ASEAN relation with China

China has been advocating and playing active roles in both multilateral and bilateral free trade area development. Before the 1990s, there was no official relationship between the ASEAN as a grouping and China. In 1991, China founded or recovered its diplomatic relations with all ASEAN members. In 1996, China was upgraded as a dialogue partner of ASEAN. In 2001, China formally put forward the proposal to establish Free Trade Area (FTA) with ASEAN and got an active response. So, bilateral trade between China and the Association of South-East Asian Nations (ASEAN) has expanded very quickly since 2001. In November 2002, China and ASEAN signed Framework Agreement on China-ASEAN Comprehensive Economic Cooperation at the Sixth China-ASEAN Summit in Cambodia. This Agreement provided the legal basis for ASEAN and China to negotiate enabling

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agreements that have led to the creation of the ASEAN-China Free Trade Area (ACFTA).

China signed an agreement on Trading in Goods of the Framework Agreement on Comprehensive Economic Cooperation with ASEAN on 29 November 2004. The agreement is set to reduce and eliminate tariffs on trade in goods between the parties, and establish a mechanism to adjudicate ASEAN-China trade disputes. China-ASEAN Free Trade Area reduced the tariff rate. Tariff cuts started 1 July 2005, and will aim to axe duties on some 4000 types of goods to between zero and five percent by 2010 for the six most advanced ASEAN members, i.e., Brunei and five original member nations. The four less advanced member states – Laos, Vietnam, Cambodia, and Myanmar (Burma) – will have to comply until 2015. The China-ASEAN FTA will allow all members to enjoy the benefits from trade effects, that is, enjoy more favorable trade and investment treatment than the World Trade Organization can offer (Tang Yihong, 2006). Subsequently, the Economic Ministers from ASEAN and China at their 10th ASEAN Economic Ministers and the Minister of Commerce (AEM-MOFCOM) Consultations in August 2011 in Manado, Indonesia, endorsed the establishment of the ASEAN-China FTA Joint Committee. The Joint Committee's main tasks will include overseeing, supervising, coordinating and reviewing the implementation of the Agreement.

The China–ASEAN Free Trade Area (ACFTA) is one of the largest free trade areas in terms of population, gross economic outputs and trade volume. By the end of 2005, the GDP of ACFTA reached US$2971.1bn and the total value of

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imports and exports reached US$1394.8bn. The development and maturation of this free trade area will have significant impacts on the Chinese and the ASEAN economies, as well as far-reaching implications for the economy and trade structure of the whole world . China's motivations in offering ACFTA are both political and economic. ACFTA is part of confidence building that includes China's participation in the ASEAN Regional Forum and China's accession to the ASEAN Treaty of Amity. ACFTA is to allay ASEAN concerns that China poses a threat with its economic ascendency by providing preferential access to its rapidly growing domestic market.

China is also eyeing the ASEAN region for its various natural resources, especially oil and its market of 560 million consumers. Closer economic relations with ASEAN will enable China to build its geopolitical clout in Southeast Asia and counterbalance the influences of Japan and US. The swift progress of ACFTA has hastened Japan as well as the US, South Korea and India to propose economic cooperation arrangements with ASEAN as well ASEAN governments welcomed the China initiative for a number of reasons. China is a huge and dynamic economy and its growing demand for ASEAN goods and services could serve as a new engine of growth. Chinese tourists are already a key factor in the growth of tourism in the region. ASEAN also looks to more Chinese investments as well. China's WTO entry will also mean a trading partnership based on international rules and discipline. Closer ASEAN-China economic ties will also enable ASEAN to reduce dependence on the US, EU and Japan. China's offer of special treatment and development assistance for the CLMV (Cambodia, Lao PDR, Myanmar and Viet

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Nam) group as well as the extension of WTO most-favored-nation benefits to the non-WTO members of ASEAN have helped them to accept the China initiative more readily. China and ASEAN will be able to go further than the WTO in liberalizing agricultural trade, as China's temperate agriculture and ASEAN's tropical agriculture are complementary in many product areas. Nonetheless there are continuing concerns over the impact of preferential opening of ASEAN markets, as many ASEAN labour intensive manufactures will not be able to compete with China on price (Yue, 2004).

China is the world’s largest agricultural economy. It is the leading producer of many agricultural commodities, supplying more than half of the world’s pork;

one-third of the world’s horticultural products, rice, and cotton; and close to 20 percent of the world’s wheat, corn, and poultry. With about one-fifth of the world’s population, China is also the largest consumer of many agricultural products; its current share of global pork consumption is 50 percent, 40 percent for cotton, 30 percent for rice, and more than 25 percent for soybeans and soybean oil. While China generally has been successful in meeting its rapidly rising demand for food and fiber by increasing domestic production, it has emerged as a leading global importer of several agricultural commodities, including cotton, soybeans, vegetable oils, and animal hides. As its domestic agricultural production has grown, China has also become the largest exporter in global markets for several horticultural products, including mandarin oranges, apples, apple juice, and garlic and other vegetables (USITC, 2011).

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After the introduction of market-based reforms in 1978, Chinese agricultural output grew significantly. Consistent with its natural resource endowments of abundant rural labor and limited agricultural land on a per capita basis, China’s agricultural exports are concentrated in labor-intensive products (compared with the United States and its other main trading partners), such as fresh and processed fruits and vegetables. In 2009, China was the fourth leading global agricultural exporting country (behind the United States, Brazil, and Canada) (USITC, 2011).

Exports of agricultural products from China to ASEAN fluctuated slightly during 1992–2001 and increased continuously after 2001. China’s agricultural exports to ASEAN are concentrated mainly in three groups of commodities:

vegetables and fruits, processed food, and fish. The combined share of the three commodity groups accounted for 77 per cent of total agricultural exports to ASEAN.

Vegetables and fruits are the largest export commodity group, accounting for 40 per cent. Vegetables and fruits became the largest group of agricultural exports from China to ASEAN in 2002 and its status has been strengthened by strong export growth since then. The remarkable improvement might have resulted from the Early Harvest Program (EHP) tariff-reduction program launched between China and ASEAN in 2004. China’s exports of labor-intensive agricultural commodities to ASEAN increased between 1992 and 1995 and then declined to the 1992 level between 1996 and 2000. Exports of these kinds of commodities began to increase strongly after 2000, achieving an annual growth rate of 21.2 percent between 2001 and 2005. As the growth rate of exports was higher than that of imports after 2000,

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the net export value of labor-intensive agricultural commodities increased and the trade surplus reached US$0.67 billion in 2005 (Chunlai Chen, 2008).

Chinese agricultural trade relations can be easily understood in terms of resource endowments in China and those other countries. China has abundant labor but is land-scarce relative to North America and Latin America. If a comparison is made between labor/land resources and capital, China certainly has comparative advantages in agriculture. China exports temperate horticultural products and grains (except rice), soya and cotton to ASEAN, and imports mostly tropical products and rice from ASEAN. The swift FTA deal between China and ASEAN benefits from the fact that the two regions have quite similar economic structures. Both are emerging markets with a significant agricultural sector and a mostly labor-intensive manufacturing sector. Therefore, politically sensitive products were very few and the FTA negotiations encountered little domestic opposition (AID, 2007).

In 2010, trade between ASEAN and China showed a sharp rebound from the decline in 2009 following the global financial crisis. ASEAN's exports to China increased by 39.1%, from US$81.6 billion in 2009 to US$113.5 billion in 2010, moving up a notch to be ASEAN's second largest export destination. Imports rose by 21.8% from US$96.6 billion in 2009 to US$117.7 billion in 2010. China maintained its position as ASEAN's largest trading partner accounting for 11.3% of ASEAN's total trade. ASEAN was China's 4th largest trading partner accounting for 9.8% of China's total trade. For the first half of 2011, ASEAN became China's 3rd largest trading partner. According to ASEAN statistics, the foreign direct investment flow from China to ASEAN declined by 32.0% from US$3.9 billion in

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2009 to US$2.7 billion in 2010. According to Chinese statistics, China's direct investment in ASEAN has accumulatively reached US $12.5 billion, nearly half of which was realized in the past two years. During the global financial crisis in 2009, China established a US$15 billion loan to ASEAN Member States for economic development. The loan has been mainly used for construction activities related to connectivity (ASEAN-Secretariat, 2011).