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China, ASEAN Push For Free Trade Zone - 2002-11-09

China and the members of ASEAN are planning to ease tariff and trade barriers with the eventual goal of creating a free trade zone in 10 years. Beijing's motives for pushing the agreement are not simply economic. It could be the world's largest trading block, covering a large part of Asia with a population of 1.7 billion people.

The issues surrounding the trade agreement are complex, according to analysts, but the ten ASEAN nations and China have good, but differing reasons for coming to terms.

For Southeast Asian nations, China looms large. According to Rodolfo Severino, the secretary general of the Association of Southeast Asian Nations, ASEAN nations cannot afford to ignore China. "Well certainly it is a competitive challenge but ASEAN sees the rise and opening up of China also as an opportunity, China is a big market out there, you can't hold it back nor should you," said Rodolfo Severino.

For ASEAN, a trade agreement might create efficiencies, unifying a market that a report commissioned for the ASEAN summit called "fragmented" and "unattractive to investors" compared with China to the north.

ASEAN countries lack common product standards and specifications, the report noted, a problem believed to add about 15 percent to the cost of producing consumer goods. A free trade agreement would rectify some of these inefficiencies.

Another hurdle to the trade agreement might be getting ASEAN nations to take down barriers to Chinese imports. Countries like Thailand, Singapore, Malaysia, Indonesia and the Philippines are still recuperating from the 1997 Asian financial crisis, and those countries may not welcome goods produced in China rather than at home.

While a regional free trade zone may look good on paper, Sailesh Jha, chief regional economist with DBS Bank in Singapore, says it may do little to boost commerce or economic growth in Southeast Asia. "The regional trading arrangements give basically preferred trading agreements to the parties involved in that arrangement," he said. "That's the idea. In fact it's discriminatory if you don't belong to a regional trading arrangement."

Others fear that including China in the trade zone would erode ASEAN's manufacturing, which produces computer chips, semiconductors and electronics. Some warn that ASEAN's information technology and service sectors will suffer as China's economy diversifies. Southeast Asian nations have already lost vital manufacturing to China due to its low labor costs.

On the other hand, advocates of the trade pact say China's growing consumer demand for commodities like palm oil, rice, rubber and petroleum will help power ASEAN growth. They say the first round of tariff cuts due in 2003, called the "early harvest" package, will pave the way for Southeast Asia's agricultural products. These products already have gained market share in China's wealthier coastal regions.

While ASEAN countries ponder the effects of doing business with China, academics and economists say Beijing's motives go far beyond business: China hopes the trade agreement will further regional stability.

Political scientist Joseph Cheng at Hong Kong's City University says Beijing's agenda is twofold. "There is [are] obvious economic merits in such a proposal, there's no doubt about it but at the moment it is more a political gesture more than anything else," said Joseph Cheng. "China feels the pressure from the United States and it also worries about the closer security cooperation between the United States and Japan. While China sometimes is seen as a counterweight to American influence, it also tries very hard to maintain some kind of multi-polar balance."

Professor Cheng says Beijing would like to change its neighbors' perception of China as an expansionist power with hegemonic intentions. It wants to create the image as the engine for regional prosperity.

Andy Xie, chief economist of Morgan Stanley Asia agrees. "On balance ASEAN gains economically more than China, for China the issue is much more about regional stability," he said. "And that's why China wants to support Indonesia and that alone would generate enough money for Indonesia to get developed. The key is Indonesia must have a stable political system and China is very willing to work together with ASEAN countries." A new agreement on the disputed Spratly Island is another sign that China considers regional stability its top priority. China signed an accord on the islands on the same day it signed the trade agreement.

China and five other Asian countries claim this collection of tiny islands believed to be rich in oil deposits. The "Declaration of Good Conduct" promises that any future disputes will not result in armed conflict.