN investment cooperation, 216 China-ASEAN joint venture, 213 China-ASEAN relations evolution, 295–99 strategic implications, 301 China-ASEAN trade, 204 figures, 304, 305 goal set, 109 China-ASEAN trade in goods, 99, 100 China bond market macro policies needed, 186 China-CLMV trade, 280 China Construction Bank, 160 China Development Bank, 259 China’s economic growth broadly based, 16 domestic demand, 24 China international aid programmes, 264 China National Bureau of Statistics (NBS), 18, 21 China National Offshore Oil Cooperation (CNOOC) 213, 260 China-Pakistan FTA, 108 China’s Market Economy Status ASEAN’s recognition, 97 China’s Ministry of Commerce, 254 Chinese businesses, partnering with, 63, 64 Chinese capital mobilization tradition, 3 Chinese companies collaboration with ASEAN companies, 63 Chinese economy changing structure, 22 present state, 15–17 Chinese enterprises going abroad in search of new business, 59

11/7/06, 4:45 PM

Index

366

Chinese FDI, 11 Chinese government attention to good economic relations, 69 support for research and developments, 60 Chinese investments ASEAN, in, 331, 332 Southeast Asia, in, 254 Chinese leadership, 30 Chinese world order, 83 Closer Economic Partnership Arrangement (CEPA), 5 with Hong Kong, 104 with Macau, 104 Closer Economic Partnership (CEP), 38 CNOOC, 58 coal, 231 transportation of, 237 coal-to-liquid technology, 8 Cold War small impact on trade with Southeast Asia, 69 collateralized bond obligations, 179 collective enterprises, 51, see also Jitiqiye collective oil-purchasing team, 23 common currency arrangement, 177, 178 common currency basket advantages, 192 Common Effective Preferential Tariff (CEPT), 33, 290 Communist Party of China, 16 competitiveness survey Asian MNCs, 58 Comprehensive Economic Cooperation Agreement (CECA), 38 concessions China, by, 95 conciliation, 127, 131

17 ASEAN-China ER Index

366

construction industry, 22 Corporate Control Theory (CCT), 188 corporate governance, 170, 171, 187, 188 countertrade, 5 countervailing measures, 123–26 credit enhancement risk control, 193 credit guarantees, 194 Criterion of Credit Bureau Rendering Bond Rating Report to Security Companies, 200 cross-border investment cooperation, 284, 285 impediments, 192 cross-border merger and acquisitions, 148 cultural jurisdiction, 10 current account surplus, 19

D DBS Bank, 161 Declaration on the Conduct of Parties in the South China Sea, 297 debt financing faster growth in, 198 demand analysis, 22 Deng Xiaoping, 12, 28, 50, 51, 253, 295 original intention of reforms, 56 Development Assistance Committee (DAC), 251 development cooperation, 251 direct foreign investment (DFI), 35 direct marketing relaxation in China’s countryside, 55 disaster relief, 260, 261 Dispute Settlement Mechanism (DSM), 96, 100, 126 implications, 129, 130 Doha Development Agenda (DDA), 40

11/7/06, 4:45 PM

Index

367

domestic external finance, 168 domestic savings, 16 Dubai, 43

E Early Harvest Programme (EHP), 5, 72, 92, 93–95, 116, 117, 137, 138 ACFTA Tariffs, 39 agricultural products, for, 91 arrangement, 94, 95 China’s exclusion list, 142 concessions, 116, 117 implementation, 98 sensitive track, 96 East Asia Community, 10, 109 East Asia Economic Group (EAEG), 86 East Asia Summit (EAS), 40, 109, 311 geo-strategic imperatives, 338 East Asia Vision Group, 311 Economic and Social Commission for Asia-Pacific (ESCAP), 42 economic growth, negative impact, 17 Economic Partnership Agreement (EPA) Singapore, with, 107 economic policymakers, important issues, 16 economic relations, 299, 300 Eichengreen, 179 Eichengreen and Luengnaruemitchai’s five broad hypotheses, 169, 170 Eight Principles, 259, 266 electricity, 232 conveyance of, 237 Eleventh Five-Year Programme, 15, 30 Emaar, 49 Eminent Persons Group, 310 energy conservation, 234, 235 energy consumption efficiency standards, 234, 235

17 ASEAN-China ER Index

367

energy cooperation development of gas and hydropower potential, 233 energy subsidization elimination of, 238 energy supply cooperation, 227–33 energy use peer review system, 241 environmental degradation, 28 European Commission outline for common EU energy policy, 243 European Community, 139 European Court of Justice, 131 European Union agreement signed with China, 31 fostering regional energy cooperation, 245 growing protectionism in textile industry, 16 European Union energy cooperation relevance of, 242, 243 exchange rate, 21 exchange rate agreement, 191, 192 exchange rate coordination, 193 exclusion lists, 95 Executives’ Meeting of East Asia and Pacific Central Banks (EMEAP), 179 export dependence, 83 exports, 19

F feed manufacturing, 54 Filipino-Chinese movies, 322 financial cooperation rationale for, 180 roadmap, 190 financial institutions diversified, 198 financial instruments lack of diversity, 167 financial structure evolution, 167

11/7/06, 4:45 PM

Index

368

fixed asset investments, 24, 30 growth in, 23 flying geese model, 39, 65 food processing industry, 63 foreign affiliate trade in services (FATS), 147 foreign direct investment (FDI) China, in, 7 efforts to attract more, 17 flow from China, 206 flows into ASEAN countries, 205 into China, 13 inflow, 19 Mekong basin, 284, 285 statistics, 148 foreign exchange reserves, 21 foreign reserve holding, China, 15 foreign reserves China, of, 59 invested in US dollars, 201 Forum of East Asia-Latin America Cooperation (FEALAC), 49 Framework Agreement, 136, 137, 138, 145 Framework Agreement on Comprehensive Economic Cooperation, 4, 67, 72, 136 application of WTO provisions, 97 exclusion lists, 95 protocol to amend, 93 rules of origin, 95, 96 trade in services, 100, 101 Free Trade Agreements (FTAs), 38 Free Trade Area of the Americas (FTAA), 40 freight transportation China’s commitments under GATS, 156, 157

G gas pipelines trans border, 230

17 ASEAN-China ER Index

368

GCC Unified Economic Agreement, 44 General Agreement on Tariffs and Trade (GATT), 119, 120 dispute settlement, 119 General Agreements on Trade in Service (GATS), 6, 146, 151 China’s commitments, 153 classification of trade in services, 147 progress report for China, 154 Getihu, 52 GIPA 2005–2008, 164 global economic integration, 27 global financial imbalance, 171, 172 globalization, 62 prospect of ACFTA in, 107 Golden Quadrangle, 291 government-to-government dialogues, 35 Greater Mekong Basin development, 92 Greater Mekong Sub-region Development, 105–106 Greater Mekong Sub-region (GMS), 61, 69, 162, 261, 271, 333 basic indicators, 273 development programme, 88 integration, 290 population, 294 social indicators, 275 tourism, 286 Greater Mekong Sub-region Economic Cooperation, 291 Greater Mekong Sub-region (GMS) Summit, 105, 106 gross domestic product China, 2 Growth Triangle, 271 Guangzhou Container Terminal, 160 guanxi, 224 Gulf Cooperation Council (GCC), 5, 42 FTA with China, 108 Gulf of Tonkin, 297

11/7/06, 4:45 PM

Index

369

H Haier, 52 Haikou, 52 Harmonized Commodity Description and Coding System of World Customs Organization, 110 Hanoi Plan of Action, 33 Harvard Business School case studies on CP, 66 Highly Sensitive List, 97, 118 Hin Leong Trading, 44 Hong Kong, 5, 22, 25 CEPA, 104 Huawei, 52, 259 Hu Jintao, 258 humanitarian assistance, 260, 261 hydropower, 232 development of, 233, 234

I ICT-driven globalization, 47 import dependence, 83 income disparities, 15 income distribution problems of, 18 income gap rural and urban areas in China, 56 India relations with China, 312 Indonesia coal reserves, 231 continuing problems, 36 falling oil production, 227 trade with China, 159 Indonesian-Chinese community, 322 Industrial and Commercial Bank of China, 162 Industrial Bank of Korea (IBK), 179 industrialization-cum-urbanization, 22 industrial production growth in, 23

17 ASEAN-China ER Index

369

information and communication technology (ICT) importance of, 37 Institute of Defence and Strategic Studies, 247 Institute of Southeast Asian Studies (ISEAS), 34 insurance business China’s commitments under GATS, 154 Integrated Logistics Bhd, 159 inter-ASEAN integration, 34 Interim Provisions on Guidance for Foreign Investment, 221 international aid definition, 251 International Energy Agency, 239, 240 International Financial Corporation, 7 International Institute for Management Development, 152 International Law Commission, 138, 139 International Monetary Fund (IMF), 41 Balance of Payments (BOP) Statistics, 147 international organizations treaty-making powers, 132, 133, 144 intra-ASEAN tariffs relatively low, 220 intra-ASEAN trade, 32 IMF statistics, according to, 108 intra-industry Trade (IIT), 209 estimates for ASEAN trade with China, 212 Grubel-Lloyd, 209 intra-Mekong Basin Trade, 279 intra-regional trade, China and CLMV countries, 278, 279 investment cooperation, forms, 203, 204 investments negotiations on, 104, 105

11/7/06, 4:45 PM

Index

370

Islamic banking and finance, 46 Islamic economics, 3 Itoyokado, 58

J Jackson, John, 125 Japan, 25 an example for China, 263, 264 corporate scandals, 2 FTA with ASEAN states, 107 overseas development assistance, 9 relations with China, 312 trading activities in ASEAN, 65 Japan Bank for International Cooperation (JBIC), 179 Japan-India FTA, 42 Japan-Malaysia FTA, 38 Japan-Thailand FTA, 38 Jinchuan Shanghai Bao Steel Company, 259 Jitiqiye, 51 Joint Declaration on the Conduct of the Parties in the South China Sea, 231 joint industrial projects, 223 Jurong Island Petrochemical Park, 44

K Kanissorn Navanugraha, 91 knowledge-based economy, 36 Korea-ASEAN Summit, 108 Korea-Singapore Free Trade Agreement (KSFTA), 107 Kra Isthmus, 238 Kunming hub for ASEAN-China business connections, 61 Kunming-Bangkok road, 106 Kunming-GMS Summit, 334 Kuzets, Simon, 28, 31

L Laos New Economic Mechanism, 271

17 ASEAN-China ER Index

370

leaders diplomacy, 308 Lenovo, 52, 58, 60 Lewis, W. Arthur, 28, 31 Lianxiang (Lenovo), 52 livestock integration, 54 locus standi, 131 Lotus super centre chain stores, 57 low-cost airline business development of, 63

M Macau, 5 CEPA, 104 macro-economic control efforts, 16 macro-economic policy capital account liberalization, 182, 183 M&A in services between developed countries, 149 M&A sales and purchases, 148 Mahathir Mohamad proposal for East Asia Economic Group (EAEG), 86 Malaysia 2020 Vision, 36 net exporter of oil, 227 relations with China, 307 trade with China, 159 visitors from China, 160 Malaysian companies projects in China, 159, 160 Manual on Statistics of International Trade Statistics, 147 manufacturing industry, 22 Mao Zedong, 252 maritime Silk Road, 68 Masta Engineering and Design Inc., 218 mediation, 127, 131 Meiji Restoration, 28 Mekong Basin, 9, 261, 262 Mekong Committee, 270 Mekong River, 269 abundant fishery, 270

11/7/06, 4:45 PM

Index

371

Mekong River Commission, 9, 291, 293 Mekong-Ganga Economic Cooperation, 9 Memorandum of Understanding on Cooperation in Information and Communications Technology, 299 Memorandum of Understanding on Medium and Long-Term Plan of Agricultural Cooperation, 298 Metro, 58 MFN tariff rates reduction, 97 Middle East oil exports to China, 227 multilateralism, 141 multilateralism approach, 137, 138 multinational corporations (MNCs), 35 Asian, 58 Chinese, 59, 60 foreign direct investment in China, 51 retailing business in China, 58 significance in China, 50 Thailand, 53 Myanmar Open-door Policy, 271

non-tariff barriers, 119, 120 timetable for elimination of, 97 normal liberalization arrangement, 117, 118 Normal Track elimination of goods on, 99 tariff reduction for goods on, 99 North American Free Trade Agreement (NAFTA), 39, 40, 87, 129 nuclear power, 232, 233 Nuctech Company, 161

N

P

Nangyang, 82 national energy markets liberalization, 238 National People’s Congress, 15 tenth plenum, 56 National Tourism Authority of Lao PDR, 287 natural gas dependence low, 229 large scale production, 230 natural resources ASEAN exports to China, 4 Ningbo Commercial Bank, 161 non-aligned movement (NAM), 45

pai hwa, 323 Pearl River Delta, 52 peasantry, 2 domestic implosion, 2 Pecking Order Hypothesis, 188 personal income increase in, 58 “Petrodollar recycling”, 43 petroleum reserves building a network, 239, 240 Philippines lowering foreign equity restriction, 219 protection of agricultural sector, 99

17 ASEAN-China ER Index

371

O Official Development Aid (ODA), 251 oil, 227, 228 oil products conveyance of these, 237 oil refineries construction and maintenance, 240, 241 Ong Keng Yong, 135 Organization for Economic Cooperation and Development (OECD), 251 “original sin”, 202 Overseas Chinese Banking Corporation (OCBC), 160

11/7/06, 4:45 PM

Index

372

pollution, impact of high growth, 17 Port of Tanjung Pelepas investment by Cosco Pacific, 159 poultry integration business China, in, 54 poultry production modern factory style, 55 poverty, 18 predatory pricing, 123 private enterprises China, in, 200 private sector companies involvement in China’s stimulus package for rural sector, 56 Product/Input Market Interaction, 188 Professional Exchange, 152 protectionism use of anti-dumping measures, 124 PSA International, 160 public-private partnerships, 35 purchasing power parity (PPP), 18

Q Qatar, 44 Qingdao Liuting Airport, 160 quantitative restrictions phasing out of, 142

R redistribution of growth, lacking in China, 2 re-engineering, 48 regional development policies, 28 regional gas development of, 233, 234 regionalism, 141 definition, 91 regional trade agreements, 33 renewable energies, 234 renewable energy resources, 8 research and development support of Chinese government, 60

17 ASEAN-China ER Index

372

resource allocation improvement, 125 retail sales increase in, 23 risk control demand side, on, 195, 196 supply side, on, 194, 195 Rules for the Navigation Charges of Commercial Ships on the Upper Mekong River, 162 rules of origin, 95, 96, 120, 121 rural-urban disparities, 17 rural-urban income gaps, 29

S Sannong question, 56 securities China’s commitments under GATS, 155 security concerns, 34 Sensitive Track, 118 services role in ASEAN, 149, 150 trade and investment, 6 services trade global trend, 147–49 upsurge in ASEAN, 149 upsurge in China, 149 securitization credit enhancement, 193 derivative product, 194 severe acute respiratory symptom (SARS), 34 Severino, Rodolfo C., 134, 135, 145 Shanghai Automotive Industry Corporation, 218 Shanghai Ministry of Foreign Trade and Economic Commission (MOFTEC), 222 Shangri-la Hotel and Property Group, 64 Shantou, 52 shareholders’ rights, 170

11/7/06, 4:45 PM

Index

373

short-term liquidity support, 176 Shougang, 51 Shougang (Capital) Iron and Steel Corporation, 217 Singapore, 3, 22 Chinese perspective on, 307 FTAs signed, 42 international aid focused on education and training, 264 knowledge-based economy, 36 projects in China, 160, 161 tariff reduction on certain goods, 142 world’s third largest oil refiner, 43 Singapore Airport Terminal Services joint venture with China Aviation, 160 Singapore-Kunming railway, 87 Sino-ASEAN trade, 10 increase in, 329–31 small-and-medium enterprises (SMEs) China, in, 52 Songhua River, 29 sophisticated diplomacy, 320 South Asian Association for Regional Cooperation (SAARC), 41 South Asian Free Trade Area (SAFTA), 41 Southeast Asia ancient times, in, 62 China’s aid, 252 growing bilateral assistance, 322, 333 South Korea, 25 South-South aid, 251 Spratly Islands, 231 Standard International Classification System (SITC), 74, 84 state-owned enterprises government’s implicit guarantee to, 189 state-owned enterprises (SOEs), 51 corporatization, 51

17 ASEAN-China ER Index

373

Static Tradeoff Model (STM), 188 Sung dynasty, 68

T Taiwan issue, 10, 82 tariff liberalization arrangements, 118, 119 tariff measures importing nation, 122 tariff reduction goods in Normal Track, 99 tariffs cuts for certain products, 93 multilateral approach, 116 TCL, 51 telecommunications China’s commitments under GATS, 155, 156 market access, 153 restricted field, 161 Temasek Holdings, 160 textile and clothing industry quota restrictions, 31 textiles and clothing, 25 Thailand Agreement on Accelerated Tariff Elimination under the Early Harvest Programme, 95 Charoen Pokphand Group (CP), 53 cooperation with Chinese companies, 161, 162 exports to China, 98, 99 implementation of EHP, 98 lowering foreign equity restrictions, 15 Thailand-Pakistan, FTA, 42 Thai multinational corporation Charoen Pokphand, 3 Thai Rung, 63 Thaksin Shinawatra, 98 Thompson Electronics acquisition by TCL, 60 Tianxia, 130

11/7/06, 4:45 PM

Index

374

TIG Agreements, 117, 119, 120, 122, 141, 143 Annex 3, 120, 121 tourism, 9, 153, 299 China’s commitments under GATS, 156 Greater Mekong Sub-region, 286, 287 potential for joint ventures, 223 Tourism of Authority of Thailand, 287 tourist arrivals, 289 trade and investment data, 11 trade and investments services, 6 trade dependence, 83 trade in goods negotiation beyond EHP, 96, 97 Trade in Goods Agreement ACFTA Tariffs, 39 trade in services negotiations on, 100 trade intensity index, 83 trade surplus, 25 Trans-ASEAN Gas Pipeline (TAGP), 231 Trans Asia Logistics Company Limited, 161 trans-border gas pipelines, 230 Treaty of Amity and Cooperation (TAC), 135, 298 tribute trade ancient times, 68 tsunami, 255, 260, 262

U UNCTAD World Investment Report, 163 United Arab Emirates, 43 United Nations China’s admission, 69 United States capital inflow to GDP, 174 China’s main market, 25

17 ASEAN-China ER Index

374

protectionism in textile industry, 16 relations with China, 312 relations with Myanmar and Cambodia, 306 trade deficit and net capital inflow, 172 UNOCAL, 58 urbanization effect of, 18 urban-rural social issues China, 2

V very large crude carriers (VLCCs), 44 Vienna Convention on the Law of Treaties, 132, 138 Vietnam, 162 cooperation in Greater Mekong Sub-region, 105 relations with China, 307 signing of Treaty on the Land Border, 297 Vietnam National Administration of Tourism, 287 Vietnam War China aid programme, 265

W Wal-Mart, 58 partnering with CP in China, 57 water pollution, 28 Weatherbee, Donald E., 87 Wen Jiabao, 19, 29, 98 Wenzhou merchant grouping, 61 Wong, John, 2 World Bank, views on China, 28 World Competitive Yearbook, 152 world order Chinese perception, 130 World Trade Organization (WTO), 33, 51 China’s accession, 5, 12, 149 definition of regionalism, 91

11/7/06, 4:45 PM

Index

375

dispute settlement, 129 growing interest in services, 149 MFN tariff, 123 “WTO effect” China, on, 2, 13

Yasuo Tanabe, 249 Yunnan Province, 98 border trade with GMS, 282, 283 trade with CLMV countries, 28, 282

Z X Xiamen, 52 xiaokang, 18 Xiwang emergence, of, 54

Y Yangling Hi-tech Agricultural Demonstration Center, 57 Yangon-Kunming railway, 248

17 ASEAN-China ER Index

375

Zhejiang Wahaha production of mineral water in Indonesia, 60 Zhengda Jituan, 53 Zheng He, 68, 324 Zhongshihua (SinoChem), 51 Zhou Enlai, 252 Zhu Rongji, 12, 72, 87, 93 Zone of Peace, Freedom and Neutrality Declaration, 145

11/7/06, 4:45 PM

Index

376

17 ASEAN-China ER Index

376

11/7/06, 4:45 PM