Recent Development of ASEAN's Economic Relationship with China
Recent Development of ASEAN's Economic Relationship with China and India By: Hendri Saparini, Ph.D Managing Director ECONIT Advisory Group [email protected] IDEAs Workshop New Delhi, 5-6 November 2009 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. 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. List of ASEAN Free Trade Agreements AGREEMENT SIGNING DATE EFFECTIVE ASEAN-Australia-New Zealand Free Trade Area (AANZFTA) 27 February 2009 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. Preparations are currently being undertaken for the ratification and the subsequent implementation of the Agreement by the parties
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. 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. Economic Growth: ASEAN Behind China and India 20 15 10 Percent 5 China India Indonesia ASEAN-5 0 -5 -10 -15 Source: IMF GDP Comparison: ASEANs GDP only 34% of the Chinese (2008) China 4,401.6 India 1,209.7 Indonesia 511.8
60.9 20.1 0 -1.8 -5.3 -16.5 -20 Brunai China Singapore Private consumption Malaysia India Government consumption Thailand Indonesia Vietnam Gross domestic capital formation Philipina Net Export Source: ADB High Growth of FDI in China: Impact of Economic Reform 120 100
China Billion USD 80 60 ASEAN 40 20 Indonesia - India (20) Source: UNCTAD FDI Inflow (1998-2008): China is far Above ASEAN China 677.2 ASEAN 396.4 Singapore 190.0 Thailand 75.3 Malaysia 47.8
600 700 Source: UNCTAD Exports and Import: Huge Surplus of Chinas International Trade 1428.5 China 879.3 ASEAN 187.4 India 241.4 Singapore 194.5 Malaysia Exports Imports 175.0 Thailand 137.0 Indonesia Viet Nam 61.8 Philippines 49.0
Brunei Darussalam 8.8 Myanmar 6.6 Cambodia 4.4 Lao PDR 0.8 0 200 400 600 800 1000 1200 1400 1600 Billions of USD Source: Asean Economic Community Chartbook, 2008 Top 5 ASEAN Exports to China: Dominated by Electonics Parts and Primary Commodities Others, 58% Electronic integrated circuits and
microassemblies, 18% Automatic data processing machines; optical reader, etc, 7% Palm oil & its fractions, not chemically modified, 5% Natural rubber, balata, gutta-percha etc, 6% Petrolium oils, not crude, 6% Source: Asean Economic Community Chartbook, 2008 ASEAN Commodities Export to China: Main Source for Chinas Demand , 2008 Marble,travertine, ecaussines etc 76.6 Niobium, tantalum, vanadium ores & concentrates 76.7 Zinc ores & concentrates 76.9 Ores & concentrates, nes 77.3 compounded rubber, unvulcanised, in primary forms 82.9 84.1 Iron oxides & hydroxides
Zirconium & articles thereof, including waste & scrap 86 Chromium ores & concentrates 89.9 Alumunium ores & concentrates 91.8 94.8 Iron ores & concentrates; including roasted iron pyrites Slag. Dross other than granulated slag 97 Uranium or thorium ores & concentrates 99.9 75 80 85 90 95 100 Percent Source: ASEAN Economic Commonity Chartbook 2009 5 Top ASEANs Import ASEAN from China, 2008 Others, 76% Hot rolled, flatrolled products of iron or nonalloy steel, 2%
Electronic integrated circuits and microassamblies, 5% Automatic data processing machines; optical reader, etc, 5% Electric app for line telephony, including current line system, 6% Parts & acces od computers & offi ce machines, 6% Source: ASEAN Economic Commodity Chartbook, 2009 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
ASEAN Imports from India (2008) Why being dominated by Petroleum Oils? Refined copper and copper alloys, Soybean oilcake & unwrought, 3% other solid residue, 4% Diamonds, not mounted or set, 5% Petrolium oils, not crude , 31% Electric app for line telephony, including current line system , 3% Others, 54% Source: ASEAN Economic Community Chartbook 2009 ASEAN trade with China: Continuous increase of deficit 120 100 Import Billion USD 80 60 Export 40 20 0 -20 -0.9 -1.7 -4.3 -2.0 -2.7 -4.0 -2.9 -3.7 -1.5 -6.4 -8.9 -9.9
05 20 06 20 07 20 08 Billion USD 25 Source: ASEAN Statistical Yearbook, 2008 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. 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. 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. Early Harvest Product Description HS 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 Tariff reduction on ACFTA X= Applied MFN Tariff Rate ACFTA Preferential Tariff Rate (Not later than 1 January 05) 2005* 2007 2009 2010 X > 20%
20 12 5 0 15% < X < 20% 15 8 5 0 10% < X < 15% 10 8 5 0 5% < X < 10% 5 5 0 0 0 0 X < 5%
Standstill Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Co-operation ACFTA starting on January 1, 2005 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%
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 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%
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 China Financial Aids and Investment: Aggressiveness due to Huge Foreign Reserve Investment cooperation fund totaling US$10 billion (infrastructure construction, energy and resources, information and communications) Credit of US$15 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 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. 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. Indonesian Economic Relationship with China and India 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. GDP Structure: Indonesia, China and India 120 100 Percent 80 Statistical discrepancy Net Export Gross domestic capital formation Government consumption Private consumption 60 40 20 0 -20 China India Indonesia Source: ADB Manufacture Productivity and Competitiveness
84 19 82 19 80 19 Billion USD 1,500 500- Source: State Administration of Foreign Exchange Bureau of PRC Economic Reform: Increasing India Foreign Reserve 300 250 150 100 50 Jul-09 2008 2007 2006 2005 2004 2003 2002
2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 0 1990 Billion USD 200 Source: Reserve Bank of India Indonesia Foreign Reserved: Unstable, Not a Result of Productivity and Competitiveness 60 50 Billion USD 40 30
20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Bank of Indonesia Chinas Export: Focusing on Manufacturing Goods 100% 90% 80% 70% 60% 50% Manufactured Goods 40% 30% 20% 10% Primary Goods 20 07
Manufactured goods 30% 20% 10% 0% Primary products Primary Product Source: Reserve Bank of India Indonesian Export: Increasing Shares of Primary Commodity 100% 90% 80% 70% Non Primary Commodity 60% 50% 40% Primary Commodity 30% 20% 10% 0% 2002 2003 2004 2005 2006 2007
Source: CBS 2008 Trade Balance Indonesia-China Surplus for Oil & Gas, Deficit for Non Oil & gas 6 4 Billion USD 2 0.50 0.82 1.71 1.12 0 -2 -4 (3.61) -6 -8 2004 2005 Balance of trade 2006 Oil and gas 2007 2008 Non-oil and gas Source: Ministry of Trade
Indonesia-India Trade Balance Surplus for Non-Oil & Gas, Mainly Raw Materials 5 4 Billion USD 3 4.26 2 3.33 1 1.83 1.98 2005 2006 1.07 0 2004 2007 2008 -1 Balance of trade Oil and gas Non-oil and gas Source: Ministry of Trade Top 10 Exports Indonesia to China Dominated by Natural Resources (2008)
Million USD Source: CBS 3,000.0 Top 10 Exports Indonesia to India Dominated by Natural Resources, too (2008) Coconut (copra), 2% Binders for foundry molds or cores, 2% Copper ores and concentrates, 4% Petroleum coke, 1% Chemical wood pulp, 1% Natural rubber, 1% Others, 14% Coal, 17% Palm oil & its fraction, 58% Source: CBS Top Imports Indonesia from China (2008) Mostly Manufactured Products, but Agricultural, too Portable Digital Automatic Data Processing Machines 306 Structures And Parts Of Structures Nesoi, Of Iron Or Steel 194 Parts And Accessories For Automatic Data Processing Machines 181
Auxiliary Plant For Use With Steam Or Other Vapor Generating Boilers 155 Garlic, Fresh Or Chilled 151 Aluminum Nonalloyed Rectangular 147 Superphosphates Fertilizers 145 Disodium Carbonate 138 Parts And Accessories Of Motorcycles 125 Petroleum Oils And Oils From Bituminous Minerals, Crude 121 Parts For Auxiliary Plant For Use With Steam 99 Steam And Other Vapour Turbines 93 Flat-Rolled Products Of Iron Or Non-Alloy Steel 92 Parts For Machinery Making Or Finishing Paper Or Paperboard 90
Antennas And Antenna Reflectors 87 Mandarins (Including Tangerines And Satsumas), Fresh Or Dried 85 Apples, Fresh 83 Tobacco 81 - 50.00 100.00 150.00 200.00 250.00 300.00 350.00 Millions of dollar Source: CBS Top 10 Import of Indonesia from India Dominated by Manufactured Goods (2008) Semi-finished products of iron 4% Cotton, not carded or combed
5% Television camera, transmissn app 8% Ground-nuts, not roasted 3% Trucks, motor vehicles for the transport of goods 3% Others 45% Soya-bean oil 9% Cyclic hydrocarbons 10% Petroleum oils, not crude 13% Source: CBS Chinas and Indias FDI Insignificant in Indonesia China 0.9% USA 1.0% Australia 0.3% India 0.1% Other Asia Countries 3.3% Europe 7.3%
Japan 9.2% Mauritius 43.6% ASEAN 12.5% Joint Countries 21.8% Source: Indonesia Investment Coordinating Board 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. China Investment to Indonesia It Will Increase, Soon Contract Year 2004 2005 2007
2007 2008 2009 2009 2009 Sector Bridge Oil (SOE) Railways (SOE) Other infrastructure Dam Other infrastructure Oil Power Plant (west Java) Power Plant (east Java) Power Plant (central Java) Power Plant (south Sumatra) Mining Biodiesel Emergency Steel Power Plant Power Plant (SOE) Amount US$ 150 million US$ 1.5 billion US$ 200 million US$ 600 million US$ 239.7 million US$ 200 million US$ 642 million US$ 481.9 million US$ 293,2 million US$ 605,2 million US$ 330 million US$ 14.4 million US$ 255 million US$ 500.000 US$ 500 million 60% of total 10000 megawatt US$ 615 million
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. 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. Before ACFTA Low Competitiveness of Indonesian Products 8% 6.2%
Source: CBS Indonesia Exporting Raw Tin ........ Others, 5% Vietnam, 2% Congo, 4% Brazil, 4% Bolivia, 5% China, 45% Peru, 13% Indonesia, 22% Source: CBS ..But, Increasing Imports of Tin Based Products Radiotelephony, radiotelegraphy, radiobroadcasting or television 10.61 169.85 Flat-rolled iron or nonalloy steel products, > 600 mm wide, plated or coated with tin, < 0.5 mm thick 42.2 73.48 2003 2007 Flat-rolled iron or nonalloy steel products, >600 mm , plated or coated with tin, > 0.5 mm thick 1.79 20.35 Flat-rolled iron or nonalloy steel products, <600 mm wide,
plated or coated with tin 0.31 0.54 0 50 100 150 200 Source: CBS 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
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