Free trade zone

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Journal of the Asia Pacific Economy
Vol. 12, No. 4, 485–503, November 2007

The Prospects of the ASEAN–China
Free Trade Area (ACFTA):
A Qualitative Overview
DONGHYUN PARK
School of Humanities & Social Sciences, Nanyang Technological University, Singapore

ABSTRACT ASEAN and China are economic partners as well as economic competitors. A widely proposed means of strengthening the economic partnership is to form a free trade area between the two. Our primary objective is to use insights from customs union theory to examine whether an ASEAN–China Free Trade Area (ACTFA) would be potentially beneficial for both sides. Our analysis of relevant static factors such as the level of pre-integration trade and initial tariff structures provides some grounds for optimism about the ACFTA’s prospects. In addition, various dynamic factors and non-economic factors further reinforce such optimism. KEY WORDS: ASEAN, China, trade, free trade area, economic integration JEL-CLASSIFICATIONS: F10, F14, F15

Introduction
The ASEAN countries of Southeast Asia have been an integral part of the East Asian miracle. Singapore is a newly industrialized economy along with Korea, Taiwan and Hong Kong, while Malaysia, Thailand and Indonesia have also transformed themselves from stagnant agricultural economies to dynamic manufacturing economies through sustained growth and industrialization. More recently, other ASEAN countries, in particular Vietnam, are also beginning to achieve consistently rapid growth. Owing to such impressive region-wide performance over a long period of time spanning more than three decades, developing countries in other parts of the world have looked up to Southeast Asia as models of economic development and nation-building. Since the Asian currency crisis of 1997–1998, however, there has been an unmistakable loss of momentum and self-confidence among the once high-flying economies of the region.

Compounding this growing uncertainty is the remarkable economic emergence of China, which is perhaps the most significant trend of the 21st century global Correspondence Address: Donghyun Park, Economics Division, School of Humanities & Social Sciences, Nanyang Technological University, Singapore 639798. Email: adpark@ntu.edu.sg ISSN 1354–7860 Print/1469–9648 Online /07/040485–19

DOI: 10.1080/13547860701594103

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2007 Taylor & Francis

486 D. Park
economy. China is quickly becoming the factory of the world as it churns out and exports an ever-wider range of ever more sophisticated manufactured products. China is no longer merely a producer of mass-market low-tech goods but is increasingly moving up the value chain into high-tech goods as well, even though these tend to be produced by foreign firms rather than local firms. Its plentiful supply of human capital and talent, along with a seemingly limitless pool of unskilled labor, is transforming the country into the global manufacturing center. This obviously poses a threat to the ASEAN economies, whose own success was based largely on producing and exporting manufactured products to the rest of the world. All the more so since, with the possible exception of Singapore, the ASEAN countries are well within the striking distance of China in terms of technological and skills gaps. A specific example of the growing economic competition between China and ASEAN is competition for FDI. There is widespread concern within ASEAN that the explosive growth in FDI inflows into China, especially in the manufacturing sector, is taking place partly at ASEAN’s expense. This is a serious concern in light of the catalyst role played by FDI in ASEAN’s industrialization and growth.

At the same time, the emergence of China as a globally influential economic heavyweight presents a wide range of significant opportunities for ASEAN. The relative stagnation of the region’s traditional engine of growth – Japan – since the bursting of an asset bubble in the early 1990s makes it all the more imperative for...
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