In South-East Asia, unease over new free trade zone

In South-East Asia, unease over new free trade zone

Kuala Lumpur: When the clock strikes midnight on New Year’s eve, China and 10 South-East Asian nations will usher in the world’s third-largest free trade area. While many industries are eager for tariffs to fall on everything from textiles and rubber to vegetable oils and steel, a few are nervously waiting to see whether the agreement will mean boom or bust for their businesses.

Trade between China and the 10 states that make up the Association of Southeast Asian Nations (Asean) has soared in recent years, to $192.5 billion (Rs9 trillion now) in 2008, from $59.6 billion in 2003. The new free trade zone, which will remove tariffs on 90% of traded goods, is expected to increase that commerce still more.

The zone will rank behind only the European Economic Area and the North American Free Trade Area in trade volume. It will encompass 1.9 billion people. The free trade area is expected to help Asean countries increase exports, particularly those with commodities that resource-hungry China desperately wants.

The China-Asean free trade area has faced less vocal opposition than the European and North American zones, perhaps because existing tariffs were already low and because it is unlikely to alter commerce patterns radically, analysts say.

But some manufacturers in South-East Asia are concerned that cheap Chinese goods may flood their markets once import taxes are removed. Indonesia plans to ask for a delay in removing tariffs from items like steel products, petrochemicals and electronics.

“Not everyone in Asean sees this FTA as a plus," said Sothirak Pou, a visiting senior research fellow at the Institute of South-East Asian Studies in Singapore.

Asean and China have gradually reduced many tariffs in recent years. However, under the free trade agreement, signed in 2002, China, Indonesia, Thailand, the Philippines, Malaysia, Singapore and Brunei will have to remove almost all the tariffs in 2010. Asean’s newest members—Cambodia, Laos, Vietnam and Myanmar—will gradually reduce tariffs in coming years and eliminate them all by 2015.

Most of the goods that will become tariff-free in January, like manufactured items, are now subject to import taxes of about 5%. Some agricultural products and parts for motor vehicles and heavy machinery will still face tariffs in 2010, but will gradually be phased out.

In recent years, China has overtaken the US to become Asean’s third-largest trading partner after Japan and the European Union. The overall trade balance has shifted slightly in China’s favour, although there are significant differences among South-East Asian countries’ trade balances, said Thomas Kaegi, head of macroeconomic research for the Asia-Pacific region at UBS Wealth Management Research.

Singapore, Malaysia and Thailand have only small trade deficits with China, while Vietnam’s has grown sharply. In 2008, Vietnam exported items worth $4.5 billion to China but imported about $15.7 billion worth of Chinese goods.

While competing with more Chinese imports may pose new challenges for Asean manufacturers, increasing their access to China’s 1.3 billion people could give significant benefits, say analysts.