Economy / International Relations

The ACFTA: a marathon, not a sprint, the greater economic growth in the ASEAN region

The ACFTA (ASEAN China Free Trade Area) is one the world’s largest free trade agreements. When it was officially set in motion in January 2010, the area encompassed 1.9 billion people, had a combined GDP of US$6.6 trillion and total trade amounted to US$4.3 trillion. ACFTA was intended to bolster economic growth in the region through expanded trade: Asian economists showed that the plan to build a free-trade area between the Association of Southeast Asian Nations (ASEAN) and China would bring about mutual wealth, in part by diverting trade with ASEAN away from Western economic powers to China. However, 21 months on, are the benefits apparent, or has the agreement caused more harm than good, not only to members of ASEAN, but also China?

China is considered the main engine for economic growth in the region, so it is not surprising that ASEAN is attempting to use that to its advantage. A study of Asian economists showed that the plan to build a free-trade area between the Association of Southeast Asian Nations (ASEAN) and China would bring about mutual wealth, in part by diverting trade with ASEAN away from Western economic powers to China. The FTA momentum will also provide greater encouragement for greater Chinese investment into ASEAN, particularly in transport and infrastructure. China recently launched a US$ 10 billion infrastructure investment fund to improve road, railway, airlines and information telecommunications links between China and ASEAN. China is providing a US$ 15 billion credit facility to promote regional integration and regional connectivity. The integration of ASEAN with China can also entice more foreign corporations, which each market alone cannot otherwise attract. With a larger market, more intense competition, increased investment and economies of scale, investors will be more inclined to locate in the integrated region. Secretary General of ASEAN noted “China’s economic growth and strong investment expansion is energising the region and is providing ASEAN with an expanding diversified market in an environment of slowing growth in its traditional partners,” denying that ACFTA will be at all detrimental to ASEAN.

However, recent statistics show a stagnation in the Chinese economy, and many have attributed this lull to the recent FTA with ASEAN. Even after ACFTA took effect, the deficit remained high, rising by $1 billion to $5.4 billion in 2010. In the first two months of 2011, the deficit was nearly $1 billion, signaling that this year the deficit with China could be getting worse, especially given that the growth of the consumer-driven Indonesian economy remains strong while China is putting a break on their stellar growth out of fear of overheating and the possibility of a bubble. Also, the potential gains of ACFTA for ASEAN remain unclear. The Chinese economy harbours a large pool of unskilled workers and has recently emerged as an important source of FDI investments overseas.

The complementary effects of ACFTA are expected to be realised in the medium- to long-run as compared to the short-run adjustment costs on the industrial structures in ASEAN countries. The FTA positions ASEAN to take advantage of the next phase of China’s growth, as its expanding middle-class consumption trends are expected to predicate the next wave of economic expansion. Although it is generally acknowledged that certain industries will face competitive pressures in the transition of the FTA, overall, the benefits from the growing trade between ASEAN and China would be translated into more jobs, more spending power and greater synergies between the two regions.There are adjustment pains but weighing in the gains, this FTA is necessary to ASEAN to learn to handle the competitive pressures so as to be able to survive in an increasingly more difficult global economic environment.

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