Recent Development of ASEAN's Economic Relationship with China and India

1

• Recent Development of ASEAN's Economic
  Relationship with China and India

By Hendri Saparini, Ph.D Managing
Director ECONIT Advisory Group saparini_at_econit.co.
id IDEAs Workshop New Delhi, 5-6 November 2009
2
Presentation Outline

• Economic characteristics and its development of
  ASEAN members, China and India.
• ASEAN China Free Trade Area (ACFTA) and ASEAN
  India Trade in Goods Agreement (TIG) The Basic
  Agreement and Current Development
• Trade and Investment between Indonesia China
  and Indonesia India, and their impacts on
  Indonesian economy.

3
Introduction

• ASEAN is very aggressive to enter into a Free
  Trade Agreement (FTA). In fact, the country
  members of ASEAN have not all been ready to
  commit in such FTA.
• A review on ASEAN-China and ASEAN-India FTAs is
  very crucial as ASEAN will have to deal with two
  economic giants, not to mention that they are
  highly competitive.
• A review on Indonesia, as one of ASEAN members
  that has huge economic potentials, is expected to
  give significant result in form of relationship
  development pattern, as well as the potential
  benefit and negative impact from the economic
  integration on process.

4
List of ASEAN Free Trade Agreements
AGREEMENT SIGNING DATE EFFECTIVE
ASEAN-Australia-New Zealand Free Trade Area (AANZFTA) 27 February 2009 Preparations are currently being undertaken for the ratification and the subsequent implementation of the Agreement by the parties
ASEAN-China Free Trade Area (ACFTA) November 2002 The realization of ACFTA in 2010 for Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, Thailand and China, and 2015 for Cambodia, Lao PDR, Myanmar and Viet Nam.
ASEAN-India Trade in Goods (TIG) Agreement 13 August 2009 The ASEAN-India FTA will see tariff liberalisation of over 90 of products traded between the two dynamic regions. Tariffs on over 4,000 product lines will be eliminated by 2016, at the earliest. The ASEAN-India TIG Agreement will enter into force on 1 January 2010 once India and at least one ASEAN Member State notify completion of their internal ratification process.
ASEAN-Japan Comprehensive Economic Partnership (AJCEP) April 2008 The Agreement entered into force on 1 December 2008. As of July 2009, Brunei Darussalam, Lao PDR, Malaysia, Myanmar, Singapore, Thailand, Viet Nam and Japan have ratified the Agreement. 
ASEAN-ROK Framework Agreement on Comprehensive Economic Cooperation 13 Dec. 2005 The Framework Agreement provides for an ASEAN-ROK Free Trade Area by the year 2008 (with flexibility to 2010) for ROK, 2010 (with flexibility to 2012) for Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore and Thailand, 2016 for Viet Nam and 2018 for Cambodia, Lao PDR, and Myanmar.
5
Countries Economic Characteristics ASEAN Needs
to Define A Better Strategy

• China is an economic giants to ASEAN
• GDP and Foreign Reserve of China are far above
  those of ASEAN members
• Trade structure between China and ASEAN members
  show that Chinese products are highly competitive
• Almost all ASEAN members face trade deficit
  against China
• Chinese attractiveness for foreign investment is
  above that of ASEAN members in average.

6
Economic GrowthASEAN Behind China and India
Source IMF
7
GDP ComparisonASEANs GDP only 34 of the
Chinese (2008)
Source 2008 figure, IMF
8
GDP StructureASEAN members, China and India
Source ADB
9
High Growth of FDI in ChinaImpact of Economic
Reform
Source UNCTAD
10
FDI Inflow (1998-2008) China is far Above ASEAN
Source UNCTAD
11
Exports and ImportHuge Surplus of Chinas
International Trade
Source Asean Economic Community Chartbook, 2008
12
Top 5 ASEAN Exports to ChinaDominated by
Electonics Parts and Primary Commodities
Source Asean Economic Community Chartbook, 2008
13
ASEAN Commodities Export to China Main Source
for Chinas Demand , 2008
Source ASEAN Economic Commonity Chartbook 2009
14
5 Top ASEANs ImportASEAN from China, 2008
Source ASEAN Economic Commodity Chartbook, 2009
15
Main ASEAN Countries Exports to India India
Dependent for Raw Materials (2008)
Country Commodity Share of total export ()
Brunei Darussalam Crude petroleum oils 99.80
Cambodia Palm oil its fraction 88.80
Myanmar Dried vegetables, shelled 61.70
Indonesia Palm oil its fraction 57.40
Malaysia Crude petroleum oils 39.70
Singapore Petroleum oils, not crude 22.20
Viet Nam Coal briquettes, ovoid similar solid fuels manufactured from coal 21.68
Philippines Parts access of motor vehicles 18.90
Thailand Petroleum oils, not crude 6.40
Source ASEAN Secretariat Office
16
ASEAN Imports from India (2008)Why being
dominated by Petroleum Oils?
Source ASEAN Economic Community Chartbook 2009
17
ASEAN trade with ChinaContinuous increase of
deficit
Source ASEAN Statistical Yearbook, 2008
18
ASEAN - India TradeSurplus with Value Added?
Source ASEAN Statistical Yearbook, 2008
19
ACFTA Gates to Liberalization

• ACFTA was agreed in November 2002. Both sides
  have targeted the realization of ACFTA in 2010
  for Brunei Darussalam, Indonesia, Malaysia,
  Philippines, Singapore, Thailand and China, and
  2015 for Cambodia, Lao PDR, Myanmar and Viet Nam.
• Under the ACFTA, tariffs on certain products as
  known as the Early Harvest Program (EHP), were
  reduced before the onset of the FTA (came into
  effect on 1 January 2004).
• Others agreements by sectors have also been
  agreed under ACFTA.

20
Agreements Under ACFTA 1

• The ASEAN-China MOU on Strengthening Sanitary and
  Phytosanitary (SPS) Cooperation was signed in
  November 2007.
• ASEAN-China MOU on Agricultural Cooperation in
  November 2002 in Phnom Penh a more direct
  cooperation in the agricultural sector between
  the lead national agencies in ASEAN and China. An
  extended ASEAN-China MOU on Agricultural
  Cooperation for 2007-2011 was signed in January
  2007 in Cebu.
• ASEAN and China strategic partnership in
  Information and Communications Technology (ICT)
  to promote international cooperation in terms of
  investment in human resources development on ICT
  and to explore the possibility of establishing
  Greater Mekong Sub-region (GMS) information
  highway.

21
Agreements Under ACFTA 2

• ASEAN and China cooperation the MOU on Transport
  Cooperation in November 2004 in Vientiane,
  promoting i) transport infrastructure
  construction ii) transport facilitation iii)
  maritime safety and security iv) air transport
  v) human resources development and vi)
  information exchange.
• The 7th ASEAN-China Maritime Transport Agreement
  (ACMTA), November 2008 agreed in principle with
  the Strategic Plan for ASEAN-China Transport
  Cooperation, identifying transport infrastructure
  projects aimed at enhancing international and
  cross-border transportation and facilitation.

22
Early Harvest Product
HS Description
01 Live Animal
02 Meat and edible meat offal
03 Fish, crustacean, molusc, other invrt.
04 Dairy products
05 Products Animal Origin, nes.
06 Live tree and other plant
07 Edible vegetables and certain roots
08 Edible fruits and nuts
Source ASEANSEC
23
Tariff reduction on ACFTA
X Applied MFN Tariff Rate ACFTA Preferential Tariff Rate (Not later than 1 January 05) ACFTA Preferential Tariff Rate (Not later than 1 January 05) ACFTA Preferential Tariff Rate (Not later than 1 January 05) ACFTA Preferential Tariff Rate (Not later than 1 January 05)
X Applied MFN Tariff Rate 2005 2007 2009 2010
X gt 20 20 12 5 0
15 lt X lt 20 15 8 5 0
10 lt X lt 15 10 8 5 0
5 lt X lt 10 5 5 0 0
X lt 5 Standstill Standstill 0 0

• Agreement on Trade in Goods of the Framework
  Agreement on Comprehensive Economic Co-operation
  ACFTA starting on January 1, 2005

24
Average Tariff Applied (2007) 1
Industry Vietnam India China Thailand Malaysia Indonesia
Agriculture and hunting 20.1 28.2 15.9 21.0 5.0 4.8
Chemicals and chemical products 4.4 7.9 11.2 3.4 2.1 4.3
Coke, petroleum products and nuclear fuel 5.8 8.2 7.1 3.0 0.1 3.2
Electrical and electronic equipment 14.0 6.0 14.6 7.9 4.4 5.0
Food, beverages and tobacco 36.5 34.1 21.5 23.1 15.2 10.2
Forestry and Fishing (PRODUCTS) 20.5 24.8 12.3 10.8 1.1 4.7
Machinery and equipment 7.5 7.5 11.5 6.2 4.8 2.7
Metal and metal products 9.9 7.2 9.3 6.8 12.2 7.0
Mining and quarrying 4.2 4.9 4.6 1.2 0.7 3.7
Mixed goods (trade data) 5.1 9.1 9.1 5.9 0.6 6.1
Simple average across all partners countries
Source ITC
25
Average Tariff Applied (2007) 2
Industry Vietnam India China Thailand Malaysia Indonesia
Motor vehicles and other transport equipment 25.4 18.3 14.6 18.8 10.1 10.2
Non-metallic mineral products 25.4 9.2 15.9 7.3 15.9 7.5
Other manufacturing 28.4 9.6 20.4 15.6 7.8 10.5
Petroleum 5.4 6.1 2.3 0.3 2.0 3.7
Precision instruments 11.5 7.9 11.9 5.1 0.7 4.6
Publishing, printing and reproduction of recorded media 22.0 7.4 7.2 8.7 8.5 4.4
Recycling 0.5 5.8 2.9 0.1 0.5 1.6
Rubber and plastic products 19.4 9.6 14.2 10.4 20.5 11.6
Textiles, clothing and leather 41.6 28.3 19.2 13.3 11.5 10.5
Wood and wood products 18.1 9.4 8.7 6.2 11.4 4.8
Average 16.3 12.5 11.7 8.8 6.8 6.1
Simple average across all partners countries
Source ITC
26
China Financial Aids and Investment
Aggressiveness due to Huge Foreign Reserve

• Investment cooperation fund totaling US10
  billion (infrastructure construction, energy and
  resources, information and communications)
• Credit of US15 billion (including loans with
  preferential terms of 1.7 billion dollars in aid
  for cooperation projects)
• Special aid of 39.7 million dollars to Cambodia,
  Laos and Myanmar
• Provide 300,000 tons of rice for to strengthen
  food security
• Donate 900,000 dollars to the cooperation fund of
  ASEAN plus China, Japan and the Republic of Korea
• Inject 5 million dollars into the China-ASEAN
  Cooperation Fund
• Offer of 2,000 government scholarships and 200
  Master's scholarships for public administration
  students

27
Relationship of ASEAN-China and ASEAN-India

• ASEAN economic is relatively much smaller than
  China in terms of GDP, which is around 2.9 times
  of ASEANs. It is difficult for ASEAN to compete
  with China in FTA. Chinese population is 2.3
  times ASEANs and a very huge market for ASEAN
  products, but even before FTA ASEAN products can
  hardly penetrate Chinese market due to lack of
  competitiveness.
• ASEAN members (excl. Singapore) have similar
  characteristics, rich of natural resources, but
  low industrial productivity and competitiveness.
  This means that they compete each other, rather
  than complementing. Considering this
  characteristics, it needs a very hard work to
  develop AFTA for they are competing in same
  existing market and not creating a new
  opportunity.

28
Relationship of ASEAN-China and ASEAN-India

• ASEAN has already signed a free trade agreement
  and will be followed by other agreements. ASEAN
  should develop a joined-marketing strategy to
  increase their bargaining, for example for CPO,
  Indonesia and Malaysia are the biggest producers,
  so they have a very strong position in
  determining price.
• When ASEAN is able to become a unified economy,
  then ASEAN will be able to offer an economic
  cooperation for mutual benefit of ASEAN, China
  and India. In investment, for instance, it is
  encouraged to China and India to establish
  processing industry in ASEAN, so China and India
  will not only absorb raw materials from ASEAN,
  but also give higher value added ASEAN.
• Should ASEAN not transform into an economic
  power, ASEAN would not get more benefit from FTA.
  Trade and investment after FTA will indeed
  encourage economic growth, but such growth will
  not give much value added into the economy.
  Although exist, value added will only be limited
  and unable to raise social welfare.

29
Indonesian Economic Relationship with China and
India
30
China, India dan Indonesia Different Economic
Characteristics

• Chinese GDP showed that investment has the
  biggest share in GDP, while in China and
  Indonesia the second of the biggest share in GDP.
  
• China and India focus on exporting manufactured
  products, not natural resources materials.
• More competitive industrial sectors has made
  trade liberalization have more positive impact to
  China and India, otherwise to Indonesia.
• Export of manufactured products, due to more
  competitiveness and productivity, has an
  important role in increasing Chinese and Indian
  foreign reserves.

31
GDP StructureIndonesia, China and India
Source ADB
32
Manufacture Productivity and Competitiveness
Increasing Foreign Reserve of China
Source State Administration of Foreign Exchange
Bureau of PRC
33
Economic ReformIncreasing India Foreign Reserve
Source Reserve Bank of India
34
Indonesia Foreign ReservedUnstable, Not a
Result of Productivity and Competitiveness
Source Bank of Indonesia
35
Chinas ExportFocusing on Manufacturing Goods
Source Ministry of Commerce PRC
36
India Exports Dominated by Manufactured Goods
Primary Product
Source Reserve Bank of India
37
Indonesian ExportIncreasing Shares of Primary
Commodity
Source CBS
38
Trade Balance Indonesia-ChinaSurplus for Oil
Gas, Deficit for Non Oil gas
Source Ministry of Trade
39
Indonesia-India Trade Balance Surplus for
Non-Oil Gas, Mainly Raw Materials
Source Ministry of Trade
40
Top 10 Exports Indonesia to ChinaDominated by
Natural Resources (2008)
Source CBS
41
Top 10 Exports Indonesia to IndiaDominated by
Natural Resources, too (2008)
Source CBS
42
Top Imports Indonesia from China (2008)Mostly
Manufactured Products, but Agricultural, too
Source CBS
43
Top 10 Import of Indonesia from IndiaDominated
by Manufactured Goods (2008)
Source CBS
44
Chinas and Indias FDIInsignificant in Indonesia
Source Indonesia Investment Coordinating Board
45
China, India dan Indonesia Trade and Investment

• Indonesian trade balance against China and India
  surplus for oil and gas, but deficit for non-oil
  gas
• Indonesian top 10 export to China and India are
  natural resources commodities. It is almost 80
  for Indonesian export to India and 70 to China
• Import Indonesia from China and India mostly
  manufactured products and final goods.
  Furthermore, on EHP implementation since 2004,
  Indonesia has imported a huge amount of
  agricultural products from China.
• Chinese and Indian FDI in Indonesia was
  relatively insignificant.
• Currently, there is a trend of acceleration of
  Chinese investment in Indonesia in infrastructure
  and oil gas, while India in financial sector.

46
China Investment to IndonesiaIt Will Increase,
Soon
47
China Loan to Indonesia Increased During 2008
Crisis

• Indonesia government has received standby loan of
  USD 5.5 billion and Bilateral Currency Swap
  Agreement (BCSA) up to US 17.5 billion.
• The BCSA scheme will strengthen rupiah value and
  maintain financial stability, as well as
  encouraging trade and investment. China trade
  with Indonesia will be pushed on natural
  resources and raw materials. Indonesian trade
  will be continuously dominated by Chinese
  manufactured products. As China has agreed to
  provide Special Buyer Credit Facility (SBCF) for
  Indonesia.

48
China-Indonesia Trade and Investment Need
Improvement for Mutual Benefit

• China will focus their investment and trade on
  natural resources and raw materials, as well as
  infrastructure. On the other hand, Indonesian
  will be continuously importing Chinese
  manufactured products.
• This trend will make Indonesia become natural
  resources and raw materials exporter, as a
  consequence, employment opportunity growth will
  be stagnant, even slowing down.

49
Before ACFTALow Competitiveness of Indonesian
Products
Source CBS
Growth of Textile and Leather Product
50
Indonesia Exporting Raw Tin ........
Source CBS
51
..But, Increasing Importsof Tin Based Products
Source CBS
52
How to Increase Benefit from FTA

• Prior to FTA, China investment in Indonesia is
  only in natural resources sectors. Soft loans to
  Indonesia are mostly aimed at infrastructure
  development and natural resources. Considering
  the privatization trend in Indonesia, China will
  have bigger opportunity to own shares of
  strategic Indonesian SOE, like electricity, power
  plant, railway, steel, etc.
• Chinese investment pattern is most likely to be
  focused on natural resources exploitation and
  assembling plant for components/parts imported
  from China, so most of the value added goes to
  China. If this condition continues to occur,
  Indonesian and other ASEAN members natural
  resources will be drained. ASEAN members will
  fail to create competitive and productive
  industrial countries.
• Evaluating agreements related with FTA and
  postponement of FTA implementation.
• Immediately prepared industrial policy map road
  in order to increase national productivity and
  competitiveness