Zhao Jinping

Research Report No 076, 2003

III. A Comparison between China’s FTA Practice and International Experience Since China proposed to establish a China-ASEAN FTA at the "10+1" conference in 2000, initial progress has been made in promoting bilateral FTA relations, which has also produced a positive impact on system cooperation in East Asia. In November 2001, China and ASEAN reached consensus on the official launch of the FTA procedure and decided to establish a free trade region within 10 years. After several rounds of inter-governmental consultations, the two sides signed a framework agreement in November 2002 and reached agreement on the early harvest projects and the schedules of tariff concessions for different ASEAN members. If bilateral negotiations can be completed on schedule, they will become the world’s largest free trade region, which is made up of developing countries, with a population of 1.7 billion people, a GDP of 2 trillion U.S. dollars and a trade turnover of 1.3 trillion dollars. At present, China’s mainland and Hong Kong, the two customs territories are holding consultations on a "Closer Economic Partnership" arrangement (CEP).

Launching FTA negotiations between China and ASEAN has become a new endeavor by China in establishing FTA. It is also another major policy measure taken by China after its WTO accession in participating in economic globalization and regional economic integration and in developing an open economy. Strengthening system cooperation with ASEAN is both conducive to China’s economic development and structural adjustment as well as to prosperity and stability in neighboring regions. Therefore, the move is of long-term, comprehensive and strategic importance. But this attempt is only a beginning. Compared with the FTA strategies of other regions, Japan and Southeast Asia, China’s strategy is still lagging behind and has some problems.

First of all, conventional experience shows that the roles played by FTA in promoting the economic growth of members is in direct proportion to the scope of FTA coverage and that the more the members are the more difficult it is for them to reach agreement. The differences in economic, political, cultural and ethnic issues may all become the "bottlenecks" to multilateral negotiations. Even if the negotiation procedure can be completed on schedule, the scope of liberalization shared by all parties can only be the "common divisor" of the commitments that can be accepted by all parties. This will be a great discount of the original concept of FTA. Therefore, many countries prefer a "from the easy to the difficult" approach when they try to establish FTA, proceeding first of all from bilateral negotiations. China’s FTA negotiations with ASEAN as a whole lack experience and have to deal with 10 negotiating parties simultaneously. Therefore, if the negotiations are to produce expected results, China may have to make quite a lot concessions. Japan on the other hand adopted a two-pronged strategy when it was trying to establish FTA with ASEAN, which involved both multilateral and bilateral negotiations at the same time. On the one hand, Japan tried to reach an all-embracing framework agreement through multilateral negotiations. Under this agreement, consensus can be achieved in establishing a comprehensive system cooperation relationship and all the areas of possible cooperation can be covered so as to leave room for selecting appropriate contents, modes and time frame of cooperation. On the other hand, specifying in advance the contents of possible bilateral cooperation in the multilateral framework agreement can pave the way for selecting appropriate cooperation partnership and order of priority according needs and for promoting bilateral FTA consultations. In fact, the bilateral process between Japan and Singapore, Thailand and the Philippines is far ahead of their multilateral process. In the end, the benefit reaped by Japan could be an "addition" of the benefits embodied in all bilateral FTAs, instead of a "common divisor".

Second, the relevant FTA theories tell us that because of the effect of trade transfer, the expansion of inter-regional trade and investment activities will help increase the overall efficiency if an FTA is established with the members with high economic efficiency. But there exists a possibility that low-efficiency commodities or investments may replace extra-regional high-efficiency commodities or investments if a FTA is established with low-efficiency countries. Therefore, while the establishment of a FTA between developed and developing countries may enable the industrial products of the developed countries to enter the markets of the developing countries more easily, the competitive products of the developing members can obtain greater market access because of the effects of comparative advantages. In addition, this will help the developing countries to absorb the industrial transfer and investment from the developed countries and help promote the resource allocation optimization and structural upgrading of the area as a whole. A typical example is Mexico, which has been performing well in trade, investment and economic development since it joined the North American Free Trade Area and signed an FTA agreement with the European Union. It is for the same reason that the Republic of Korea, Singapore and the leading Southeast Asian countries are eager to establish FTA with Japan, the United States, Australia, New Zealand and other developed countries. China is a developing country. Although the level of its economic development is still very low, it enjoys fairly strong competitiveness in the area of labor-intensive products. Establishing free trade relations with developed countries will help tap its own comparative advantages and absorb the capital and technology factors from cooperation partners so that they can complement each other in advantages and raise the production efficiency of their factors.

Third, selecting FTA targets and setting different combination priorities is an elementary work for a country to work out its strategy for economic cooperation with foreign countries. Most countries have been selecting negotiating counterparts in keeping with a "from the easy to the difficult" approach and proceeding from the perspectives of easing domestic pressure, seeking mutual complementarity and pursuing economic interests. Japan selected Singapore as its first negotiation counterpart, mainly because doing so can avoid the possible pressure of the other party’s agricultural products on its own agriculture and can have a greater influence in the Southeast Asian region. Japan selected Mexico, simply because it wanted to avoid the disadvantages when the products of Japanese enterprises enter the Mexican market compared with those of the European and American enterprises. In addition, Japan wanted to take advantage of Mexico being both a NAFTA member and also a signatory to the FTA agreement with the European Union so as to create conditions for the products of the Japanese-invested enterprises in Mexico to enter the European and American markets. Japan’s selection of the Republic of Korea as its next partner was designed mainly to contain China’s influence and to play a leading role in regional affairs while pursuing economic interests by making use of its trade and technology advantages. The Republic of Korea selected Chile as its first negotiation counterpart for several reasons. First, it deliberately selected a relatively small economic entity for an FTA try. Second, the Republic of Korea has dramatically opposite seasons with Chile and as such Chilean agricultural products would not pose a direct threat to similar Korean products. Third, Chile is both a member of the Southern Cone Common Market and a signatory to an FTA agreement with the EU, which made it necessary for the Republic of Korea to take measures to ensure that Korean enterprises will not suffer losses when they complete with European and American enterprises on the Chilean market. Fourth, the Republic of Korea wanted to take advantage of its own superiority in automobiles and other industrial products so as to open new markets. ASEAN wanted to establish FTA respectively with China, Japan, the Republic of Korea and the United States. This is because this approach will facilitate ASEAN products to enter these leading markets in the world and expand foreign trade. But more importantly, it wants to become a production base that has zero tariff links with all these major markets, to attract direct investments from these countries and to obtain more capital factors. At present, China is actively promoting the establishment of FTA with ASEAN and Hong Kong region. However, China has not worked out a whole set of well-defined strategies and priority arrangements for regional multilateral and bilateral system cooperation for its long-term development needs. The main reason is that it still lacks sufficient understanding of the future trend and roles of regional economic integration and has not established a national strategic response system in keeping with the development of the situation.

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