Upgrading China-ASEAN FTA：Related Issues and Future Development

□ Wei Min

Upgrading China-ASEAN FTA：Related Issues and Future Development

□ Wei Min

At the 16th China-ASEAN summit on October 9， 2013， Chinese Premier Li Keqiang proposed that China and ASEAN set up a “2+7 cooperation framework”. That is they should reach two political consensuses and promote cooperation in seven fields. Among which， one field of cooperation relates to the launching of an upgraded China-ASEAN FTA （CAFTA）. This proposal was put forward by China again after the 10th China-ASEAN Expo （CAEXPO）.

China and ASEAN officially launched their negotiations on an FTA in 2002， and the CAFTA was established on January 1， 2010. During this period， China and the ASEAN countries steadily pushed forward the building of their FTA， with the “early harvest” reaped on January 1， 2004. In November 2004， the two sides signed an FTA Agreement on the Trade in Goods， and they started to cut tariffs in a comprehensive way in July 2005. Then in January 2007， China and ASEAN signed an agreement covering their trade in services， and in 2009 signed an investment agreement.

The establishment of the CAFTA and the sharp decrease in tariffs have greatly promoted the two-way economic and trade relations between China and ASEAN. The bilateral trade volume rose from $54.8 billion in 2002 to $443.6 billion in 2013， an eight-fold increase， and the GDP per capita in the ten ASEAN countries has doubled， or more. China has been the largesttrade partner of ASEAN in the past five successive years， and ASEAN has become China's third-largest trade partner， fourth-biggest export market， and its second-largest source of imports. After， their “golden decade”， 2014 was the start of the “diamond decade” for China-ASEAN cooperation. Although China and ASEAN countries have seen a slowdown in their trade activities，compared with China's other major trade partners， China-ASEAN trade is still growing at the fastest speed. According to the statistics issued by the Chinese Ministry of Commerce， the trade volume between China and ASEAN in 2014 was $480.16 billion， an increase of 8.23 percent compared with the same period last year. Such a growth rate is 4.8 percent higher than China's overall foreign trade growth rate. As of the end of September 2014， the twoway investment between China and ASEAN totaled $123.1 billion. The two sides have conducted a large number of cooperation projects covering electricity， bridge-building， agriculture and manufacturing.

On August 26 and 27， 2014， the East Asia Economic Ministers Conferences were held in Naypyidaw， Myanmar. At the meeting， the element document for talks on an upgraded CAFTA was adopted， thus signaling the official launch of negotiations. Then on September 23 and 24， the CAFTA joint commission held its sixth round of meetings in Hanoi， Vietnam. The meeting was the first round of talks between China and ASEAN on an upgraded CAFTA. The two sides focused their discussions on the work arrangements for the negotiations on an upgraded CAFTA， but they also held working group meetings on investment， economic cooperation， rules of origin and customs procedures and trade facilitation. The two sides reached consensus on a working plan and made positive progress in several areas.

On February 3-6， 2015， the CAFTA joint commission held its seventh round of talks in China， which was the second round of negotiations between the two sides on upgrading the CAFTA. With their continuous and positive efforts， the negotiators conducted seven working group meetings on the trade in services， investment， economic cooperation， customs procedures and trade facilitation， rules of origin， standards， technical regulations and conformity assessment procedures （STRACAP） and sanitary and phytosanitary measures（SPS）. They exchanged views on specific areas， which yielded remarkable progress. Bearing in mind the principles of mutual benefits and win-win cooperation， China and ASEAN are making joint efforts in the talks to upgrade the CAFTA， and the two sides hope to conclude the negotiations by the end of 2015 so as to substantially upgrade trade and investment liberalization and facilitation and make the CAFTA a more comprehensive and higher quality free trade arrangement.

At a time when the US-led Trans-Pacific Partnership talks are expected to reach their conclusion and China is confronted with increasing uncertainties on its periphery， the endeavor to build an upgraded CAFTA will help deepen and expand China's comprehensive strategic partnership with the ASEAN countries. It will also help China speed up the implementation of its FTA strategy with its periphery as foundation， and form a high-quality and globaloriented FTA network. By so doing， China's influence in the region willincrease， and significant and strategic impacts will be created for China's new round of reform and opening-up.

The proposal for an upgraded CAFTA has been made at a time when great changes are taking place in the world's economic landscape. The global economy， while emerging from the financial crisis， is still weak in growth because of the lack of effective demand. Having experienced a “golden decade”，China and the ASEAN are now seeking to enter a “diamond decade”. The two sides are determined to achieve their target trade volume of $1 trillion by 2020 and to increase their two-way investments by $150 billion from 2013 to 2020. Therefore， in the coming seven to eight years， there are huge cooperation opportunities for China and ASEAN. Under such circumstances， to initiate an upgraded version of the CAFTA and expanding the scope of the China-ASEAN Framework Agreement on Comprehensive Economic Cooperation will significantly improve the market conditions of the two sides， and further balance the bilateral trade， thus bringing new impetus for their economic and trade relations， which are in structural transformation.

Some Related Issues

Although China and ASEAN have agreed to make joint efforts in building an upgraded CAFTA， there still exist certain difficulties on the part of ASEAN countries that might have an impact on the upgrading process.

ASEAN might be distracted from an upgraded CAFTA because of its prioritizing building an economic community.

ASEAN is determined to complete building an economic community by 2015. The ASEAN Economic Community will set up an integrated market，including tariff cuts and intensified liberalization and facilitation to tackle the obstacles to trade in goods and services. Most of the measures have already been completed. Malaysian Minister of International Trade and Industry Mustafa Muhammad disclosed that up to now ASEAN has completed 84 percent of its work on building the proposed economic community. By theend of 2015， ASEAN countries will start to remove tariffs bilaterally， although with certain exceptions.

However， the remaining work involves the hardest nuts to be cracked in building the ASEAN Economic Community. Agriculture remains the most difficult sector in terms of full liberalization， while in the removal of non-tariff trade barriers， intellectual property rights protection， the opening of services，and standards certification， ASEAN still has a long way to go. Among ASEAN countries there still exists the popular practice of non-tariff barriers， such as Singapore's strict need for an “import license” for imported rice from other ASEAN countries. Besides， in promoting economic integration， ASEAN has to resolve problems such as further improving its connectivity level， strengthening its policy implementation， and providing strong support to its less-developed members. Therefore， ASEAN still has a long way to go to realize true economic integration and to build the region into a single market and production base with free movement of goods， services， investment， labor and capitals..

For ASEAN， 2015 will be a very important year. The ASEAN members will not only concentrate their efforts on community building， but also play a leading role in concluding the Regional Comprehensive Economic Partnership talks. Four of the ASEAN members are also taking part in the Trans-Pacific Partnership talks， which are scheduled to conclude in 2015. In the face of these significant endeavors， ASEAN's attention on an upgraded version of CAFTA， to some extent， will be distracted. In addition， some members of ASEAN question the necessity of building an upgraded CAFTA， since the RCEP talks are under way.

Some countries are concerned about the possible consequences of further opening up their domestic industries.

China has a similar industrial structure to some ASEAN countries， andthey have intense competition in some labor-intensive sectors. The export similarity index of Thailand， the Philippines， Malaysia， Indonesia and China is between 0.8-1 （the closer the figure is to 1， the greater the convergence in trade structure）. When it comes to the trade of goods， like China， many ASEAN countries exports are machinery and electrical products， minerals，and chemical products. Many ASEAN countries and China compete to export to Europe， North America， Japan and the Republic of Korea.

Meanwhile， China has a big trade surplus with Singapore， Indonesia and Vietnam. Take Indonesia for example， China's trade surplus with Indonesia in 2014 was $14.537 billion. Of late， nationalist sentiments in Indonesia are on the rise. Some Indonesians regard FTAs， and the CAFTA in particular，as a threat to the Indonesian economy， claiming that transactions between China and Indonesia are not favorable to Indonesia. They complain that Indonesia is over-reliant on a few export markets and non-processed export products. Indonesia， in recent years， has adopted important measures for industrialization， with the purpose of encouraging the mining and processing of natural resources， prohibiting exports of unprocessed minerals and inviting domestic and international investments in mineral processing and refining，and other downstream sectors. The new government of Indonesia， with its excessive attention to domestic nationalist sentiment， might have second thoughts about upgrading the CAFTA.

Different ASEAN countries hold diverse attitudes toward their cooperation with China. Except for Thailand， which is fairly developed， other countries in the Indo-China Peninsula such as Cambodia， Laos， Myanmar and Vietnam， which lack manufacturing sectors because of insufficient skilled workers and backward infrastructure， have a pressing demand for opening up and are eager to engage in cooperation with China. However， China's advantage in Laos， Cambodia and Myanmar is also challenged by other ASEAN countries.

Regional economic development is confronted with increasing internal and external uncertainties.

Affected by the weak economic growth in the United States and Europe，the economic growth rate in ASEAN countries has slowed. Except for Cambodia， Laos and Vietnam， economic growth in most of ASEAN countries has been lower than expected. The increasing pressure for reform of their economic structure and rising conservative sentiments at home are creating an unfavorable environment for new trade and investment liberalization. Since the latter part of 2014， some ASEAN countries have experienced political unrest. The economic integration process is bound to be affected by the fermenting political uncertainties. The protracted political struggle in Thailand has， to a large extent， exerted an impact on the country's economy， especially its tourism. It has also weakened its leading role in the ASEAN community building. Myanmar is to have a general election in 2015， and Vietnam will have a new leadership inn 2016. Both of these bring new uncertainties.

The 49 percent drop in the price of Brent crude oil in 2014 has had a varied impact on ASEAN economies. Major oil importers such as Thailand，the Philippines and Indonesia have saved money， while oil exporters such as Malaysia have suffered big losses. Being the largest oil and gas exporter in Asia， Malaysia relies， to a great extent， on exports of crude oil， palm oil and rubber， with crude oil accounting for one-third of its financial revenue. Malaysia's revenue has shrunk drastically and its economic outlook is gloomy. Affected by the low oil prices， Malaysia's Ringgit devalued by 6.2 percent in the fourth quarter of 2014， the biggest one-quarter decline since the financial crisis in Asia， and the currency fell to a four-year low. Brunei's economy also relies heavily on oil and gas exports， and the trade in energy accounts for 66 percent of its GDP and 93.6 percent of its export revenues.

In 2015， ASEAN countries will find their economic growth to be restrained by global economic uncertainties. Washington's exist from its quantitative easing policy and the continuing drop in world crude oil prices will exert a dual impact on ASEAN's economic development.

Other problems are on the rise.

The previous FTA talks between China and ASEAN focused mainly on tariff cuts. But now tariffs have been reduced substantially， talks on an upgradedFTA should go beyond the issue of tariffs to cover topics such as the technical barriers to trade， SPS measures， rules of origin， customs procedures and trade facilitation. In short， the content for an upgraded FTA needs the “upgrading”of talks， with some new rules and areas that have not been touched on before. With more areas open for discussion， the talks are bound to encounter new problems. Besides， since more departments with diversified interests are involved， increasing difficulties in coordinating negotiations are expected.

China， in its negotiations with ASEAN， has always pursued the principle of “giving more and taking less”. In the past when China's relations with ASEAN countries were smooth， it was natural for China to make concessions in the negotiations. Now China's relations with certain ASEAN countries have encountered difficulties， China has to take people's sentiments into consideration when conducting the negotiations.

Future Development

The proposal for an upgraded CAFTA has been launched at a time when the China-ASEAN strategic partnership is being strengthened. An upgraded CAFTA constitutes an important way for both sides to realize their respective economic transformations and to carry out mutually beneficial and winwin cooperation. Since China is the world's biggest developing country and ASEAN is an association of small and medium-sized countries， an upgraded CAFTA should help the China-ASEAN strategic partnership find new common points， new common interests and new economic growth drivers. While ASEAN is concentrating on its community building， China should take the initiative to lay out the main content for the upgraded CAFTA，taking into consideration the interests of both sides and showing the way forward for future cooperation.

Focusing on investment in building an upgraded CAFTA and promoting all-round cooperation with ASEAN

Since the CAFTA has solved the problem of trade openness， an upgradedversion of the CAFTA should focus on the investment field. In recent years，China's overseas investments have grown rapidly. its foreign direct investment totaled $101 billion in 2013. China is now the third-largest source of FDI. In 2014， China's investment in the world overtook the investment it received from other countries， and China has become a net foreign investment country.

Therefore， Chinese enterprises have shown a stronger will to go abroad and make investments， and Chinese foreign investments have shifted from the traditional sector of resources to diversified consumption. Chinese enterprises，in their “going abroad” strategy， prefer ASEAN as their first choice because of ASEAN's geographical location. The Nanyang Siang Pau reported that 60 percent of Chinese enterprises plan to invest in Southeast Asia countries. However， Chinese enterprises competitiveness is weakened by their imperfect industry chains and lack of subsidiary support. Therefore， compared with Japan and South Korea， there is big rooms for improvement in terms of China's investments in ASEAN， and in-depth industrial cooperation between them needs to be strengthened.

Industrial cooperation should become the new direction for China-ASEAN economic and trade cooperation. The building of an upgraded CAFTA should combine with adjustments and upgrading of their respective industrial structures， so as to create staggered competition and to realize mutual and win-win benefits for both sides. Taking into account the different levels of industrial development in the ASEAN countries， China should adopt differentiated policies for industrial cooperation with them. Formulating new preferential measures in the investment field aimed at extending industrial chains and helping Chinese enterprises go abroad is in the interests of China as well as the ASEAN countries. ASEAN is not content with its positioning as a source of natural resources； instead it wishes to realize its economic structure transformation and upgrading through cooperation with China. Therefore，the building of an upgraded CAFTA should take into consideration the needs of both China and ASEAN， and it should take the strengthening of China-ASEAN industrial cooperation as an important goal.

To break the bottleneck in building an upgraded CAFTA with the support of China's Belt and Road initiatives

The 21st Century Maritime Silk Road initiative put forward by China and the building of an upgraded CAFTA complement and support each other. Together， they constitute the main approaches of China to boosting cooperation with ASEAN. In terms of China-ASEAN cooperation， the 21st Century Maritime Silk Road focuses on the smooth performance of policy communication， transport connectivity，trade activities， currency flow and the closeness between peoples， while an upgraded CAFTA will promote further expansion of China-ASEAN cooperation in finance， infrastructure， and fishing. Therefore， the two initiatives have many objectives and directions in common. China-ASEAN cooperation in these fields should not be conducted in an isolated manner， instead cooperation should be carried out as complementary to industrial cooperation， and should be improved gradually as industrial cooperation deepens.

The building of an upgraded CAFTA coincides with the implementation of the Silk Road Economic Belt and the 21st Century Maritime Silk Road initiatives. Therefore， with the support of the 21st Century Maritime Silk Road initiative， breakthroughs should be made in the bottlenecks of infrastructure，transnational financial services and maritime cooperation with ASEAN.

Infrastructure construction plays a pivotal role in the advancement of mutual trade and investments. In recent years， China has invested large amounts of money to improve its connectivity with ASEAN. However， with imperfect passenger and freight transport agreements between China and some ASEAN countries， logistics and transportation in certain regions are not smooth. And the costs of transporting goods and people-to-people exchanges remain high. All these are bottlenecks which can be removed with an upgraded CAFTA.

In its community building， ASEAN is focusing on improving itsinterconnectivity， and therefore， ASEAN has worked out a master plan for connectivity between its members that covers infrastructure construction，mechanism building and personal exchanges. China has been active in helping ASEAN in its connectivity building through various projects and partnerships. The cooperation on connectivity between China and ASEAN is to be institutionalized. The China-ASEAN Connectivity Cooperation Council held its first meeting in November 2012 to define the mechanism and its main work areas and objectives， ushering in a new era of connectivity cooperation between the two sides. At the 13th meeting of transportation ministers in Mandalay， Myanmar， China and ASEAN decided to make joint efforts to implement existing and forthcoming infrastructure projects such as railways， highways， waterways and airlines under the framework of the “Belt and Road” initiatives， so as to improve all-round cooperation on connectivity. At the 2014 East Asia Summit meetings， cooperation on infrastructure investment and financing between China and ASEAN was made one of the important issues on the agenda. The establishment of the Asia Infrastructure Investment Bank （AIIB） and the Silk Road Fund will undoubtedly raise the importance of connectivity to an unprecedented height.

The inadequate capacity of transnational financial services is also causing an impediment to upgrading the CAFTA. The economic links between China and ASEAN have been very much restrained by the imbalanced political and economic development in the ASEAN countries， as well as their different banking and finance policies and systems， and their diversified legal systems. Besides， a full mechanism for foreign currency cooperation has not been established among ASEAN countries， creating bigger risks for foreign currency trading. Along the border areas between China and Vietnam， China and Laos and China and Myanmar， some border trade， valued at more than $10 billion a year is conducted according to exchange rates provided by “vendor banks”. As a result， a good few of uncertainties exist in the China-ASEAN trade activities and finance security.

At present， China is working hard to encourage Chinese banks to go abroad， in order to provide services to help promote China-ASEAN economiccooperation. China has taken the initiative in proposing the establishment of the AIIB， and all ASEAN countries are founding members of the AIIB and will undoubtedly be major benefactors. The AIIB will provide more flexible financial assistance to ASEAN countries in their necessary infrastructure construction， such as transportation， oil pipelines， power grids and information networks. In addition， the Chinese Government has set up a $50 billion Silk Road Fund and a $10 billion China-ASEAN Maritime Cooperation Fund as the founding funds for the Silk Road projects. In addition， to provide support to the two Silk Road initiatives through the China-ASEAN Investment Cooperation Fund and China-ASEAN special preferential loans for infrastructure， China has decided to launch the fund-raising of $3 billion as the second stage of the China-ASEAN Investment Cooperation Fund. The China Development Bank will also provide to ASEAN countries $10 billion in preferential loans for infrastructure， and these loans will focus on infrastructure cooperation， energy and natural resources. China and ASEAN have held five sessions of the leaders' forum on financial cooperation and development， laying a solid foundation for financial cooperation and free currency movements. Up to now， China-ASEAN crossborder trade settlement in the Chinese currency in the pilot region of the Guangxi Zhuang autonomous region and Yunnan province has accumulated to over RMB 500 billion. Renminbi exchange swaps are already in practice for the Malaysian Ringgit， Singapore dollar， Thai baht， Philippine peso，Indonesian rupiah and the Vietnamese dong. China and ASEAN are moving to the direction of “de-dollarization” by expanding local currency settlement.

Maritime cooperation will enjoy great room for development following China's proposal to build with ASEAN the 21st Century Maritime Silk Road. Of the ten ASEAN members， nine have coasts. China is also a maritime country. The proposal to build the 21st Century Maritime Silk Road will help bolster the development of CAFTA in a multi-faceted way and at multiplelevels， thus gaining widespread support from ASEAN countries. Making the new maritime Silk Road a trade and logistic corridor， energetically developing cooperation in offshore petroleum extraction， chemical industry and tourism，and forming a marine industrial cluster， will all become important engines to promote bilateral economic development.

Taking the initiative in the shaping of China-ASEAN relations

Most of the ASEAN countries are small and medium-sized countries. Understandably， ASEAN， for the time being， will not wholeheartedly accept China's many initiatives and measures for regional development. China should take into consideration what ASEAN countries have the capacity to bear，focus on its priorities， and do a good job in dispelling concerns and increasing mutual trust. China should do everything possible to help ASEAN understand that it intends to fulfill its responsibilities as a major regional country and to provide more public products to the region rather than engaging in looting of ASEAN's resources. The latest Chinese initiative of establishing the AIIB has aroused concerns in some neighboring countries. Some people worry that China intends to undermine the regional architecture and world economic order by setting up another investment bank. Building an upgraded CAFTA should remove ASEAN's misgivings， and encourage ASEAN countries to engage willingly in joint development. A clear—cut distinction should be made between the functions of existing regional cooperation mechanisms and of new initiatives in order to avoid confusion. China should continue the principle of “giving more and taking less” in order to win an active response from ASEAN， and make the less developed countries the first benefactors of an “early harvest”. The trade imbalance problem between China and some ASEAN countries should be addressed and their demands should be taken into account. More balanced trade relations and a continuous growth in investments are in the interests of both China and ASEAN.

At a time when the United States is pushing forward its “rebalancing”strategy in the Asia-Pacific region， ASEAN has become an important region for China-US power plays. Washington makes use of its allies as strategic pivotpoints in the region. Some ASEAN countries are in a contradictory situation as they rely on the US for security assurance while they are inseparable from China economically. A good management of relations with these countries will set good examples for other countries.

Building a “flagship” project for a China-ASEAN community of common destiny

At present， China and ASEAN have already started their talks on an upgraded CAFTA. To define the specific scope and content of an upgraded CAFTA， practical measures should be taken to cope with an evolving situation and related requirements， so as to establish an FTA that is in accord with the features and reality of the China-ASEAN economies and trade. Attempts should be made to establish standards and rules， so as to adapt to the trend of FTA building and explore ways for China's participation in regional FTA talks. At the same time， ASEAN's diversification and different levels of development should be taken into consideration in pursuance of a commonly approvable level and model.

Both the talks on an upgraded CAFTA and the RCEP are scheduled to be completed by the end of 2015. Since there are big differences among the 16 participants involved in the RCEP talks， it will be hard for them to reach consensus on many sensitive issues and new topics. This will leave room for China and ASEAN in their upgraded FTA talks to conduct consultations and seek consensus on higher standard rules in the fields of labor， jobs， environment，intellectual rights protection， government procurement， competition policy，SOE and industrial policies. It is expected that negotiations on an upgraded CAFTA will be more difficult than when the two sides first negotiated their agreement. Moreover， when the two sides conducted their CAFTA talks， relations between them were less controversial， with fewer differences compared with the current China-ASEAN relations， which are becoming increasingly complicated. Therefore， unexpected obstacles may crop up in the negotiations， and joint efforts will be needed to overcome divergences.

Wei Min is Associate Research Fellow at the Department for World Economy and Development， China Institute of International Studies.