74 - China-ASEAN FTA Changes ASEAN's Perspective on China

Summary

The China-proposed Free Trade Agreement (FTA) with ASEAN (Association of Southeast Asian nations) countries 10 years ago was mainly a political decision. Responding to ASEAN countries’ concerns over the possible adverse impacts of China's World Trade Organization (WTO) access, Premier Zhu Rongji proposed a China-ASEAN FTA, which was accepted readily by ASEAN leaders.

The FTA proposal involved two parallel considerations on the part of Premier Zhu. On the one hand, it was to dispel the growing concerns among ASEAN nations of a “China threat”. As a regional power, China's rapid rise naturally caused uneasiness among its neighbours, who were uncertain about China's intentions. Economically, such sentiment rose from the fear that, as a WTO member, China would become an even stronger competitor for ASEAN's export to third markets as well as for ASEAN's efforts to attract foreign direct investment (FDI).

Such fear was especially rampant among Southeast Asian countries hard hit by the 1997 financial crisis which resulted in a drastic decline in FDI inflow. Indeed, most ASEAN nations and China are similar in their development levels and economic structures. Thus China presents significant challenges to countries like Indonesia that relies on exports of labour-intensive products.

On the other hand, the China ASEAN Free Trade Agreement (CAFTA) initiation was also a useful tool to reinforce domestic support for China's WTO accession. In fact, China's bid to join the WTO was not totally free of domestic resistance. Some argued that some industries as well as the agriculture sector would suffer from intense import competition. Forming a bilateral trade arrangement with ASEAN offered a good alternative to reduce domestic concerns.

Even though the CAFTA initiation was based mainly on political calculations, economic interests were also important from the very beginning. Chinese leaders were fully aware that ASEAN, a large potential market with 500 million people and rich in various natural resources, could play a crucial role in China's long-run growth.

Somewhat surprisingly, this reactive decision has proved to be quite successful, both diplomatically and economically. As the first FTA of its kind in Asia, the FTA initiative between China and ASEAN gave China a diplomatic advantage. Soon afterwards, Japan, worried that China might dominate the region, was compelled to follow suit.