Sei sulla pagina 1di 39



This chapter is dedicated to answer the main thesis question: How will the ASEAN

Integration affect the ASEAN-China economic relation in terms of investments and trade?

Furthermore, the following subordinating questions are also answered in this chapter.

1.1. How will ASEAN’s newly established community further include or exclude

China in its economic affairs?

1.2. What do ASEAN and China anticipate with their economic relationship?

1.3. How will China respond in terms of economic and foreign policies with

regards to ASEAN’s newly established community?

The data collected from interview and secondary sources were shown in the results. This

portion is divided into three subtopics namely, ASEAN Economic Integration, ASEAN-China

Cooperation, and China Foreign Economic Policy. The first part of the chapter which is the

results contain the raw data gathered. The latter part of the chapter contains the Discussion

which has the purpose of explaining thoroughly the importance of the data gathered in

answering the problems raised by this study.


1. ASEAN Economic Integration

The Association of Southeast Asian Nations (ASEAN), established on 8 August 1967 in

Bangkok is rapidly approaching a new milestone: the implementation of the ASEAN

Economic Community (AEC) at the end of 2015. The AEC is one of the strategic objectives
of the ASEAN Community next to the ASEAN Political Security Community and the

ASEAN Socio-Cultural Community (Zhao, 2014, p.3). The ASEAN Economic Community’s

envisaged launch at the end of 2015 will not only be an integration milestone but a potential

game changer for ASEAN. The bloc’s diversity – ranging from advanced economies like

Singapore to developing countries like Myanmar – could be a source of synergies, bringing

the capital and know-how of the more mature economies together with the competitive costs

and abundant labour and resources of the less-developed member countries (Hansakul, 2013,


Beginning in 1976—with its five original members—ASEAN began to move toward

economic cooperation and integration, initially with a focus on merchandise trade. In the

1990s, it added focus on services, investment, and labor. And in the past decade—now

including all of Southeast Asia—ASEAN broadened cooperation on macroeconomic and

financial issues, many of these together with its Northeast Asian neighbors—the “Plus 3” of

the People’s Republic of China, Japan, and the Republic of Korea (Hill and Menon, 2010).

The Bali Summit in 1976 facilitated the first formal steps towards regional cooperation.

These comprised of the ASEAN Preferential Trading Agreement (APTA), the ASEAN

Industrial Projects (AIPs), the ASEAN Industrial Complementation (AIC), and the ASEAN

Industrial Joint Ventures (AIJVs). APTA, the most significant of the four, represented the first

attempt to promote intra-ASEAN trade through institutional integration and regional trade

preferences. The AIPs, on the other hand, were designed to establish in each member country

a large-scale, inter-governmental project. The AIC and the AIJVs were aimed at promoting

specialization in complementary products and to facilitate resource pooling (Hill and

Menon, 2010, p.4). However, in spite of the early enthusiasm, the APTA had little impact on
intra-regional trade. The tariff cuts were not implemented on an across-the-board basis but

rather on product-by-product basis. Hence the commodity coverage was narrow, the tariff

cuts were too small to have any discernible effect on trade, and implementation was half-

hearted (Hill and Menon, 2010, p.4).

The following failure was followed by a recovery when the ASEAN Free Trade Area was

first conceived in 1992. This marked a clear break with the past. The emphasis was on

stronger economic cooperation: for the first time, “free trade” was the regional objective,

there was a clear timetable for implementation, and a “negative list” approach was adopted,

in that all goods trade was to be included within AFTA unless explicitly excluded. The six

leaders agreed to reduce the common effective preferential tariff (CEPT) rates to 0%–5% by

2008, with an interim target of 20% by 1998–2000. This deadline was subsequently advanced

to 2005 at the Fifth ASEAN Summit in 1995, and later to 2003. The leaders also agreed that

each country would have at least 85% of its tariff lines in the”Inclusion List” by 2000, and

90% by 2001 (Hill and Menon, 2010, p.5).

ASEAN leaders built on this renewed vigor by seeking to extend its geographic spread and

commercial depth. By the early 1990s, Viet Nam had clearly signalled its intention to adopt

market-oriented reforms and to look outwards. The earlier antipathy toward the communist

regime gave way to pragmatism, fuelled in both cases by a common apprehension toward the

PRC. Thus Viet Nam joined in 1995, followed by Lao PDR and (with a delay owing to its

domestic political instability) Cambodia. Despite some reservations, ASEAN also invited

Myanmar to join, partly for geopolitical reasons and partly in an effort to engage one of the

world’s most isolated states economically and politically (Hill and Menon, 2010, p.6).
ASEAN has played a constructive role in its commercial engagement with the three

reforming states in mainland Southeast Asia. ASEAN membership has reinforced their

outward orientation, built confidence in their reform momentum, and enabled them to learn

from their more advanced neighbors. The four mainland states negotiated phased-in

arrangements for accession to AFTA and other agreements. Thus Viet Nam was given until

2006 to bring down tariffs on products in its Inclusion List to no more than 5%. For Lao PDR

and Myanmar it was 2008, while owing to its delayed accession Cambodia had until 2010. As

of 2009, almost 80% of the products of the new member countries had been moved into their

respective Inclusion Lists, and of these about two-thirds have tariffs within the 0%–5% range.

Thus the implementation of the AFTA accords for this group is on track (Hill and Menon,

2010, p.6).

By the mid-1990s, and consistent with the global trend in preferential trade agreements

(PTAs), ASEAN began to cautiously develop arrangements for trade in services, investment,

harmonization of customs, and in other fields. The ASEAN Framework Agreement on

Services (AFAS) was signed 15 December 1995 at the Fifth ASEAN Summit Meeting in

Bangkok. This was an ambitious agreement with two main objectives: to substantially

eliminate all restrictions (both discriminatory and market access measures) to trade in

services among member countries, and to liberalize trade in services by expanding the depth

and scope of liberalization beyond those undertaken by member states under the General

Agreement on Trade in Services (GATS) (Hill and Menon, 2010, p.6).

The following year, in 2003, ASEAN resolved to pursue comprehensive integration towards

the establishment of an ASEAN Community by 2020, founded on the three pillars of political

and security community, economic integration, and socio-cultural cooperation, to form the
ASEAN Security Community (ASC), the ASEAN Economic Community (AEC) and the

ASEAN Socio-Cultural Community (ASCC). The ASC aims to ensure that countries in the

region live at peace with one another and with the world at large in a just, democratic and

harmonious environment. The AEC is the realization of the ultimate goal of economic

integration to create a stable, prosperous and highly competitive ASEAN economic region in

which there is a free flow of goods, services, investment and freer flow of capital, equitable

economic development and reduced poverty and socio-economic disparities in year 2020.

The ASCC is envisioned to create a region bonded together in partnership as a community of

caring societies (Guerrero, n.d., p.54).

1.1 ASEAN Economic Community

ASEAN Economic Community (AEC) is the end-goal of the bloc’s economic integration as

espoused in its “Vision 2020”. The latter was articulated in 1997 by the ASEAN heads of

state, in the aftermath of the eruption of the Asian financial crisis, seeking to create a stable,

prosperous and highly competitive economic region. The decision to establish the ASEAN

Economic Community was affirmed by the Declaration of ASEAN Concord II in Bali,

Indonesia, in 2003. The Declaration came not long after China joined the WTO and India

emerged as an investment and offshore location for multinational corporations. The rise of the

emerging markets, in particular the BRIC, appears to have given ASEAN leaders the impetus

to do something to keep the region under investors’ radar. The launch of AEC is currently

planned for the end of 2015. The start date was initially set for 2020 and subsequently moved

forward to January 1, 2015. In November 2012, ASEAN leaders agreed to move the launch

date again to December 31, 2015 in order to give member states more time to prepare for

necessary regulatory changes (Hansakul, 2013, p.6).

The AEC shall establish ASEAN as a single market and production base, turning the diversity

that characterizes the region into opportunities for business complementation and making the

ASEAN a more dynamic and stronger segment of the global supply chain. ASEAN has

agreed on the following: (i) institute new mechanisms and measures to strengthen the

implementation of its existing economic initiatives such as the AFTA, ASEAN Framework

Agreement on Services (AFAS) and AIA; (ii) accelerate regional integration by 2010 in

priority sectors, namely, air travel, agro-based products, automotives, e-commerce,

electronics, fisheries, healthcare, rubber-based products, textiles and apparels, tourism, and

wood-based products; (iii) facilitate movement of business persons, skilled labor and talents;

and (iv) strengthen the institutional mechanisms of ASEAN, including the improvement of

the existing ASEAN Dispute Settlement Mechanism to ensure expeditious and legally-

binding resolution of any economic disputes (Guerrero, n.d., p.54).

1.1.1 AEC Four Pillars

The AEC has four pillars that aim to “transform ASEAN into a single market and production

base, a highly competitive economic region, a region of equitable economic development,

and a region fully integrated into the global economy” (ASEAN 2008).

Table 1. AEC Blueprint—Four Pillars and Core Elements

Pillars Core Elements

A. Single Market and Production Base A1. Free flow of goods: 9 strategic
A2. Free flow of services: 3 strategic
A3. Free flow of investment: 5 strategic
A4. Freer flow of capital: 7 strategic
A5. Free flow of skilled labor
A6. Priority integration sectors A7. Food,
agriculture, and forestry
B. Competitive Economic Region B1. Competition policy B2. Consumer
B3. Intellectual property rights
B4. Infrastructure development: 10 strategic
B5. Taxation B6. E-commerce
C. Equitable Economic Development C1. SME development
C2. Initiative for ASEAN Integration
D. Integration into Global Economy D1. Coherent approach toward external
economic relations
D2. Enhanced participation in global supply
Source: ASEAN Secretariat (2008).

1.1.2 ASEAN as a Single Market and Production Base

The creation of a single market and production base should allow ASEAN to benefit from

economies of scale and efficiency in production network processes. ASEAN could leverage

on economies at different levels of economic development to provide complementary

locations for production networks. An integrated market and production base would clearly

boost intra-regional trade and investment flows while an ASEAN consumer market of over

half a billion would be attractive for investors (Chia, 2013). In the AEC, the single market is

committed to free flow of goods, services, and skilled labor and freer flow of capital for

priority sectors by 2010 “to the extent feasible and agreeable to all member countries” and a

goal of national treatment for all service sectors is in the Roadmap for Integration of ASEAN. Free flow of goods

The AEC free flow of goods includes the elimination of tariff and non-tariff barriers to

internal trade, coordination of rules of origin for customs purposes and trade facilitation

including implementation of the ASEAN Harmonized Tariff Nomenclature (AHTN) and

the completion of the ASEAN Single Window. This will provide for significant

facilitation for crossborder intra-ASEAN trade. The implementation of this part of the

AEC Blueprint has proven to be most successful in integrating markets and opening up

trade in goods intra-ASEAN as on average intra-ASEAN tariffs went from 13 percent in

1993 to near zero in 2013. All ASEAN countries have eliminated tariffs on almost all

imports from other ASEAN countries except on a few sensitive goods (Kalloe and

Zhao, 2014, p.4) Free Flow of Services

The AEC free flow of services including the removal of restrictions on trade in services,

started with priority sectors such as air transport, e-ASEAN, healthcare, tourism,

logistics services and it is intended to lift all other restrictions for all sectors by the end

of 2015. The aim is to gradually allow foreign (ASEAN) equity participation of 70

percent for all service sectors and include mutual recognition arrangements for

professional services such as architects, accountancy, surveying, medical and dental and

all others. The financial services sector remains a sensitive sector allowing members to

ensure orderly financial sector development goods (Kalloe and Zhao, 2014, p.5). Free Flow of Investment

The AEC free flow of investment offers enhanced investment protection to all ASEAN

investors and their investments in other ASEAN countries, including an investor state

dispute settlement mechanism leading to a non-discrimination principle including

national treatment and most-favored nation treatment for all ASEAN investors when

investing in other ASEAN countries (Kalloe and Zhao, 2014, p.5). Free flow of Capital

The free flow of capital offers greater harmonization in capital markets standards in

ASEAN in the areas of offering rules for debt securities, disclosure requirements and
distribution rules and enhancing withholding tax structure (Kalloe and Zhao, 2014,

p.5). Free flow of Skilled Labor

The AEC free flow of skilled labor facilitates issuance of visa and employment passes

for ASEAN professionals. Apart from these five AEC freedoms, the AEC blueprint

offers a roadmap for developing a competition policy, protection of intellectual property

rights, the aim for completion of the network of bilateral agreements on avoidance of

double taxation intra-ASEAN countries and the facilitation of e-commerce (e-ASEAN)

(Kalloe and Zhao, 2014, p.5).

1.1.3 ASEAN as a Competitive Economic Region

To promote ASEAN as a competitive economic bloc, it is important to have a regional

standard in trade policy and for the business operating environment. This pillar seeks to

address the following areas to enhance the region’s competitiveness to investors: Competition

policy, Consumer protection, Intellectual property rights, Infrastructure development,

Taxation, E-commerce (Hansakul, 2013, p.5). This AEC pillar has several behind-the-border

action areas to reinforce ASEAN competitiveness. These cover: Competition Policy. Several initiatives have been undertaken, including the

formation of an ASEAN Experts’ Group on Competition, ASEAN Regional

Guidelines on Competition Policy, and a Handbook on Competition Policy and Laws

in ASEAN for Business. The guidelines provide a reference on country experiences

and best practices at the international level, while the handbook provides basic
notions of substantive and procedural competition law applicable in ASEAN countries

(Chia, 2013, p.22). Intellectual Property Rights (IPR).

The ASEAN countries’ position is primarily that of developing country users,

although Singapore has significant interest in intellectual property (IP) protection for

its high tech and biomedical sectors, while other ASEAN countries are concerned

with the protection of their traditional and indigenous cultures, medicines, and plants.

The development of IP and IPR is crucial to build ASEAN as an innovative and

competitive economic region. Hence in August 2011, ASEAN endorsed its IPR Action

Plan 2011–2015 (Chia, 2013, p.22). Infrastructure Development.

Transportation and IT infrastructure are essential for the movement of goods, capital,

labor, people, and ideas among ASEAN countries. The Brunei Action Plan adopted in

2010 contains strategic actions to be implemented in 2011–2015 toward the

realization of AEC as well as new priorities under the Master Plan on ASEAN

Connectivity. In 2010 the Master Plan on ASEAN Connectivity was adopted, with an

estimated $60 billion annual infrastructure investment needed for the 2010–2020

period. The ASEAN Infrastructure Fund commenced operation in May 2012 (Chia,


1.1.4 ASEAN Equitable Economic Development

The 19th ASEAN Summit in November 2011 endorsed the ASEAN Framework on Equitable

Economic Development (EED) as a new initiative.The AEC Blueprint lists only two
measures: SME (small or medium-sized enterprise) development targeted to narrow intra-

country development gaps; and the Initiative for ASEAN Integration (IAI) targeted at

narrowing the development gap between the ASEAN6 and CLMV (Chia, 2013, p.23). Development of small or medium-sized enterprises (SMEs). This is

necessary for equitable development through mitigating market dominance by foreign

MNCs and large state-owned enterprises (SOEs) and fostering local entrepreneurship,

innovation, and employment creation. SMEs in ASEAN face several challenges,

including limited access to finance and technology, severe competition from SOEs

and MNCs as well as SMEs from the PRC, Japan, and the Republic of Korea, weak

entrepreneurial and management skills, and difficulties in coping with AEC market

standards. ASEAN endorsed the Strategic Action Plan for the ASEAN SME

Development (2010–2015) in August 2010. The ASEAN SME Advisory Board

provides strategic policy input on SME development to the ministers and guidance on

high priority matters to the ASEAN SME Working Group. Work started on the

Conceptual Framework for Regional SME Development Fund (Chia, 2013, p.23). Initiative for ASEAN Integration (IAI). The IAI serves as a platform for

identifying and implementing technical assistance and capacity building programs

targeted at CLMV. The ASEAN6, ASEAN dialogue partners, and the Asian

Development Bank (ADB) are involved in the IAI programs. The new IAI Strategic

Framework and WorkPlans I and II were endorsed to facilitate implementation of

CLMV projects. The scope of priority areas has expanded beyond the initial focus on

infrastructure, human resource development, ICT, and capacity building for regional

integration to include tourism, poverty, and quality of life (Chia, 2013, p.23).
1.1.5 ASEAN Integration into the Global Economy

ASEAN operates in an increasingly global environment, with interdependent markets and

globalised industries. In order to enable ASEAN businesses to compete internationally, to

make ASEAN a more dynamic and stronger segment of the global supply chain and to ensure

that the internal market remains attractive for foreign investment, it is crucial for ASEAN to

look beyond the borders of AEC. External rules and regulations must increasingly be taken

into account when developing policies related to AEC (ASEAN, 2014).

The AEC Blueprint prescribes a “coherent” approach to external economic relations. ASEAN

has negotiated FTAs with its major regional dialogue partners: China, South Korea, Japan,

New Zealand and Australia (jointly), and India. These agreements vary in quality, with recent

agreements, particularly the FTA with New Zealand and Australia, offering greater levels of

market access, broader coverage, and more rigorous obligations (Wallar, 2014, p.22). Coherent Approach towards External Economic Relations

ASEAN shall work towards maintaining “ASEAN Centrality” in its external

economic relations, including, but not limited to, its negotiations for free trade (FTAs)

and comprehensive economic partnership (CEPs) agreements. This shall be done by:

Actions: (i) Review FTA/CEP commitments vis-à-vis ASEAN’s internal integration

commitments; and (ii) Establish a system for enhanced coordination, and possibly

arriving at common approaches and/or positions in ASEAN’s external economic

relations and in regional and multilateral fora (ASEAN, 2014, p.25). Enhanced Participation in Global Supply Networks

ASEAN shall also enhance participation in global supply networks by: (i) Continuing

the adoption of international best practices and standards in production and

distribution, where possible; and (ii) Developing a comprehensive package of

technical assistance for the less developed ASEAN Member Countries to upgrade

their industrial capability and productivity to enhance their participation in regional

and global integration initiatives (ASEAN, 2014, p.26).

1.2 Regional Comprehensive Economic Partnership (RCEP)

In 2012 ASEAN launched negotiations for the Regional Comprehensive Economic Partnership

(RCEP). The RCEP is a Free Trade Agreement between ASEAN nations and ASEAN’s FTA

partners. The agreement is between 16 countries, which make up 45% of world population and

contribute a third of the world’s GDP in total (Ministry of Trade and Industry Singapore,

2012). Leaders announced that RCEP would be “a modern, comprehensive, high-quality and

mutually beneficial economic partnership agreement establishing an open trade and investment

environment in the region to facilitate the expansion of regional trade and investment and

contribute to global economic growth and development”. The RCEP is intended to cover trade

in goods, trade in services, investment, economic and technical cooperation, intellectual

property, competition, dispute settlement, and other issues. Ministers ambitiously have targeted

the end of 2015 to reach an agreement (Wallar, 2014, p.22).

RCEP is a significant step in the evolution of trade policy frameworks in East Asia over the

past decade. RCEP’s history reaches back some 10 years, starting as a study process for an

FTA between ASEAN, China, Japan, and Korea (known as ASEAN+3). This was

complemented from 2007 with a parallel study process for an ASEAN+6 FTA, which included

the ASEAN+3 partners plus Australia, India, and New Zealand. ASEAN has been playing a

substantial role in developing FTAs in East Asia. The Common Effective Preferential Tariff

(CEPT) entered into force in 1993 and was replaced by the ASEAN Trade in Goods Agreement
(ATIGA) in 2010. The development of FTA networks with ASEAN’s Dialogue Partners has

been an integral part in the ASEAN Economic Community (AEC) design (Pillar 4 in the AEC

Blueprint). As a result, five ASEAN+1 FTAs have come into force, namely the ASEAN-

Australia-New Zealand FTA (AANZFTA), the ASEAN-China FTA (ACFTA), the ASEAN-

India FTA (AIFTA), the ASEAN-Japan Comprehensive Economic Partnership (AJCEP) and

the ASEAN-Republic of Korea FTA (AKFTA) (Fukunaga and Isono, 2013).

ERIA forecasts that the RCEP will produce more economic growth for all ASEAN member

states than the current network of FTAs. The RCEP could also be used to streamline and

harmonize provisions in the existing network of ASEAN+ FTAs and allow ASEAN to press for

more rigorous rules and broader coverage. Despite the promise of the RCEP, however, progress

and enthusiasm are difficult to detect after four negotiating sessions (Wallar, 2014, p.22).

RCEP negotiations will be guided by the following principles: (i) The RCEP will be

consistent with the WTO, including GATT Article XXIV and GATS Article V. (ii) The RCEP

will have broader and deeper engagement with significant improvements over the existing

ASEAN+1 FTAs, while recognizing the individual and diverse circumstances of the

participating countries. (iii) The RCEP will include provisions to facilitate trade and

investment and to enhance transparency in trade and investment relations between the

participating countries, as well as to facilitate the participating countries’ engagement in global

and regional supply chains. (iv) Taking into consideration the different levels of development

of the participating countries, the RCEP will include appropriate forms of flexibility including

provision for special and differential treatment, plus additional flexibility to the least-developed

ASEAN Member States, consistent with the existing ASEAN+1 FTAs, as applicable. (v) The

ASEAN+1 FTAs and the bilateral/plurilateral FTAs between and among participating countries
will continue to exist and no provision in the RCEP agreement will detract from the terms and

conditions in these bilateral/plurilateral FTAs between and among the participating countries.

(vi) Any ASEAN FTA Partner that did not participate in the RCEP negotiations at the outset

would be allowed to join the negotiations, subject to terms and conditions that would be agreed

with all other participating countries. The RCEP agreement will also have an open accession

clause to enable the participation of any ASEAN FTA partner that did not participate in the

RCEP negotiations and any other external economic partners after the completion of the RCEP

negotiations. (vii) Provisions for technical assistance and capacity building may be made

available, building upon the ASEAN+1 FTAs, to the developing and least-developed countries

participating in the RCEP to enable all parties to fully participate in the negotiations,

implement obligations under the RCEP and enjoy the benefits from the RCEP. (viii) The

negotiations on trade in goods, trade in services, investment and other areas will be conducted

in parallel to ensure a comprehensive and balanced outcome.

2. China’s Foreign Economic Policy

China’s strategy for ASEAN/Southeast Asian region differed significantly before and after

the cold war. China’s Open Door Policy was replaced by the Good Neighboor Policy

regarding the Southeast Asian diplomacy during the later cold war period (Chen, 2000,

p.172, Muni, 2012, p. 16 as stated in Tai &Soong, 2014, p. 25). Both Open Door Policy and

Good Neighboor Policy became paramount turning points for improvement of China-ASEAN

member countries relation. According to Tsai, Hung and Liu (2011), China’s Good Neighbor

Policy includes the following objectives:

1. Peaceful negotiation to resolve border conflicts and improved relations;

2. Construction of companies, cooperative relation and bilateral dialogue;
3. Participation in multilateralism and promotion of joint conflict resolution; and lastly
4. Improvement in economic and trade cooperation
The ASEAN financial crisis created an opportunity to strengthen China’s relation with

Southeast Asia. During the Asian Crisis, the nations of Southeast Asia found themselves with

their currencies depreciated, unlike China’s economy which was relatively untouched. The

financial crisis also offered China an important opportunity to demonstrate regional

leadership and its commitment to Southeast Asia (Ba, 2003, p.634). Through the policy,

China became the stabilizing force in Asian financial crisis by reducing and eliminating

pressure to depreciate or devalue currencies in Southeast Asia (Tai & Soong, 2014, p. 26).

China, then, gradually attained prominent position and influence in the regional economy,

and as a driver of social stability by providing Southeast Asian countries with financial

support to survive the crisis, which facilitated further development of its relationship with

Southeast Asian countries (Shiau, 2011, as stated in Tai & Soong, 2014, p. 26). China

focused on cooperation rather than competition as China cultivated economic cooperation as

a way to reduce concerns and establish exchanges in Southeast Asia (Tai & Soong, 2014, p.

26). According to Chen (2007), by reducing tensions and animosity between China and

ASEAN, these policies have contributed to the ongoing progress on economic and trade

issues in the region.

Three major strategies under the Good Neighbor Policy was devised by China to achieve

bilateral trade development in Southeast Asia, (1) establishing the China-ASEAN Free-Trade

Area (CAFTA); (2) expanding border trade; and (3) developing a trade network comprising

Chinese businesses, businesspeople, and cultural exchanges (Tai & Soong, 2014). China’s

foreign policy is now focus on the establishment of long standing and stable relations with

ASEAN (Tsai, Hung & Liu, 2011).

ASEAN- China Free Trade Area (ACFTA) took effect on January 1, 2010, alongside

with other four FTAs of ASEAN with Australia and New Zealand, Japan, Republic of

Korea, and India, respectively. The ACFTA aims to pursue progressive elimination of

tariffs and non-tariff barriers; progressive liberalisation of trade in services and

investments; strengthen investment and trade facilitation measures; and economic

cooperation in all areas of common interest ( ASEAN , 2012).

There are three clear components highlighted in the ACFTA. These are trade in

goods, trade in services and trade in investments. However, aside from the three

stated, both China and ASEAN agreed to strengthen their cooperation in areas of

agriculture, information and communications technology, human resources

development, investment, and the development of the Mekong River basin and will be

extended to other areas such as banking, finance, tourism, industrial cooperation,

transport, telecommunications, intellectual property rights, small and medium

enterprises (SMEs), environment, bio-technology, fishery, forestry, and forestry

products, mining, energy and sub-regional development (ASEAN-China Free Trade

Agreement: A primer, n.d.)

2.1.1 Trade in Goods

On July 20, 2005, the Agreement on Trade in Goods was put into force by

ASEAN, which specified that all parties are committed to reduce or eliminate

tariffs (ASEAN-China Free Trade Agreement: A primer, n.d., p.8 ). Under

the Agreement, the 6 original ASEAN members and China have to eliminate

tariffs on 90% of their products by 2010, while Cambodia, Lao PDR,

Myanmar and Vietnam, have until 2015 (ASEAN-China: ACFTA). The

agreement further include the commitment of the participating countries to

reduce and/or eliminate tariffs under five different schedules and products

were organized based on these schedules, the Early Harvest Programme (EHP,

Normal Track , which is further divided into Normal Track 1 and Normal

Track 2; and lastly the Sensitive Track which is subdivided into Sensitive List

and Highly Sensitive List (ASEAN-China Free Trade Agreement: A primer,


The earliest part of the elimination of tariffs on goods was put forward through

the Early Harvest Programme, a provision implemented on 2004, which aims

to eliminate the tariffs on some agricultural products included in the 9

categories as follows, live animals, meat and edible meat offal, fish, dairy

produce, other animals products, live tress, edible vegetables, edible fruits and

nuts (ASEAN-China Free Trade Agreement: A primer, n.d., p.8 ).

Table 2. Schedule of the implementation of the Early Harvest Program for


The second provision is the tariff reduction for Normal Track products.

ASEAN-6 (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand)

and China is required to reduce tariffs to 0-5% on 40% of their products by

2005 and 60% of their products by 2007 (Malaysia Ministry for

international Trade and industry, 2012). ASEAN 6 and China shall

eliminate their tariffs for tariff lines placed in the Normal Track not later than

1 January 2010 and flexibility is be given to have tariffs on some tariff lines

( not exceeding 150 lines) eliminated note later than 1 January 2011 (ASEAN-

China Free Trade Agreement: A primer, n.d., p.12 ). Cambodia, Laos PDR,

Myanmar and Viet Nam shall eliminate “ all its tariffs for tariff lines placed in

the Normal Track not later than 1 January 2015, with flexibility to have tariffs

on some tariff lines, not exceeding 250 tariff lines, eliminated not later than 1

January 2018” (ASEAN-China Free Trade Agreement: A primer, n.d., p.12


In the Sensitive Track, ASEAN 6 and China are allowed to place 400 tariff

lines at the HS digit level and 10% of the total import value based on 2001

trade statistics in the Sensitive Track (ST); for Cambodia, Lao PDR and

Myanmar, not more than 40% of the total number of tariff lines (ASEAN-


23july09.pdf) The Duties for the Sensitive list shall be reduced to 20% by

2012 and to 0-5% by 2018 while duties the Highly Sensitive List shall be

reduced to 50% by 2015 (Malaysia Ministry for international Trade and

industry, 2012).

Table 3.  ASEAN­China Tariff Reduction and Elimination Timeframe
Ye Tariff Rate Tariff items Participating
ar or products Countries

20 Reduced Agricultural All ACFTA

04 Agricultural tariffs Products members

20 0% for all All products China

05 WTO-ASEAN with tariff relief

20 0%-5% for all All All ACFTA

06 ACFTA countries agricultural members

20 0% for all All products 6 original

10 ASEAN countries with tariff relief ASEAN countries

20 0% for all All products China and 6

10 ACFTA countries with tariff relief original ASEAN

20 0% for all Majority of Four new

15 ASEAN countries sensitive products ASEAN members

20 0% for all Majority of Four new

15 ACFTA countries sensitive products ASEAN members

20 0%-5% for all Remaining Four new

18 AFTA and ACFTA sensitive products ASEAN members
( Table from: Tai and Soong (2014). Trade Relation Between China and Southeast
Asia: Strategy and Challenge)

2.1.2 Trade in Services

The Agreement on Trade in Services entered into force in July 2007,

aims to enhanced trade in services through improved market access

and national treatment in sectors/sub sectors where the commitments

have been made especially in more than 60 additional subsectors

committed by ASEAN Member Countries which are parties to the

GATS/WTO. (ASEAN China Free Trade Agreement Agreement on

Trade in Services, 2007). The agreement also “takes into account that
special and differential treatment shall be given to Cambodia, Lao PDR,

Myanmar, and Vietnam, to which would allow these countries to open fewer

sectors and liberalise fewer transactions” (ASEAN-China Free Trade Agreement:

A primer, n.d., p.14 ). To achieve the objectives of this agreement successfully, the

plan was divided into package commitments. Higher market access commitment of

the Trade in Services Agreement are contained in the first package specific schedule

of commitments which are attached in the Agreement. According to the media

statement of the agreement, ‘it is expected that trade in services in the region

would expand and grow in scale through the four modes of service delivery,

namely: cross-border supply, consumption abroad, commercial presence, and

movement of natural persons” (ASEAN-China Agreement on Trade in Services

Media Statement, n.d.). To further strengthen the cooperation and the expansion of

trade relations, ASEAN and China signed the ASEAN-China Summit the Protocol

to Implement the Second Package of Commitments under ASEAN-China

Trade in Services Agreement (AC-TIS). The protocol further liberalise the

trade and services and the countries involved go beyond those they have

already committed under the General Agreement on Trade in Services (GATS)

and the first package of AC-TIS, to enhanced the level of market

liberalisation and as well as further liberalise the level of restrictions or

remove discriminatory measures in those commitments (ASEAN-China

Further Liberalises Trade in Services, 2011.) In addition to liberalised

market, the agreement also is expected to bring higher level of investments in

Southeast Asian region especially in sectors cover business services such as

computer related services, real estate services, market research, management

consulting; construction and engineering related services; tourism and travel

related services; transport services; educational services; telecommunication

services; health-related and social services; recreational, cultural and sporting

services; environmental services; and energy services (ASEAN-China

Agreement on Trade in Services Media Statement, n.d.).

2.1.3 Trade in Investment

The third agreement under the ACFTA is the Investment Agreement which

was sign on August 2009, in Bangkok, Thailand and implemented on 15

February 2010. The agreement aims to promote investment flows and to

create a liberal, transparent, facilitative and competitive investment regime in

ASEAN and China through the creation of favourable investment conditions,

improving transparency of investments rules and providing protection of the

investments in ASEAN and China (Agreement on Investment, 2009).

Through this agreement, the ASEAN member countries will be given the

opportunity to negotiate with China in a favourable and secured investment

environment without fearing the imbalances between the economies of

ASEAN and China, thus making the small economies of Cambodia, Laos

PDR, Myanmar and Viet Nam as active and competitive actors in ASEAN-

China economic relations.

2.2 Expanded of Border Trade

The second strategy of China’s Good Neighbour Policy is the expansion of border

trade. ASEAN countries which share border with China are Cambodia, Myanmar

(Burma), Laos and Vietnam. These countries were small-scale and technologically

backward, and unable to take advantage of their proximity to China thus there was

only little trade between them and China (Tai & Soong, 2014, p. 30). According to
Xie and Zhu, this resulted to China having more trade with faraway countries than

with its nearest neighbours (2012). China’s primary reason for putting forward border

trade was to promote local development through shared economic benefits generated

by trade.

China had both internal and external strategy for promoting border trade. The internal

strategy, is to increase the border trade with ASEAN members. The internal strategy

encompassed the Western China Development Program as a supplementary measure

that utilized the capacity of the development of eastern coastal areas to further the

economic and social development of the western China ( Tai & Soong, 2014). Under

this framework, China’s south-western border provinces of Yunnan, Guangxi and

Guizhou were transport hub for adjacent ASEAN countries, making the south-western

border the transfer station, facilitating the trade development in Vietnam, Laos and

Myanmar ( Tai & Soong, 2014, p. 31; Zhou, 2006). On the other hand, the external

strategy under the CAFTA framework, encompassed agriculture, information

industries, human resource development, mutual investments, and development in the

Mekong River Basin ( Tai & Soong, 2014).

2.3 Trade Networks through Chinese People and Businesses

Chinese population in ASEAN countries have a profound influence on the economic

development of ASEAN countries. Domestic economic activities and trade operations

in Southeast Asia are control by the networks established by ‘overseas Chinese’. The

rising important role of China in the global economy paved way for opportunities

provided by private economic ties and China’s expanding market prompted Southeast

Asian increase their economic interactions with China (Zheng and Huang, 2009, as

stated in Tai and Soong, 2014). On the other hand, Chinese immigrants have
integrated themselves in Southeast Asian society while maintain close ties with China,

which is an important factor in attracting Foreign Direct Investment thus improving

China-ASEAN relations.

3. Achievements of ASEAN-China Economic Relations

3.1 Trade Relations

The bilateral trade between China and ASEAN has improved greatly. The growth has

been especially rapid since 2001 when China joined the WTO and the ACFTA talks

were initiated. By 2008, China became ASEAN’s third largest trading partner and

ASEAN China’s fourth largest (Tong & Chong, 2010). Since 2011, China emerged

as ASEAN’S biggest trade partner with China’s share increased from 4.3% in 2000 to

14% in 2013 (ASEAN Community in Figures, 2014).

Table 6. Top ten ASEAN export markets and import origins, 2013 (data as of December


(Table from: (2014), External Trade Statistics. Retrieved date: March 31, 2014)

Table 7. Top ten ASEAN Trade Partner Countries/Region, 2013 (data as of December

(Table from: (2014), External Trade Statistics. Retrieved date: March 31, 2014)

As shown in Table 6 and 7, in 2013, China is the 2 nd largest trading partner of

ASEAN member countries on both export and import trading, with 12% and 16%

share of the total trade, respectively. However, if intra-ASEAN trading is excluded

from the two tables, China will be the number one export market and import origin for


Table 8. China’s Import and Exports with Major Trade Partners, 2011-2012 (USD

(Table from: Jiang J. and Cai L. ( 2013). Analysis of Trade Development between China and
Association of Southeast Asian Nations. Journal of Behavioural Economics, Finance,
Entrepreneurship, Accounting and Transport, 013, 1(1), 15-20. )
The table above shows the importance of ASEAN in China’s import and export as the

third major trading partner of China after European Union and United States which

are all Western countries. In Asia alone, ASEAN, is the major trading partner of China

in 2011 and 2012.

According to Alter (2014), ASEAN-China relations are now reciprocal where China

is no longer an exporting competitor of the past decades. China and ASEAN have

become an important consumer market for both parties. Closer economic ties create

opportunities for both ASEAN and Chinese corporates. For Chinese corporates,

ASEAN benefits their country with natural resources, agriculture, electronics and

large consumer market and rapid developing infrastructure projects (Alter, 2014).

Due to the lower level of economy of ASEAN countries, their import and exports

mainly focuses on agricultural products. China with rapid economic development

demands greatly for raw products which will be manufactured by Chinese corporates

into finished products. The improved ties between China and ASEAN open up

numbers of opportunities for ASEAN countries especially for Indonesia, the

Philippines, Vietnam and Cambodia, which have large labor force capable of

competitive low cost production for Chinese companies (Jiang & Cai, 2013).

ASEAN is highly dependent on Chinese markets for 18 commodity lines shown in the

table below. Almost 75% to 98.6% of these commodities went to China. Based from

the table, all of the commodities are mineral, raw resources and agricultural products

which are very abundant in the ASEAN region.

Figure 3. Exports to China with Highly Significant Share in ASEAN Total Export, 2013
(in percent)
( Figure 3 from: ASEAN Community in Figures(ACIF)-Special Edition 2014: A Closer Look
at Trade Performance and Dependency, and Investment. Retrieved from
Figure 4. Import from China with Highly Significant Share in ASEAN Total Import,
2013 (in percent)

(Figure 4 from: ASEAN Community in Figures(ACIF)-Special Edition 2014: A Closer Look

at Trade Performance and Dependency, and Investment. Retrieved from

ASEAN is also highly dependent on imports from China for the following

commodities which is shown in the Figure 4, although all these commodities do not

appear in the top-twenty of ASEAN import commodities. However, ASEAN greatly

demand for electronics, refined oil, and steel from China. In fact, in 2013, China

became the most important origin of petroleum oils and oils from

bituminous minerals, other than crude; parts and accessories

of the motor vehicles; parts and accessories (other than

covers, carrying cases and the like); and telephone sets,

including telephones for cellular networks or for other wireless

networks, with at least 25% of ASEAN import of these products

in 2013 originating from China (ASEAN Community in Figures,


The large portion of China-ASEAN trade is the Intra-industry trade which is showed

when over half of China exports to ASEAN are machinery and mechanical

appliances; electrical equipment; parts thereof sound recorders and reproducers,

television image and sound recorders and reproducers, and parts of accessories of

such articles, indicating high-tech products account for a large

proportion of China - ASEAN trade. (Tong and Chong, 2010).

3.2 Foreign Direct Investments

China and ASEAN have been two of the major recipients of Foreign Direct

Investments. This is due to the rapid economic growth and competitiveness of

China and ASEAN countries which attract investors across the globe. They

may have seen as FDI rivals, however both ASEAN and China are important

source of FDI of one another, although, Singapore is the only ASEAN

countries included as the top sources of China’s Foreign Direct Investments

(as seen in Table

Table 9. ASEAN’s FDI in China, 2010-2011. (USD 10,000)

(Table from: Jiang J. and Cai L. ( 2013). Analysis of Trade Development between China and
Association of Southeast Asian Nations. Journal of Behavioural Economics, Finance,
Entrepreneurship, Accounting and Transport, 013, 1(1), 15-20. )

China has become an important source for financing infrastructure

investments in the Southeast Asia region. According to (2009), although China

is not counted as a major regional provider of ODA (Official Development

Assistance) as defined by the OECD ( Organisation for Economic Co-

operation and Development), some reports and observations suggest that the

China is one of the largest sources of economic assistance in Southeast Asia.

Table 9. Top ten sources of Foreign Direct Investment inflows to ASEAN, 2011-2013

(Table from :, Foreign Direct Investment Statistics- 2014. Retrieved date: March
31, 2014)

European Union (EU) and Japan continue to be the top sources of FDI to ASEAN.

The European Union contributed 22.4 percent share of the total FDI sources

followed by Japan with almost 17 percent and United States with 7.2 percent share.

It is important to observe that US FDI to the region has relatively decreased in 2013,

wherein China with 7.1 percent share of the total 2013 FDI outranked US with only

3.1 percent. China came after EU and Japan as the top sources of FDI in 2013.

China and ASEAN countries are becoming economically interdependent due to the

improvement in their economic relation strengthened by share benefits and

cooperation. According to Lum (2009), China is considered as the primary source

of economic and military assistance to the least developed countries of mainland

Southeast Asia, specifically, Burma (Myanmar), Cambodia, and Laos. In addition,

China also provided them with implicit security. The People’s Republic of China

have financed infrastructure, energy related, agricultural, and other development

projects in these countries too, which rely greatly upon Chinese technology,
materials, equipment, and technical expertise, things which they lacked. China also

has financed construction of railway, hydropower development and shipbuilding

facilities to Viet Nam; and also finance mining, agriculture and energy in the

Philippines (Lum, 2009).

3.2.1 China-ASEAN investment Cooperation Fund (CAF)

To achieve China’s regional investment aims to ASEAN region, the

China-ASEAN Investment Cooperation Fund was founded on 2010. It

is a pilot initiative sponsored by prominent national and international

investors which is also greatly supported by China’s central

government ( Li, 2014 Retrieved from


The fund “focuses investment opportunities in infrastructure, energy

and natural resources” in the ASEAN countries (china-asean- Furthermore, the fund specializes in sustainable

investments which not only bring financial growth to the investee

company but also significant benefits to the community. The ultimate

target of the CAF is investing $10 billion in ASEAN and more than

30% of the initial spending has gone to Cambodia, Myanmar, Laos and

Vietnam and the rest spread across the remaining countries in

Southeast Asia (Li, 2014).

CAF first investment is in the Philippines, in 2010, when it helped the

Negros Navigation Negros Navigation buy out Aboitiz Transport

Services owners of SuperFerry. In 2011, CAF invested into Asia's

largest potash mine in Lao PDR, Thailand’s largest port and

Cambodia’s Fiber Optic Network. CAF invested into Cambodia’s

Smart Tv Project and in Hong Kong to support the development of an

iron ore mine in Malaysia in 2012. A year after they invest in the

leading provider of healthcare services in Southeast Asia, Thaland’s

green power sector and largest biomass power generator, in Indonesia’s

largest ferro-nickel project . In addition, in 2014, China-ASEAN Fund

invests in Indonesian telecom tower operator (


ASEAN has increasingly become an important player in the regional and global economy,

which could be attributed to the region’s bold move to establish the ASEAN Economic

Community in 2015. ASEAN is now a hub of 4 FTA and 1 CEP. In addition, ASEAN has

extended its regional economic cooperation to East Asia through the creation of ASEAN+3

which involves three top countries in East Asia - China, Japan, and South Korea. It was

initially formed as an informal measure to tackle the financial crisis but soon evolved into an

institutionalised regional framework furthering economic integration in the region (Hussain,

n.d., p.9). This framework of ASEAN+3 has been mutually beneficial for all states involved

and proved a relatively successful driving force for economic integration in the region mainly

due to the convergence of interests. Furthermore, ASEAN adopted the Regional

Comprehensive Economic Partnership (RCEP) framework in November 2011. This will join

its ten members with six nations — Australia, China, India, Japan, Korea and New Zealand

— that are currently enjoying five separate FTAs with ASEAN as a whole. It is noticeable

that in all the external cooperations that ASEAN pursued, China is a recurring name. Indeed,
ASEAN’s Free Trade Agreement with China is one of the most successful agreements it has

ever had. It was during the ASEAN+3 Summit in November 2000 when China proposed the

establishment of a China-ASEAN Free Trade Area (CAFTA)19 which was regarded as a

pillar to economic integration between ASEAN and China, promoting free trans-border trade

and investment. According to Xinhua news agency, China has already become the largest

trading partner of ASEAN while ASEAN is China’s third largest trading partner. As ASEAN

Secretary General Rodolfo stated, “ASEAN sees China’s surging economy as both a

competitive challenge—for markets and investments—and an opportunity as an export

market and an investment provider and destination” (Xiao, 2009, as states in Hussain, n.d.,

p.16). A closer economic integration between China and ASEAN would bring about currency

stability in the region and provide a market for ASEAN export commodities (Hussain, n.d.,

p.16). For ASEAN, China’s booming economy together with the rising economies of India

and to some extent Japan can bring development to the poorer member states of ASEAN.

China’s huge economy needs a lot of natural resources which are supplied by the resource-

rich but economically backward ASEAN countries like Laos, Cambodia and Vietnam who in

turn makes economic gains through this demand-supply chain (Hussain, n.d., p.16); while

the smaller and lesser developed ASEAN countries benefit from China’s surging market

which provides a sense of competition as well as a bigger opportunity for export related

growth, China benefits from the possibility of an economically stable Southeast Asia for its

own development and to enhance its status as a superpower in the region. The Association of

Southeast Asian Nations has long established its shared vision of a region that is “outward

looking, living in peace, stability and prosperity, bonded together in partnership in dynamic

development and in a community of caring societies” (ASEAN Secretariat, 2011). The 21st

Century has witnessed the phenomenal rise of China, both economically and militarily, as the

most strategic actor in the Asia-Pacific. As such, it is impossible for the ASEAN countries to
ignore the rise of China as a potential hegemon in the region. Moreover, realistically

speaking, the ASEAN has very little power to restrain or confront China in case of a serious

confrontation. As such, the viable course of action for ASEAN is to accommodate and have a

working relationship with China instead of direct confrontation.

The second subtopic deals with the present foreign policy of China towards their negotiation

in ASEAN region. With emphasis on the economic side, the Good Neighbor policy main

objectives include enhance economic and trade relations through participation in

multilateralism, construction of companies, cooperative relation and bilateral dialogue. In line

with this, China has created three strategies to achieve these goals.

First, the establishment of Asean-China Free Trade Agreement (ACFTA), which facilitate the

reduction of trade barriers between China and ASEAN member countries, which has the end

goal of further elimination of all barriers by the end of 2018. Aside from the reduction of

tariffs, the ACFTA also include agreements to further develop trade in goods, service and

investments. Through ACFTA, ASEAN and China became bound to adhere to the terms,

conditions and goals of the agreement. Cooperation among signatories is required as a means

to maximize the attainment of shared goals.

The ACFTA is the most important among all ASEAN FTAs, given the large population of

China and ASEAN, it creates a regional trade agreement which involves nearly 1.9 billion

people and also the third by trade volume (2008 data) after EU and the North American Free

Trade Area (Gradziuk, 2010). The reduction of trade barriers give ASEAN exporters more

access to the Chinese market than that enjoyed by exporters from countries with no FTA with

China. In addition, considering that China’s strength is manufacturing and industry, they

highly demand for raw materials, agricultural and intermediate goods, things that are
abundant in ASEAN region, thus creating opportunity for ASEAN countries to expand their

export market.

China’s strategy of expansion border trade mutually benefitted China and the poorest

members of ASEAN namely, Cambodia, Laos, Myanmar and Viet Nam. Increasing the trade

with theses countries, provided China an economic opportunity to solve the unbalanced

development of eastern and western China. Mutual benefits to ASEAN and China open up

opportunity to further develop ASEAN and China relations.

At present, China’s burgeoning economy resulted to the rise of wealthy middle class which

relatively affected the costs of labor in China. According to Gradziuk (2010), the rising cost

of labor in China could boost China’s investment in the region- a trend that will benefit the

poorest ASEAN members, Cambodia, Myanmar and Laos which also offer low cost of man

power. Asec. Rodolfo of the DTI International mentioned that ASEAN countries are now

becoming favourable manufacturing hub in Asia due to the improvement in ASEAN

countries’ industry sector which is inspired by the growing competence of ASEAN in global


The third strategy of China is the establishment of trade networks among Chinese businesses,

people and culture. Chinese immigrants have founded extreme influence on the economic

development of ASEAN countries. According to Tai & Soong (2014), the networks

established by these overseas Chinese control mainly the trade operations in regions as well

as the domestic economic activities. As an addition to the ACFTA, this boost China’s

importance in the region in domestic trade and investments. However, ASEAN markets fear

the large inflow of the low cost, low quality products and investments coming from China,

will dominate the ASEAN market and somehow create competition rather than cooperation.

This situation is mainly seen in Southeast Asian countries of Indonesia, Myanmar, Malaysia,

Singapore, Thailand and the Philippines which have a large number of Chinese immigrants
(Young, n.d.). They have engaged since 1990’s in intense economic and trade interactions

with China through commercial networks. These Chinese immigrants not only influence the

place of origin in economic fields but has also brought their Chinese culture which is adopted

through time by the people of Southeast Asia. The maintenance of close ties of Chinese in

Southeast Asia to China and Chinese culture is also a factor that hasten the establishment of

ASEAN and China economic relations.

ASEAN, for China is an important market and trading partner for the pursuance of their

international and domestic economic interest. In addition to this, ASEAN is also an important

factor for China to maintain control over the Asian trade, considering the growing importance

of ASEAN in the Asian economy. According to Dr. Medalla from PIDS (2014), “China will

probably increase its policies towards strengthening economic ties with ASEAN given

ASEAN’s improved and more cohesive economy. With that said, China is actually claiming

ASEAN away from the United States as it holds back or somewhat neglects China’s policies

in trans-Pacific trade alliances like APEC”.