ASEAN-China FTA: Advantages, Challenges and Implications for the Newer ASEAN Member Countries, by Thitapha Wattanapruttipaisan

ASEAN-CHINA FTA: ADVANTAGES, CHALLENGES AND IMPLICATIONS FOR THE NEWER ASEAN

Paper presented at the Regional Seminar on “Advantages and Challenges of the ASEAN-China Free Trade Area,” Organized by the Department of Multilateral Economic Cooperation, Ministry of Foreign Affairs, Viet Nam and the Hanns Siedel Foundation, Ho Chi Minh City, 20-21 June 2002

ASEAN and China leaders decided, in Singapore during November 2000, to explore measures to widen and deepen mutual economic cooperation and integration, among other matters. A year later in Brunei Darussalam, government leaders of the two sides endorsed the proposal to set up an ASEAN-China Free Trade Area (FTA) within 10 years; the FTA is intended as part and parcel the framework and process of mutual economic cooperation and integration – initially through trade, trade-related investment, and trade-based services. This decision at the ASEAN-China Summit in 2001 is likely to become another milestone in the unfolding history and process of multi-faceted growth and diversification among developing economies in East and South-East Asia.

This paper focuses on the four least developed countries (LDCs) and economies in market-based transition in South-East Asia – namely Cambodia, Lao People’s Democratic Republic (PDR), Myanmar and Viet Nam (or ASEAN-4) -- in relation to the proposed ASEAN-China FTA. In particular three issues will be addressed. First, as regards market access, what are the potential and opportunities for these countries to grow and diversify through the FTA? Second, as regards supply-side parameters, what are the likely challenges and constraints ASEAN-4 will face in competing for the FTA as well as third-country markets? Third, as regards assistance measures, what are the implications in terms of the provision of special and differential (S & D) treatment and flexibility for ASEAN-4 for FTA adjustment and accommodation purposes. In this connection, a number of technical assistance proposals is also discussed with special reference to the needs for enhancing domestic supply capabilities and competitiveness, especially at the enterprise level, of the LDCs and transitional economies concerned.

Globalization has provided a dynamic platform to sustain high and durable rates of economic growth, structural transformation and social development among many, but not all, developing countries. In particular, the globalization process has opened up unlimited opportunities for gainful co-operation and integration in trade, investment and services among countries and communities. These include, in this region, not just China but most member countries of the Association of South East Asian Nations (ASEAN) as well.

A number of pertinent points can be noted on the patterns of interaction in trade and investment between ASEAN-4 and China. One, there has been a gradual increase in the relative share of trade with China by Cambodia, Lao PDR and Viet Nam, especially on the import side (table 1). Notably, the relative share of their merchandise trade with China more than doubled from 4.8 per cent in 1995 to 8.6 per cent in 2000 (equivalent to US$ 2.7 billion). This is much faster than the growth of ASEAN trade with China as a whole.

Two, China and Viet Nam have become comparatively important trade partners among the ASEAN-4 – in terms of both the size and the rate of expansion of merchandise trade, from US$ 0.7 billion in 1995 to 2.7 billion in 2000. Nevertheless, ASEAN as a whole remain the most important trade partner with ASEAN-4 with a relative trade share in excess of one-third in most cases (table 1). However, Cambodian exports to ASEAN, especially Singapore and Viet Nam, fell off significantly in 2002 because of the massive increase in export to the United States.[2]

Three, the available date also indicate a notable increase in trade in services, in particular tourism. The number of Chinese tourists has risen very sharply in the case of Viet Nam to account for one-third (or some 626 thousand persons) of the total
Table 1. ASEAN-China trade and investment interaction, 1995 and 2000

China

ASEAN-10

Cambodia

Lao People’s Democratic Republic

Viet Nam

Sources: Various issues of IMF, Direction of Trade Yearbook (Washington, DC); UNCTAD, World Investment Report (New York); World Tourist Organization, Yearbook of Tourism Statistics; and ASEAN website: http://www.aseansec.org/menu/tourism_statistics.

Notes: a Falling value due to the financial and economic crisis plus the lower exchange rates (to the US dollar) in several ASEAN member countries since July 1997.

c Thailand accounted for 233.8 and 356.1 thousand tourists respectively for 1995 and 2000.

number of cross-border visits (table 1). Again, however, ASEAN generally account for the large bulk of tourists visiting the other countries in ASEAN-4[3]. The potential for two-way tourism is really inviting. At present, ASEAN tourists were less than 13 per cent of the total tourist arrivals (13.1 million) in China during 2000 while Chinese tourists in ASEAN made up just 5 per cent of the 37.8 million persons visiting ASEAN in 2000 (table 1).

Four, China has been a destination for foreign direct investment (FDI) from some ASEAN member countries -- directly or via Hong Kong SAR.[4] Likewise, several ASEAN member countries have also been the host to important FDI flows from China, both directly and via third party ventures. However, China is a net investor in ASEAN-4, notably with some large investment projects in Cambodia during the second half of the 1990s. Nevertheless, ASEAN-6 as a whole remains by far the most important source of FDI for most ASEAN-4 (table 1).

In general, a large proportion of FDI is channeled to resource-based and trade related activities in ASEAN-4. Manufacturing for export, and to a much less extent, domestic market is also another important sector for such investment. In addition, there is considerable FDI “in kind” – that is the investors supply manufacturing equipment and machinery as equity in the joint ventures with their local partners, who usually provide land and infrastructure.[5]

There are potential and opportunities – both substantial and exciting – for greater and closer ASEAN-China complementarities along their pathways of development and diversification (Wattanapruttipaisan, 2001, pp. 4-9). As income grows and the standard of living rises, so will domestic demand for more as well as better goods and services for consumption and investment purposes. These include typically various kinds of imported products as well as outward travel for tourism and other purposes, including education and training. Imported consumer goods and overseas travel, for example, have served both as an incentive for work and earnings, as well as an outlet for unsatisfied (or pent-up) demand. Surely, ASEAN will be in a position to supply competitively some of such import demand for goods and services from China; and vice versa .

In the above context, three positive factors operate at the macroeconomic level. One, the Chinese economy is a huge economy with an equally huge population of some 1.2 billion persons. Gross domestic product (GDP) reached US$ 1,180 billion in 2001; comparatively, the combined GDPs of ASEAN amounted to US$ 573.8 in the same year. What is more, China has been the fastest growing among the larger economies of the world for some two decades -- with output expansion averaging some 9 per cent a year. Even during the economic crisis and slowdown of the late 1990s, GDP in China continued to expand by around 7 per cent a year during the financial and economic crisis of 1997-1998, and the global and regional slowdown in 2001[6].

Two, income per head of population in China almost tripled -- from US$ 342 to 930 between 1991 and 2001. This income level will double every 7 to 8 years with the maintenance of China’s high-growth path; it will soon approach the average per capita income within ASEAN as a whole (about US$ 1137 in 1991 and US$ 1030 in 2001). There is, of course, a big gap between per capita income in Singapore and Brunei Darussalam and, on the other hand, that in the remaining member countries[7]. Relative to China, however, the rate of expansion in GDP as well as per capita income is likely to be slower in most parts of ASEAN in general.

Three, China’s external trade in goods and in services expanded at double-digit rates (or more than twice faster than the global averages) for more than a decade before WTO accession. Yet, the trade penetration remains comparatively limited: the proportion total trade to GDP was still comparatively low at 44 per cent during 2000; the corresponding ratio being over 136 per cent for ASEAN-10 and 87 per cent in the case of asean-4 (table 1). In addition, the proportion of China’s trade with ASEAN to GDP of China, although rising, is very low – for example, in the range of only 2.0 to 3.4 per cent in the case of China during 1991-2000. Meanwhile, the value of ASEAN’s trade with China relative to ASEAN GDP was less than 6 per cent in 2000; the corresponding figure for ASEAN-4 being just 2.3 per cent (or US$ 0.8 billion).

Four, the trade flows between exports and imports have been relatively balanced. In recent years, some ASEAN-6 has been enjoying a considerable surplus in merchandise trade with China but most ASEAN-4 have a large trade deficit with China. Large economies, such as that of China, tend to have lower trade/GDP ratios than those of their smaller counterparts. However, even an increase of a few percentage points in the trade/GDP ratios between ASEAN and China can be expected with reasonable confidence (more later). And these few points already are worth tens of billions of dollars on the basis of trade flows for the year 2000 (table 1).

China joined the World Trade Organization (WTO) in December 2001. This is a significant and welcome development for the global community because the country had been negotiating for accession to GATT (the WTO predecessor organization) since 1986. In the intervening period, China became the world’s seven largest trading country, with US$ 474 billion of turnover in 2000. The country now accounts for 4 per cent of global export value, and 3.5 per cent of world imports (UNCTAD, 2002, p. 141). In addition, China is the world’s largest destination for FDI among the developing countries, hosting an inflow of US$ 47 billion in 2001. China’s WTO membership is widely expected to have several important, positive spill-over effects on ASEAN-China trade and investment relationships in a wide range of areas.

Substantial tariff cuts as well as the removal of a variety of non-tariff barriers had already been made by China in preparation for membership of the global trading community. Average tariff rate, for example, was slashed from 42.9 per cent in 1992 to 23.6 per cent four years later and to 17.5 per cent in 1999. The effective tariff rate, measured by the ratio of tariffs over import value, was only 4.5 per cent during the first half of 1999.[8] China’s WTO accession involves a very comprehensive package of further liberalization in cross-border trade in goods and services.[9]

A number of observations can be made in the above context. One, the weighted tariff on all imports in China will fall to 5.7 per cent – mostly within with 2 to 4 years after accession but in no case later than 2010. This rate is slightly higher than that in Japan (4.7 per cent), comparable to that of the United States (5.5 per cent), and slightly lower than that in EU (6.9 per cent) after the Uruguay Round. Notably, tariffs on information technology products (including computers, telecommunications equipment and semiconductors) will go down from an average rate of 13.3 per cent to zero by 2005.[10]

Two, China has made significant commitments to remove non-tariff barriers (NTBs).[11] Agricultural products, in particular, face strong barriers as well as high tariff rates. NTBs are converted to their tariff equivalents while market access is also enlarged through low import tariff (or tariff-rate quotas). Major agricultural commodities of interest to ASEAN and other exporters will be subject to an in-quota tariff level of less than 10 per cent – compared to, for example, an out-of-quota tariff of 65 per cent on rice (and wheat). The quota ceilings range from some 3 million tons for soybean and palm oils, over 5 million tons as regards rice, and almost 10 million tons in the case of wheat. In addition, import licensing and NTBs on 162 out of 377 import items were eliminated upon accession; NTBs on another 75 items are to be removed by end-2003.

Three, extensive measures and commitments for trade liberalization are also implemented by China as regards the provision or supply of cross-border services. There had been severe restrictions on foreign participation and presence in certain sectors and subsectors, in a large number of geographical locations, and in terms of the extent and ceiling of equity ownership. These are being removed, relaxed and raised, mostly within 2-4 years after WTO membership. Such liberalization is particularly significant in a wide range of financial services, in telecommunications, and in wholesale and retail trade as well.

The short- and long-term impact of China’s WTO accession has been of great interest virtually across the world. It was examined by at least 20 major econometric and simulation studies (both published and unpublished) between 1996 and 2000. Necessarily diverse in these studies are the various assumptions on the extent and depth of trade liberalization, and the various specifications as regards the sequence and the cumulative impact of domestic policy and sectoral responses. And so are the empirical results obtained. Nevertheless, some elements of convergence can be drawn from these results, although the order of magnitude involved are not necessarily uniform and, in several cases, comparable (because of differences in specification and assumption).[12]

One, with WTO membership, China’s share in global trade (on both the import and export sides) will be considerably higher. The increase may be as much as 30 per cent each in both export and import volumes. In particular, the annual net imports of selected agricultural products may increase by US$ 1.5 billion between 2000 and 2009. Meanwhile, grain imports may rise by 2 million tons, while those for oilseeds, by 2.5 millions tons.

Two, higher GDP growth in China is also expected in most of these studies. The estimated gains range from 0.9 per cent to well over 2 per cent on top of the already high-growth orbit (in the annual range of 7-8 per cent) attained by China in recent years. On the basis of 2001 output, one percentage point rise in GDP is equivalent to almost US$ 12 billion of domestic resources available for consumption and investment (including via imports).

As a whole, there will be greater market access and opportunities for ASEAN in China and vice versa – directly through trade liberalization measures, and indirectly through the consequent enlargement of trade flows coupled with significant income and welfare gains on both sides. There are few estimates of the positive spill-over effects on ASEAN and there are no separate estimates for ASEAN-4

One, the tentative results indicate tentatively that China’s post-accession demand for ASEAN imports will expand by 10 per cent a year. Thus, the value of such imports will reach US$ 35.5 billion in 2005, compared to 22.2 billion in 2000. In addition, preliminary estimates suggest that the ASEAN-China FTA would raise ASEAN’s exports to China by 48 per cent and China’s export to ASEAN, by 51 per cent. At the same time, the combined GDP of ASEAN would expand by at least US$ 5.4 billion while that of China, by some US$ 2.2 billion (Wattanapruttipaisan, 2001, pp.6-7).

Two, the actual increase may even be larger -- given the likely faster rate of China’s imports of ASEAN products relative to China’s imports from all sources as a result of greater economic cooperation and integration in the context of FTA negotiations and arrangements. Resource-based goods from ASEAN will continue to have a comparative advantage in China – especially hydrocarbons products; semi- and processed agriculture, aquaculture and forestry items etc.

But there are likely to be complementarities in electrical machinery, automotive parts and components, and computer equipment, the main source of exports of several ASEAN members -- including Malaysia, Philippines, Singapore and Thailand (more in the next section). As noted earlier, the heavy tariffs and NTBs on such imports are being cut substantially and extensively by China – for example, from 13.4 to 6.6 per cent on machinery and equipment, and 31.3 to 14.1 for motor vehicles and parts.

Three, higher trade and income growth will have a positive impact on trade in services, ASEAN-China tourism especially, and on two-way FDI flows in resource-based, trade-related manufacturing and services. Win-win possibilities exist in trade and trade-related FDI in many of these sectors and activities within ASEAN and China. As noted earlier, the potential is great for a substantial increase in two-way tourist flows between ASEAN and China, and for service-related FDI in restaurants and tourism facilities – especially given the significant liberalization in the pertinent subsectors and services in China. On the one hand, the two-way flows of tourists are still relatively small, especially in terms of the total number of tourists visiting ASEAN or China (table 1). On the other hand, the growing markets for eco-tourism, thematic tourism, adventure tourism and multiple-destination tourism remain to be tapped in and by both ASEAN and China.

A positive impact on domestic economic growth and diversification, and poverty reduction in the long term is generally associated with the widening and deepening of market access, through preferential trade arrangements (PTAs) or free-trade agreements – notwithstanding short-term adjustment costs and disruptions which can be considerable and prolonged in many cases. Among other reasons, this accounts for the proliferation of such PTAs and FTAs over the past four decades, including those of the 1990s. [13]

It is not within the scope of the paper to speculate on the shape of things to come under the proposed ASEAN-China FTA. A number of observations, however, can be made as concerning the shifting patterns and implications of trade flows. One, ASEAN-6 will remain an important trade partner on both the export and import sides) for most ASEAN-4. As such the former can continue to serve as a useful market as well as gateway for ASEAN-4 trade, both final products and intermediate inputs for processing within ASEAN-6 and, possibly in the longer term, within China, too.[14]

Two, as regards this region, intra-Asian trade has been on the increase – with the Asian newly industrializing economies (NIEs), China and several ASEAN member countries playing an important part behind this upward trend. This augurs well for further trade and investment integration in the coming decades among Asian economies and economic groups (ASEAN-6/4, Asian NIEs and China). China, for example, sourced only 45 per cent of imports from the EU, Japan and the United States in 2000, compared to 54 per cent a decade ago (table 3). The corresponding figures for ASEAN-6 are 45 and 54 per cent for these two respective years.

Three, in the above context, China has developed strong trade and investment linkages with other developing economies in East and South-East Asia. In fact, these economies supplied over one-third each of China’s import spending on both agricultural commodities and manufactured products in 1999 (table 3). Largely as a result, the Asian NIEs and ASEAN-6 have a combined merchandise trade surplus (just over US$ 2 billions in 2000) with China (UNCTAD, 2002, pp.155-156). On the other hand, the limited supply capacity and competitiveness of most ASEAN-4 has contributed to their on-going trade deficit with China noted earlier (table 1)

The fourth observation relates to competition for the liberalized and deregulated markets (for goods and services) in China. It is apparent that the bigger beneficiaries are developed countries, or countries rich in natural resources, scenic tourist attractions and/or at higher levels of industrialization and technological development. Among the developing countries, the likely beneficiaries include the Asian NIEs and several ASEAN members (OECD, 2002, pp. 69-78 and 138-156; and UNCTAD, 2002, pp. 157-164). These regional suppliers have developed complementarities with China in production and export structures. Furthermore, they now possess invaluable first-mover advantage through well and/or long established trade and investment linkages.

Directly, several ASEAN-4 may gain some additional market shares in China in resource-based goods – such as energy products, forestry, agriculture and fishery and aquaculture products. Indeed, there is now a large premium to be reaped by the cultivation and processing of environmentally preferable, natural products – including those from organic farming, and from farming with plants and species which have not been tainted by genetic modification. In addition, through rising income and affluence, higher regional demand can be expected for a variety of high-value, income-elastic agro-products – including high-value (aquaculture) fish and seafood, cut flowers, tropical vegetables and fruit, nuts and spices etc. (Lam and Wattanapruttipaisan, 2001b, pp. 29-30).

Indirectly, ASEAN-4 can also serve as second-tier suppliers to ASEAN-6 of electrical machinery, plus automotive and automotive parts and components and computer. These product categories are important exports for several ASEAN-6 members, and they are likely to be competitive with China’s trade liberalization, as noted previously. However, the skill base, and policy capacity for inducing significant resource re-allocation to take advantage, directly and via ASEAN-6, of market opening in China may be limited within ASEAN-4, especially among the smaller and least developed countries.

________________________________________________________________________________________

b Categories 6 and 8, less 68 of the Standard International Trade Classification (SITC).

Five, as regards competition for home-country markets, ASEAN as a whole can expect much greater pressures from labour-intensive manufactures (such as many lines of textiles and clothing plus electronics assembly, footwear, toys and plastic products. Garment producers at a lower stage of technology sophistication in South and South-East Asia, including in several ASEAN member countries (both new and old), are going to feel market penetration and market displacing pressures from China in the coming years (more in point six below).

In addition, China also has a competitive edge or has developed competitiveness in a wide range of other manufactures -- including building materials, machinery and electrical appliances, optical instruments, clocks and watches, measuring and checking instruments, metal products and chemicals. In fact, these manufacture goods accounted for about 70 per cent of all ASEAN imports from China -- with machinery and electrical appliances alone accounting for just over one-half of total import value in 1999. They have also expanded faster than ASEAN import of similar products from all other sources during 1993-1999 (Wattanapruttipaisan, 2001, pp.7-8).

Six, concerning competition in third-country markets, China will likely enjoy a comparative advantage over ASEAN in the United States, the EU and Japan; by far the three most important export markets for both most ASEAN members and China For example, in the G-7 market for clothing,[15]China’s share doubled to around 20 per cent in the 1990s; such market gain has occurred largely at the expense of exporters from the Asian NIEs; however, the share of ASEAN-4 (Indonesia, Malaysia, Philippines and Thailand) remained largely stagnant at around 8 per cent. The G-7 market for footwear is now dominated by China whose relative share was less than 10 per cent in the late 1980s but went as high as 38 per cent in the late 1990s. Again, this has taken place at the expense of both the Asian NIEs and ASEAN-4.

Seven, as regards tourism, the potential for mutual gains are substantial. Out-bound tourist from China amounted to around 10 million with just over one-fifth heading for ASEAN. Comparatively, however, there have been fewer Chinese tourists in ASEAN-4 (except Viet Nam). Meanwhile, the growing markets for eco-tourism, adventure tourism, and multiple-destination tourism remain to be tapped. The major selling points for such “niche tourism” – namely naturalness, rarity, and pristine quality – are in good supply particularly within ASEAN-4.

There has, indeed, been a considerable level of FDI and other investment in infrastructure development; and in tourist-based hotels, resorts, and facilities – especially in the newer ASEAN members. But such resources have been confined largely to more accessible localities and internal regions, or cheery picking in nature,. Nevertheless, good quality accommodation is not always readily available or available for different classes of tourists. In addition, a variety of tourism-related services remained to be improved and diversified (Lam and Wattanapruttipaisan, 2001b, pp.30-31).

The eighth issue relates more generally to the impulses and imperatives in future competition to be managed by both ASEAN and China. An increasingly key factor in maintaining market shares or in gaining new markets lies in innovation-led and learning-driven improvements and differentiation in product and process. There are then other non-price attributes of competitiveness, too. In particular, consumer choices and market preferences have become more demanding, more sophisticated and constantly changing.[16] Such parameters as quality, reliability, health and safety, social equity in production and marketing, and environmental compatibility of products and processes are now major determinants of demands for goods or services, whether final or intermediate. So are other elements of competitive advantage including shorter product cycles and smaller production batches, more frequent design changes, mass customization, just-in-time sourcing, and exacting timeliness in delivery.

A large number of LDCs and economies in transition – including Cambodia, Lao PDR and Viet Nam within ASEAN – are not member of GATT/WTO. As such, they will not be able to enjoy the S&D treatment provided for in the Uruguay Agreements and China’s WTO commitments for that matter. Thus, the first element of flexibility is the granting to these three countries full membership privileges for the purpose of the proposed ASEAN-China FTA.[17]

S&D provisions in favour of developing economies and LDCs normally comprise of four categories – namely the recognition of their specific interest, the imposition of fewer obligations on them, the granting of longer adjustment and transitional time frames, and the provision of technical assistance. These provisions can be found in various multilateral agreements under WTO (table 3), and on that basis, strengthened or additional S&D provisions can be extended to ASEAN-4 during the ASEAN-China FTA negotiations.

Thus, S&D treatment will in principle give developing economies and LDCs (including ASEAN-4) time and opportunities (a) to make the necessary changes in

_________________________________________________________________________________

d Smaller producers granted more rapid removal of restraints in importing countries.

their legislation; (b) to re-orientate policies and put in place new policies, and to establish the necessary institutional and administrative infrastructure; (c) to minimize and manage more effectively the inevitable economic disruptions and losses associated with their new obligations; and most crucially, (d) to build up their supply capabilities and competitiveness for gainful and sustained participation in the global trading system.

In practice, however, the S&D provisions are generally inadequate as regards, among other things, the length of time required to set up the hard and soft infrastructure, noted above. In addition, they do not sufficiently reflect the special needs and interest, or on-going performance of the intended beneficiaries (developing economies and LDCs). Furthermore, there are a variety of implementation problems in S&D treatment on the part of the developed countries. All these issues are being addressed in the current Doha (Millennium Development) Round.

In addition, the net stimuli and mutual gains from PTAs and FTAs depend on several other factors. One is the number (or range) and relative importance of sensitive activities and sectors which are excluded, and the duration of their exclusion, from FTAs and FTAs. Two, there is then the definition and calculation of (minimum) local contents or county of origin -- plus the ways in which such measures are applied in practice, and the related provisions and application of safeguards. The third factor is the availability of systems and modalities for orderly dispute settlements. Lastly, there is the duration of the transition and adjustment periods. These time frames, in turn, are conditioned by the flexibility with which resources, policies and institutions can be shifted, created, transformed and adjusted among the participating countries and industries to meet the existing, enlarged, differentiated as well as new demand.

There is thus a justifiable need, under the Doha Round and under the proposed ASEAN-China FTA , to link S&D treatment to the development and strengthening of supply-side capabilities and competitiveness of developing economies – those currently in market-based transition and the LDC (such as the ASEAN-4) in particular. By the same token and in the best-case scenario, S&D treatment needs to be tailored made to the special economic and structural circumstances of ASEAN-4. This is a prerequisite to promoting greater as well as to enhancing the quality of participation of these economies in the global trading system or in the proposed ASEAN-China FTA.

A detailed discussion on supply capabilities and competitiveness is outside the scope of this presentation. A number of points can be noted, however. One, capabilities, just like a rich base of physical resource endowments, are not sufficient to guarantee present or to sustain future competitiveness.[18] There are deeper factors and forces at work in transforming capabilities into comparative and competitive advantage.[19] These include, firstly, the availability of socio-cultural capital -- such as work ethics, trust, moral norms, ethnic- or community-based development and social networks etc. The second set of determinants relate to the supply and affordability of economic and social infrastructure and services, the quality of domestic policies and institutions, plus the extent of development-oriented governance. Thirdly, a culture or tradition of entrepreneurship and innovation is essential; and so is the ready availability of research and development institutions and facilities, and of commercially practical and accessible results. Lastly, the external conditions and circumstances must be and must remain conducive to the development process of developing economies.

Two, competitiveness is not a static concept. It is the result of learning, upgrading, differentiation and innovation processes for continuous productivity enhancement as firms adjust competitively to an environment of constant change but still of ever-fierce competition and rivalries. Such value-adding processes are inevitable: simple, initial price advantage will be exhausted or eroded over time by the rising costs of labour and land, widening infrastructure shortages, more intensifying competition, and the increasing fragmentation and sophistication of consumer demand and market requirements. In addition, learning and innovation themselves can be much further leveraged by inter-firm linkages – including through mergers and acquisitions, through becoming part of clusters and networks of collaborative firms, and through the formation and deepening of specific and/or eveloving strategic alliances and technology partnerships.

Competitiveness has a foundation in microeconomics – in particular, at the enterprise level -- whether or not it is measured and benchmarked at the industry, sectoral or national level (Porter, Sachs and Mcarthur, 2001, pp. 16-21). In fact, the competitiveness of an industry or sector (and by extension, of an economy itself) is as strong and durable as that of the weakest link in the chain or network of enterprises supporting the industry or sector concerned. However, information and data on enterprise capabilities and competitiveness are not available virtually across the region. A cooperative effort has to be made – by government, enterprise-support agencies and the donor community -- to survey and assess, in a systematic and objective manner, competitive potential and the needs for remedial capacity enhancement of selected enterprises in priority sectors within ASEAN-6/4 as well as China.

There can be identified at least 78 variables for measuring, evaluating and benchmarking capabilities and competitiveness at the enterprise level. These variables can be grouped into seven categories which provide a quantitative assessment of the overall operating environment and the competitive potential of (sampled or surveyed) enterprises.[20] The results so obtained will reveal various areas of shared weaknesses and deficiency on the enterprise supply side. They provide thus a solid foundation not just for mutual and/or remedial technical assistance and capacity building at the enterprise level by government and non-government organizations in both ASEAN and China. The surveyed results are also indispensable for the formation and deepening of inter-firm linkages and networking for enhanced collective efficiency and hence competitiveness.

Traditionally, entrepreneurship is regarded as an inherent personality trait, a cultural characteristic, or a normal response to the presence of a profit-making opportunity. However, (cross-sectional and cross-border) behavioural research on successful entrepreneurship has indicated that entrepreneurial attributes are latent and widely distributed. They are thus not in relatively fixed supplies at any given place and time. As such, these entrepreneurial attributes can be identified, developed and enhanced. Yet, entrepreneurship training has not been pursued on a sustained basis for the promotion and incubation of a culture of entrepreneurship and innovation among economies of the Greater Mekong Subregion (GMS, namely ASEAN-4 plus Thailand and Yunnan (China) and, for that matter, within ASEAN as well.[21]

Meanwhile, the challenges to enterprises and their entrepreneurs have become much more formidable and pressing as well. As noted previously, there are the intensified global and regional competition, the rapid pace of technological advances and their equally rapid incorporation in to production processes and products, and the more sophisticated and constantly changing consumer and market demands. Table 4 below contains output details of a project proposal (1) to train GMS entrepreneurs; (2) to create local training capacity for the most cost-effective replication of such entrepreneurship training across the subregion and elsewhere, for that matter; (3) to assist in the formulation of bankable business plans; and (4) to promote inter-firm linkages and networking among the GMS economies as well as with non-GMS enterprises. [22]

Table 4. Overview of various output categories of a GMS training project

on entrepreneurship development and enterprise networking

More generally, the possible elements in a cooperation framework between ASEAN-6/4 and China are listed below. These elements are grouped into four main components – namely (1) human resource development at the enterprise level; (2) institutional capacity building in enterprise/business support services; (3) facilitation measures for enterprise development and networking through a partnership between government and the private sector; and (4) government-driven promotion of enterprise investment

marketing, inventory control, improving export readiness, machinery and factory maintenance and upgrading etc.)

By way of conclusion, it can be reiterated that firstly, there are great potential and opportunities for wider and deeper relationships in trade and investment between ASEAN-6/4 and China. Secondly, such potential and opportunities can be charted, nurtured and operationalized with good commercial returns in support of mutual income growth, structural transformation and modernization, poverty alleviation and social advancement across the region. Thirdly, the whole process can be facilitated and accelerated through the synergies between external investment and local resources – as mediated by the gradual relocation of FDI and technologies to sectors, industries and enterprises in various countries and domestic regions.

This is the famous “flying geese” pattern of collective development as demonstrated by the interaction of trade and investment among East and South-East Asian economies over the past 40 years. The pattern itself is conditioned by (a) the mutual liberalization of trade and investment and the associated standardization and simplification of procedures and regulations, including via PTAs and FTAs; (b) the mutual promotion and facilitation of the needed transformation, diversification and upgrading of sectors, industries and enterprises among the countries concerned; (c) the mutual setting up and deepening of various cross-border linkages and inter-firm partnering; and (d) the formation of common position in commercial diplomacy in negotiating forums within and outside the region.

However, the cooperation and integration process will be far from smooth sailing; this has been amply demonstrated the long experience in the implementation of a variety of PTAs, FTAs and multilateral trade accords. The potential and opportunities for durable economic growth, structural transformation and social development through the proposed ASEAN-China FTA are both exciting and significant. But it is also clear that both sides will have to manage – effectively, timely, flexibly and in a forward-looking manner -- the many challenges from trade and investment liberalization as well as from their own competition in third-country markets. This will be one of the greatest tests to economic commitment and political will for sustainable cooperation and integration for mutual and equitable growth and development.

Anderson, Kim, 1997, “On the Complexities of China’s WTO Accession”, The World Economy, Vol. 20, no. 6, September, pp. 749-773.

Asian Development Bank, 2002, Asian Development Outlook 2002 (New York, Oxford University Press).

Huang, Jikun, Chunlai Chen and Scott Rozelle, 1999, Trade Liberalization and China’s Food Economy in the 21^st Century: Implications to China’s National Food Security, paper presented in a conference on China’s Agricultural Trade and Policy: Issues, Analyses, and Global Consequences, San Francisco, 25-26 June, 26 pages.

Ianchovichina, E. Will Martin and Emiko Fusake, 2000, “Assessing the Implications of Merchandise Trade Liberalization in China’s Accession to the WTO” (Washington, DC, World Bank), July.

Ianchovichina, E. and Will Martin, 2001, Trade Liberalization in China’s Accession to the WTO (Washington, DC, World Bank) May.

JP Morgan, 1999, “China’s Reform to Take another Costly Decade” in Global Data Watch, 29 October (Hong Kong).

Lam, N.V. and T. Wattanapruttipaisan, 2001a, “Entrepreneurship Trainning for SME Development and Networking among GMS Economies – A Project Proposal”, Foundation for International Human Resource Development (Bangkok), January, 27 pages.

Lam, N.V. and T. Wattanapruttipaisan, 2001b, “The New WTO Round and Concerns of the Least Developed Countries and Economies in Transition of Asia: Bridging the Gap?”, paper presented at the Joint ICTSD/CEE/HBF Regional Dialogue for Governments and Civil Society, Chiang mai, Thailand, 29-30 March, 49 pages.

Organisation for Economic Co-operation and Development, 2002, China in the World Economy – The Domestic Policy Challenges (Paris, OECD Centre).

Pomfret, Richard, 2002, The Economics of Regional Trading Arrangements (New York, Oxford University Press).

UNCTAD, 1994, Trade and Development Report 1994 (Geneva and New York, United Nations)

UNCTAD, 2002, Trade and Development Report 2002 (Geneva and New York, United Nations).

Walmsley, Terrie L. and Thomas W. Hertel, 2000, “China’s Accession to the WTO: Timing Is Everything” (Centre for Global Trade Analysis, Purdue University), September.

Wang, Zhi, 1999, “The Impact of China’s WTO Entry on the World Labour-intensive Export Market: A Recursive Dynamic CGE Analysis”, The World Economy, Vol. 22, no. 3, May, pp.379-405.

Wattanapruttipaisan, T., 2001, “ASEAN-China Economic Relationships and Co-operation in Trade and Investment: Patterns and Potential”, paper presented at the Symposium on ASEAN-China Entrepreneur Exchanges, Chengdu, China, 22-23 October.

Wattanapruttipaisan, T., 2002a, “SMEs Subcontracting as Bridgehead to Competitiveness: Framework for an Assessment of Supply-Side Capabilities and Demand-Side Requirements”, Asia-Pacific Development Journal, Vol. 9, no. 1, June (forthcoming).

Wattanapruttipaisan, T., 2002b, “The Opportunities and Challenges from ASEAN-China Free Trade Agreement”, mimeographed.

Weston, Ann, 1995, “The Uruguay Round: Unravelling the Implications for the Least Developed and Low-Income Countries” in UNCTAD, International Monetary and Financial Issues for the 1990s, Vol. VI (Geneva and New York, United Nations), pp. 61-98.

World Bank, 1993, The East Asia Miracle: Economic Growth and Public Policy (New York, Oxford University press).

World Trade Organization, 1995, Regionalism and the World Trading System (Geneva, WTO).

[1] The views expressed in this paper are those of the author and do not necessarily reflect those of the ASEAN Secretariat. Mention of any firm or license process does not imply endorsement from the ASEAN Secretariat. I am thankful to Mr. Noordin Azhari, Director, Bureau of Economic Co-operation, ASEAN Secretariat; for his encouragement in research, and to Dr. N. V. Lam, Adviser, Foundation for International Human Resource Development, Bangkok, for extensive discussions and many useful comments on an earlier draft. The usual disclaimer applies. The author can be contacted through <[email protected]>

[2] Merchandise exports to or through Singapore were down from US$ 182 to 18 million between 1000 and 2000; the figures for exports to or through Viet Nam being US$ 392 and 19 million respectively. On the other hand, exports to the United States expanded from US$ 236 to 740 million, in a large part due to the higher garment quota given to Cambodia from May 2000.

[3] The number of tourists in Myanmar went up from 117 thousand in 1995 to 205 thousand in 2000. ASEAN tourists accounted for 10 and 22 per cent of these numbers respectively. Tourist from China constituted 7 per cent of the total in 2000.

[4] Hong Kong, China, has been an important trade and investment partner of ASEAN. In 2000, for example, the share of ASEAN’s trade with this SAR was equivalent to 4.4 per cent of the total ASEAN’s foreign trade; the corresponding ratio of ASEAN’s trade being 8.5 per cent of the foreign trade value (US$ 412.4 billion ) of Hong Kong, China. In 2000, the GDP of Hong Kong, China, reached US$ 162.6 billion, equivalent thus to almost US$ 24,000 per head of resident. During the same year, there were almost 1.1 million Hong Kong tourists visiting ASEAN member countries. The number of ASEAN tourists going to Hong Kong, China, was estimated at around 1.5 million in 2000.

[5] It is worth noting the growing attraction of China as the host economy for FDI. Such inward investment averaged just under US$ 14 billion a year during 1989-1994. The flow reached almost US$ 41 billion a year over 1995-2000. Some 400 of the Fortune 500 biggest corporations have invested in over 2000 projects in China. As a whole, inward FDI from all sources in ASEAN has not been expanding and diversified that fast.

[6] On the other hand, GDP in several ASEAN member countries contracted, quite severely in 1998 -- with output down by 7.5 per cent in Malaysia, 10.2 per cent in Thailand and 13.2 per cent in Indonesia. In the global economic downturn of 2001, Singapore’s GDP fell by 2.0 per cent (compared to an expansion of almost 10 per cent in 2000). The corresponding figures for Malaysia being 0.4 and 8.3 per cent respectively

[7] During 2001, for example, income per head of population was in the range of US$ 23,000-17,600 in Singapore and Brunei Darussalam; US$ 2,800-2,000 in Malaysia and Thailand; US$ 1,000-730 in Philippines and Indonesia; and around US$ 400-255 in the newer ASEAN member countries, except Myanmar for which information is not available.

[8] OECD (2002, p. 761), UNCTAD (2002, p. 144), Ianchovichina and Martin, (2001, table 5), and JP Morgan (1999, p. 6).

[9] Wattanapruttipaisan (2002b) contains a more detailed discussion on the nature, magnitude and implications on ASEAN of China’s liberalization of trade in goods and services.

[10] There are tariff peaks on both agricultural and industrial products in China and, for that matter in virtually all other trading economies. For example, the specific tariff rates on individual agricultural goods are in the range of 0 to 65 per cent, with an average of 15 per cent; (out-of-quota) cereals and grains have the highest rates of, for example, 65 per cent on rice and wheat. Those on industrial products are from 0 to 47 per cent, with an average of 8.9 per cent; the higher rates are on photographic films, automobiles (falling from 80-100 per cent to 25 per cent) and auto parts (10 per cent by 2006).

[11] These barriers typically include import quotas, import prohibitions and restrictions, the imposition of variable levies (based on price and/or quantity) on imports, the introduction of minimum import prices or volumes, discretionary import licensing, NTBs and other opaque practices maintained by or through state trading enterprises, the requirement of voluntary restraints by import suppliers etc.

[12] For a sample discussion on the complexities involved in model specifications and making realistic and workable assumptions, and on the estimated results, see OECD (2002, pp. 118-121 and 151-156); UNCTAD (2002, pp. 141-174); Iuanchovichina, Martin and Fusake (2000); Walmsley and Hertel (2000); Huang, Chen and Rozelle (1999, pp. 1-36); Wang (1999, pp. 379-405); and Anderson (1997, pp. 749-772). For a survey and summary presentation of the results from selected major research papers and publications relating to the impact of China’s WTO accession, see OECD (2002, pp. 76l-783).

[13] For a detailed discussion on PTAs and FTAs, and related policy issues, see Asian Development Bank (2002, pp. 157-196), Pomfret (2002), and WTO (1995, pp.25-62). Further references on this subject can be found in the extensive bibliography contained in the first two pieces of work

[14] In global terms, however, it is clear that the industrialized economies and region will continue to be the most important trade markets, sources of investment finance, and origins of cutting-edge technologies and innovative services for both ASEAN 9a s a group) and China in the foreseeable future. In particular, the EU, Japan and the United States absorbed for 48 and 38 per cent of exports from China and ASEAN respectively in 2000.

[15] Namely Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

[16] This is a transformation both facilitated and fostered by the speedy progress in information and communication technologies ICTs and, on the other hand, by more fundamental forces and attitudes of a non-economic nature as well. A driving force behind the above market trends is the proliferation of complex networks of international production (NIP), which breaks down the value chain into discrete functions and activities. These are then located wherever inputs and supplies can be produced or outsourced most competitively and timely; where they can improve or upgrade the NIP-based or -related access to resources, capabilities, and knowledge and innovations; or where they can help penetrate important and growing markets, market segments, and market niches. There is, indeed, an on-going shift from large-scale vertical integration of hierarchies (of the Fordish and Taylorish varieties) to flatter horizontal production networks, involving smaller enterprises but interlinked nevertheless by on-line and real-time interaction between (alternatively) customers/producers. ICT-driven lean stocking and production, quality assurance and control, and just-in-time delivery are thus an impulse for (cause) as well as a result (impact) of inter-firm collaboration for enhanced collective productivity at various parts of the value chain within and/or across border (Wattanapruttipaisan, 2002a).

[17] Before the Uruguay Round and the setting up of WTO, developing countries were in effect exempt form most of the disciplines imposed on the contracting parties to GATT. They were accorded with mostly non-reciprocal trade preferences (the Generalized System of Preferences or GSP) while the most favoured nation (MFN) treatment allowed them to benefit from the successive reductions in trade barriers negotiated among the industrial countries. The greater specificity of S&D under various WTO agreements means that such treatment tends to be less extensive or inclusive. Yet, developing economies and, in many cases, even the LDCs, are assuming substantial new obligations in many new areas of the current trade rules. Outstanding issues in S&D treatment, including those related to implementation and technical assistance, are discussed in more detail in UNCTAD (2002, pp. 42-45) and (1988, pp. 65-87); and Weston (1995, pp. 64-85).

[18] In business management terminologies, competitiveness at the national level is normally understood as the extent to which the domestic environment in its totality is conducive to entrepreneurship and business activities. Industry-level competitiveness refers to the extent to which an industry or sector has the potential for growth and/or to generate an attractive return to direct and/or other forms of investment. Meanwhile, firm-level competitiveness is the effectiveness in the production and delivery of goods and services at lower costs than those of competitors, or at a price premium because of superior or differentiated quality, design and delivery.

[19] Some of these forces and influences, in particular development-oriented governance, have posed to be contentious issues both before and after the publication of a comprehensive study by the World Bank (1993) on the East Asian (economic) miracle.

[20] The overall environment in which the (sampled) SMEs operate is quantitatively approximated as “Nature and readiness of firm” (with 12 questions and a relative weight of 12.5 per cent). “Entrepreneurial characteristics” (13 questions and 20 per cent) are the driving force of firms, whether they are large firms or small and medium-sized enterprises. The 10 questions each in “Capabilities” and “Competitiveness” (each with 12.5 per cent relative weight) are indicative, by and large, of the initial conditions and circumstances of the SMEs concerned. The category “Production organization” (11 questions and 15 per cent) is a proxy of the potential for productivity upgrading and competitive growth through innovation-led, learning-based and investment-driven transformation of the activities of the pertinent enterprises. There are 11 questions each in “Finance” (15 per cent of relative weight) and “Human resource development” (12.5 per cent). See Wattanapruttipaisan (2002a) for a detailed discussion of the justification and methodologies involved.

[21] There have been a large number of programmes for business training and human resource development at the enterprise level within the GMS – funded by both multilateral agencies (including ADB and UNDP) and bilateral donors, notably Japan. But most of these programmes have concentrated on the generation of skills in (formal) management, finance and marketing.

[22] For further details on methodologies and approaches, see Lam and Wattanapruttipaisan (2001a).