New York Times (January 1, 2010)

Asia Free-Trade Zone Raises Hopes, and Some Fears About China

By LIZ GOOCH

KUALA LUMPUR, Malaysia — When the clock struck midnight on New Year’s Eve, China and 10 Southeast Asian nations ushered in the world’s third-largest free-trade area. While many industries are eager for tariffs to fall on things as diverse as textiles, rubber, vegetable oils and steel, a few are nervously waiting to see whether the agreement will mean boom or bust for their businesses.

Trade between China and the 10 countries that make up the Association of Southeast Asian Nations , also known as Asean, has soared in recent years, to $192.5 billion in 2008, from $59.6 billion in 2003. The new free-trade zone, which will remove tariffs on 90 percent of traded goods, is expected to increase that commerce still more.

The zone ranks behind only the European Economic Area and the North American Free Trade Area in volume. It encompasses 1.9 billion people. The free-trade area is expected to help Asean countries increase exports, particularly those with commodities that resource-hungry China desperately wants.

The China-Asean free trade area has faced less vocal opposition than the European and North American zones, perhaps because tariffs were already low and because it was unlikely to alter commerce patterns radically, analysts say.

However, some manufacturers in Southeast Asia are concerned that cheap Chinese goods may flood their markets, once import taxes are removed, making it more difficult for them to retain or increase local market shares. Indonesia is so worried that it plans to ask for a delay in removing tariffs from some items like steel products, textiles, petrochemicals and electronics.

“Not everyone in Asean sees this F.T.A. as a plus,” said Sothirak Pou, a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore.

Asean and China have gradually reduced many tariffs. However, under the free-trade agreement — which was signed in 2002 — China, Indonesia, Thailand, the Philippines, Malaysia, Singapore and Brunei will have to remove almost all tariffs in 2010.

Asean’s newest members — Cambodia, Laos, Vietnam and Myanmar — will gradually reduce tariffs in coming years and must eliminate them entirely by 2015.

Most of the goods that will become tariff-free in January — including manufactured items — are currently subject to import taxes of about 5 percent. Some agricultural products and parts for motor vehicles and heavy machinery will still face tariffs in 2010, but those will gradually be phased out.

In recent years, China has overtaken the United States to become Asean’s third-largest trading partner after Japan and the European Union. The overall trade balance has shifted slightly in China’s favor, although there are significant differences among Southeast Asian countries’ trade balances, said Thomas Kaegi, head of macroeconomic research for the Asia-Pacific region at UBS Wealth Management.

Singapore, Malaysia and Thailand have only small trade deficits with China, while Vietnam’s has grown substantially. In 2008, Vietnam exported items worth $4.5 billion to China but imported about $15.7 billion worth of Chinese goods.

In Indonesia, the textile and steel industries are particularly nervous about lifting the tariffs, prompting the government to say that it would ask for a delay on some provisions. No time frame for submitting the request was given, but the Asean secretariat said it had not yet received an official request.

While competing with more Chinese imports may pose new challenges for Asean manufacturers, analysts say increasing their access to the 1.3 billion people of China could produce significant benefits.

Rodolfo C. Severino, who was secretary general of Asean from 1998 to 2002, identified Malaysia — which already exports palm oil, rubber and natural gas to China — as one country that might benefit the most from the removal of tariffs.

But nations like Vietnam that focus on the production of cheap consumer goods are more likely to be hurt, said Mr. Severino, head of the Asean Studies Center at the Institute of Southeast Asian Studies in Singapore.

Those countries may need to look for new export products and identify new niche markets, he said: “This is the nature of competition.”

Song Hong, an economist, expects China to import more agricultural goods, like tropical fruit, from countries like Thailand, Malaysia and Vietnam when the trade area takes effect. That could hurt Chinese farmers in southern provinces like Guangxi and Yunnan, said Mr. Song, director of the trade research division at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences in Beijing.

Mr. Sothirak, who was Cambodia’s minister of industry, mines and energy from 1993 to 1998, said the removal of tariffs might help increase Cambodia’s agricultural exports to China. Cambodia needs to diversify its export markets because its exports to the United States and Europe have declined, he said.

While he does not hold much hope that Cambodian textile exports would be able to compete with China’s highly developed garment industry, he said he believed the free trade area might entice more Chinese garment factories to set up operations in Cambodia, where production costs and labor were cheaper.

Pushpanathan Sundram, deputy secretary general of Asean for Asean Economic Community, acknowledged that there would be “some costs involved” for some countries when the free trade area took effect, but he said he believed China and Asean would “mutually benefit.”

Despite the expectations for increasing trade, Mr. Severino predicted that the introduction of the trade zone would not be a “breakthrough event” setting off a dramatic surge in commerce come January.

“There are many factors that traders and investors consider, and the trend has been going this way anyway,” he said. “What this does is to send out good signals and show the determination of governments to make things easier.”