Background of the study

I. INTRODUCTION

1.1 Background of the study

The East Asian economies have been very active over the last decade by proposing to establish the East Asia Free Trade Area Agreement (EAFTA), which ideally would include all of ASEAN (the Association of Southeast Asian Nations), China, Japan and Korea. The Association of Southeast Asian Nations (ASEAN) is a geopolitical and economic organization spread over a wide and diverse region with a population of approximately 600 million.

Covering a total population of 1.7 billion people and a combined GDP of about US$2 trillion, ASEAN-China Free Trade Area (ACFTA), implemented in 2005, is billed as the largest free-trade zone by population (nearly 1.9 billion) and the third largest by volume (US$ 192 billion in 2008) in the world. China’s emergence as an avid pursuer of FTAs happened in spite of its latecomer status.

China did not begin its premarket economic reform until 1978 and did not join the World Trade Organization (WTO) until the middle of 2001.

In the case of Southeast Asia, China’s FTA with the ASEAN is driven by a political logic that responds to challenges posed by competitive regionalisms in the world economy, to cement growing economic ties with Southeast Asian nations, to secure raw materials crucial to China’s economic development, and to ensure a peaceful and stable environment close to home. ASEAN nations are attracted by the

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opportunities brought about by China’s economic expansion and trade liberalization;

they also seek to leverage their FTA with China to additional FTAs with important trading partners within (e.g. Japan) or outside (e.g. the United States) the region.

Although there are economic benefits for pursuing FTAs, nations often pursue them for non-economic reasons. Regionalism (and FTAs in particular) plays a critical role in China’s current grand strategy - “peaceful rise.” The policy of

“peaceful rise” is based on an embrace of globalization as part of the solution to China’s growth imperatives. It relies both on China’s domestic economy and the international marketplace to sustain and fuel economic growth. China’s economic diplomacy has presented opportunities and challenges for East Asia.

On the one hand, China has tried to “bind” ASEAN nations through regional institutions, such as ACFTA, ASEAN plus Three (APT), East Asia Summit (EAS) and ARF (Asian Regional Forum). Indeed, China’s FTA activism has spurred measures by Japan and India to strengthen their own economic diplomacy in Southeast Asia. For instance, since the ACFTA was enacted, Japan has signed FTAs with Singapore, Malaysia, Indonesia, Thailand, and the Philippines. In contrast, the interest of the United States in the region, as shown through the lens of economic diplomacy, pales in comparison. Since 2004, China has replaced the United States as the largest trading partner of Japan, South Korea, Taiwan, India, Australia, Brazil, and Chile. Admittedly this is mainly due to the rise of China as a world trader, but it is also an indicator of America’s relative declining influence.

The United States has only signed FTAs with Singapore and South Korea. The United States’ hope of engaging in a FTA with the entire membership of APEC

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(Asia-Pacific Economic Cooperation) also looks less appealing or feasible than China’s bilateral FTAs, especially against the backdrop of the failed Doha Round of WTO multilateral talk.

The new ASEAN FTAs were most likely to affect U.S. exports of processed agricultural products, especially in the subcategory labeled in the trade data as “food preparations: composite mixtures”—a diverse category of products such as beverage bases, some snack foods, some fruit juice preparations, coffee whiteners, herbal tea mixes, and some gelatin preparations. U.S. exports of fruit and vegetables to ASEAN members and to China were projected to fall by over US$50 million per year and by about US$30 million per year, respectively. U.S. fresh and processed fruit exports, in particular, face considerable competition in the region.

Both United States and China export high volumes of fresh fruits. In the past, Chinese fresh fruit could not compete with that of the United States in global markets. This was mostly because of the poor quality of Chinese fruit, as scarce cold storage and poor rural infrastructure in China took its toll on perishable products traveling long distances for export. As China becomes better able to supply high-quality fruit at a low cost to nearby Asian markets, competition with the United States could intensify . The United States and China both export large quantities of apples to several Asian markets, including Indonesia, Malaysia, and India. Chinese apple exports to Vietnam, a low-cost apple market, averaged $53 million between 2008 and 2010, far outpacing average U.S. apple exports of $8 million to Vietnam during the same period . Both China and the United States also export large quantities of fresh and frozen vegetables. For onions and shallots,

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Japan is the only market where competition takes place, with China exporting $117 million in 2010 and the United States $35 million . Competition is generally greater in frozen vegetables, which can be transported across long distances with little loss in quality.

China benefited from a competitive advantage relative to the United States in its proximity to ASEAN market, its lower labor and production costs, and its undervalued Yuan relative to the U.S. dollar. China also benefits from globalization and changing production pattern where production and assembly of higher valued-added products were moved from the United States and other developed countries to China .

Laos, Myanmar and Vietnam have long border area with China. Moreover, it is a fundamental fact of geography that India is in the immediate neighborhood of ASEAN. Both countries share land and maritime borders with Myanmar, Indonesia and Thailand. The vital commercial sea lanes between West Asia and South East Asia straddle the Indian mainland and its island territories.

Since, for both economic benefits and non-economic reasons, ASEAN and their dialog partners as well as top trading partners like China, India, Japan and Korea have done Free Trade Agreements (FTA), there would be some competitions among the top trading partners (FTA members and non-FTA members) as well as between FTA member countries in ASEAN market. Trade competition intensity may depend upon the structure and pattern of trade of emerging countries and declining countries. By doing Free Trade Agreements (FTA), it may lose or gain to their member countries.

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