ASEAN-China Trade Likely To Outpace That of the United States Post CAFTA

12 January 2011
By LyKC

The latest Obama’s presence in Asia -- with export forming one of his main purposes of the trip -- signals his adminstration’s effor to put more focus on Asia to export its way out of the greatest recession and high unemployment. Asia has seemingly become the economic growth center where the latest US export initiative can depend on to realize its objective of doubling its export over the next five years.

In vying for marketin this increasing integrated region, the United States --together with its effort to rebalance the global economic structure – will face challenges of enhancing its competitiveness under “competative devaluation” while coming under pressure from the region’s demands for the United States to remove trade barriers imposed on the region. The United States is expected to strike more free trade agreements with the region while pushing through the Trans-Pacific Strategic Economic Parnership Agreement . This will be seen as the United States’s attempt to counterbalance China’s economic and geopolitical influence in the region.

China is currently at advantage via-a-vis the United States in terms of its geographical proximity and the deepening integration with Asia. The China-ASEAN Free Trade Agreement [CAFTA] went into force in January 2010 is highly likely to futher advance ASEAN-Chinese bilateral trade. The bilateral trade will very likely to continue its impressive growth and secure China's place ahead of the United States as ASEAN's third largest trading partner for the foreseeable future.

In 2008, China with trade volume of $192 billion surpassed the United States in trade volume with ASEAN for the first time in recent history -- a partial result of several trade agreements hammered out over the last ten years -- now trails only the European Union ($202 billion) and Japan ($212 billion). Under nomal economic environemnt, CAFTA will very likely to increase the gap between the United States and Chinese trade with ASEAN, and has potential to ultimately replace Japan as ASEAN's largest trading partner.

Prospects of ASEAN Trade With China and the United States, Post CAFTA

The bilateral China-ASEAN trade volume is expected to expand at a faster clip than that of the US-ASEAN in the near future owing to several factors: the implementation of the CAFTA in January 2010, a continuation of current trends in trade expansion between China and ASEAN, the relative levels of total economic growth predicted by the United States and China in the near term, and China may supplant certain overlapping areas of the US-ASEAN trade.

In addition to other trade incentives, the CAFTA will provide zero tariffs on 90 percent of all products traded between ASEAN and China. It will become the world's third largest free trade zone in terms of trade volume and form a market with a population of 1.9 billion and a combined GDP of $6 trillion. 
 
The propsects of the future trade between ASEAN and China appear promising. Based on a joint ASEAN-China study on CAFTA's trade gains --48 percent increase in ASEAN's exports to China and 55.1 percent for China's exports to ASEAN-- the bilateral trade may increase to over $260 million by the end of 2010. While the above study, apparently funded by China and ASEAN, may be expected to exaggerate predictions of the upcoming CAFTA's success, the data used and calculations appear sound. Furthermore, FTA's and falling tariffs historically tend to drive trade expansions.

The previous trends of the trade expansion between China and ASEAN also suggest trade will continue to rapidly grow between the two sides. In 1993, Chinese-ASEAN trade accounted for a minuscule $8.8 billion, compared to the US-ASEAN trade volume of $75 billion. By 2008, however, that order was reversed and China led the United States in ASEAN trade volume with $192 billion compared to the US-ASEAN trade which stood at $181 billion. There is no evidence suggesting these trends of relative growth will reverse again in the near future.

In the short term, China's continued economic growth, the United States's sluggish economic recovery, and high unemployment may well sever as an important factor in further contributing to an expansion in China-ASEAN trade outpacing US-ASEAN trade. China's strong economic growth forecast at 8.8 percent in 2009 and 7.0 percent in 2010 according to Chinese media sources.

The United States is widely seen as experiencing a "very slow" recovery, suggesting weaker overall trade. It is unclear, however, how China's economy will fare once taken off of its stimulus-fueled recovery. A potential prolonged weakening of the dollar potentially driven by the latest US Federal Reserve’s quantity easing [QE2] and the prospects for a resulant boost in US exports may, however, complicate this picture somewhat.

The considerable overlap in the goods traded by both the United States and China with ASEAN may suggest certain areas of the US-ASEAN trade may be susceptible to being replaced by Chinese competitors should that trade relationship expand.

According to historical data, nearly fifty percent of both the trade between the US and ASEAN as well as China and ASEAN fall in the same two commodity groups, HS 84 and HS 85 (mostly heavy industrial equipment and consumer electronics). With CAFTA entering into force with its expected boost in trade, China is very likely to see an increase in the trade in these commodities. While far from a zero-sum scenario, a jump in Chinese trade of these overlapping commodities has the potential to translate into a slowdown or reduction in the US-ASEAN among these commodities.

Previous China-ASEAN's Agreements Yield Significant Trade Increases

ASEAN and China have together taken several institutional steps aimed at increasing bilateral trade over the last decade, culminating with the CAFTA coming into force 2010. China has conducted 12 annual ASEAN-China Summits since 1997. One of the most significant initiatives achieved thus far is the "Framework Agreement on ASEAN-China Comprehensive Economic Cooperation" (ACCEC). The share of China's trade relative to total ASEAN trade also increased significantly from 2.1 percent in 1993 to 11.3 percent in 2008, whereas the United States' decreased from 17.6 percent to 10.6 percent during the same period.

In 2002, the two sides signed the ACCEC that serves as an important basis on which to boost trade cooperation, investment liberalization and facilitation. The bilateral trade rose almost fivefold to $192 billion in 2008 from $43 billion in 2002, a staggering hike of an average annual growth of 30 per cent that was almost double from the 1995-2001's average growth of 17 per cent. ACCEC's early tariff elimination known as "Early Harvest Program" of a large group of agricultural products over three years beginning 2004 was one of the key contributory factor in the rapid ASEAN-China trade growth over the last five years.

In an apparent effort to further advance the bilateral economic and trade interests, China initiated China-ASEAN Expo in 2003, which has been held annually in the Chinese city of Nanning since 2004. The Expo serves as a key arena for ASEAN and Chinese leaders to further strengthen trade and investment relations and for both China's and the region's exporters to promote their products. The Expo appeared to have been successful. The sixth Expo in 2009 had a total of some 2500 enterprises participating (17% increase), the total amount of goods transaction $1.6 billion (4% increase) and $6.4 billion worth of international economic cooperation projects (1.2% increase) signed.

In April 2009, China presented eight-point proposal to ASEAN diplomats in Beijing and again made another six-point proposal at the Thailand's 12th ASEAN-China Summit in October 2009 to elevate the bilateral cooperation and relations to a higher level. The proposals sought to vigorously advance ASEAN integration and regional cooperation and further promote and accelerate ASEAN-China infrastructure and inter-connectivity construction, and trade and economic cooperation and exchanges.

In October 2009, ASEAN-China took a further step to create a Beijing-based "ASEAN-China Center" to maximize the benefits of the CAFTA through providing relevant information contributing to promotion of economic, trade, investment and tourism.

China’s latest burgeoning investment in the region -- a subject of latest regional media reports -- is likely to be another critical factor in further increasing the prospects of growing bilateral trade between China and Southeast Asia.

Implications for the US Manufacturing Employment Generation

As the US economy is reeling from the effects of the country’s deep economic recession, suffering from high unemployment and stagnant domestic demand, job-creation through exports particulaly to Asia with the latest robust economic growth has increasingly become one of the critical components of the US economic strategies. The importance of the export employment is reflected in a comprehensive and agile “National Export Initiative” launched by President Obama in March this year.

The United States is fully cognizant of the opportunity to export its way out of the economic recession, weak domestic demand, and unacceptably high unemploment. The Obama Administration has made its concerted effort to double exports to the rest of the world, particulaly Asia, through its unprecidented comprehensive export promotion strategy. The Administration is well aware of the threat that any exports decline and/or stagnation potentiallyposes to the existing half a million jobs and additional job creation opportunity through exports.

Albeit not as significant relative to its total employment, the United States has enjoyed job creation over the past 13 years through exports to the region. On average, during the period of 1994 to 2007, ASEAN's imports from the United States supported around 500,000 manufacturing jobs. The US exports to ASEAN additionally created an average of approximately 50,000 jobs every year from 2002- 2008. Stagnation and decline in exports will potentially threaten not only the opportunity to create new jobs, but also the existing ones.