Introduction

In November 2004, at the 10^th ASEAN Summit in Vientiane, Lao PDR, the Economic Ministers of ASEAN and China signed the Agreement on Trade in Goods (TIG) of the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China. This occasion is a major step towards the realisation of an ACFTA for goods, which is set to be established by 2010 for ASEAN 6[2] and China, and by 2015 for the newer ASEAN Member States.[3]

This ACFTA in goods would soon be augmented by services and investments with negotiations on agreements on these relevant areas being aggressively pursued in 2005.

In order to understand the economic relevance of the ACFTA, this brief will highlight its net benefits to the ASEAN region.

Enlarged Market Size and Enhanced Trade

Outright, this ACFTA will create an economic region with 1.7 billion consumers, a regional Gross Domestic Product (GDP) of about US$2 trillion and total trade estimated at US$1.23 trillion. This makes it the biggest FTA in the world in terms of population size.

And as any in other FTA, the ACFTA will bolster ASEAN-China trade, which has risen at a dramatic pace, indicating the growing economic interdependence of ASEAN and China, as illustrated in Table 1 below.

                                     Source: ASEAN Trade Statistics Database

Moreover, the share of China in ASEAN’s total trade has grown from 2.1 per cent in 1994 to 7% in 2003, making China the 4^th largest trading partner of ASEAN after the European Union (11.5%), Japan (13.7%) and the United States of America (14%).

This trade volume is expected to grow further with the implementation of the Early Harvest Programme of the ACFTA in January 2004, as well as the implementation of the tariff reduction programme under the normal track of the TIG Agreement by the mid-2005. Already by July 2004, the value of the Early Harvest Programme products[4] traded between ASEAN and China reached US$1.11 billion representing an increase of 42.3% over the same period of 2003, amongst which ASEAN exports to China were US$ 0.68 billion, an increase of 49.8% over that same period.

            Amongst ASEAN’s top exports to China include electrical equipment, computer/machinery, lubricants/fuels/oil, organic chemicals, plastics, fats & oils and rubber. Notably these products are mostly intermediate goods to China’s exports to Third Countries. Thus, it can be expected that in the process of China’s economic expansion and with the ACFTA in place, it will import more from ASEAN countries for its required inputs in its production processes and for its needs as its income and standard of living improves.

Removal of Trade Barriers, Specialisation and Enhanced Economic Efficiency

A key feature of the TIG Agreement is the non-maintenance of quantitative restrictions and the elimination of non-tariff barriers.[5] The removal of these trade impediments will lower the costs o