China's trade strategy

["Ian Murray" <seamus2001@xxxxxxxxx>]

< http://www.feer.com >
CHINA-ASEAN TRADE

Enough for Everyone

China hopes that its emergence as a major market for the region
will be enhanced by a raft of free-trade agreements. It's trying to
persuade neighbours that its growth is good for them, too
By Susan V. Lawrence/BEIJING
Issue cover-dated June 13, 2002


CHINA'S SEEMINGLY relentless strides toward domination of global
markets are ringing alarm bells among neighbours in the region and
beyond. Acutely aware of the concern, Beijing is labouring to show
that its economic growth also has benefits for the rest of the
region. Impressive April trade statistics from South Korea,
Singapore and Taiwan helped fast-developing China make that point.
They showed exports to China contributing to a long-awaited rebound
in each economy's exports, highlighting China's growing role as a
buyer as well as a seller.

Picking up where those statistics leave off, an influential Chinese
economist is arguing that they are part of a bigger trend of
China's emergence as a significant market for the region. He and
many Chinese officials predict, moreover, that the trend will only
become more pronounced as China and its neighbours move forward
with a raft of free-trade arrangements, the most high-profile being
that liberalizing trade between China and the Association of
Southeast Asian Nations.

China's pitch to Asean, in particular, has a lot to do with
politics. Given their history of territorial disputes, moves toward
a free-trade area, or FTA, are a form of "political
confidence-building" for both, says the economist, Zhang Yunling,
who heads the Institute for Asia-Pacific Studies at China's largest
think-tank, the Chinese Academy of Social Sciences. It is also a
way for China to respond to "unilateral United States policy" and
"find its own area for counterbalance," Zhang suggests. And, he
says, it offers a way for China to begin to challenge Japan's role
as the dominant economic power in the region.

With the free-trade area initiative, senior Chinese trade official
Long Yongtu tells the Review in an interview, "we are trying to
take some special, concrete action to prove that China's economic
growth and China's opening to the outside will not only benefit
developed countries, like the United States and the European Union,
but will also be beneficial to our neighbouring developing
countries." China recognizes, he says, "that we have to strengthen
our ties with our neighbours, especially in Southeast Asia."

A senior Asean official sums up the situation as: "China wants to
lock in Southeast Asia and exclude Japan."

That doesn't sit well with many Asean elites. "The bilateral
relationship between the U.S. and Japan is of crucial importance,
not just for the U.S. but for us in Southeast Asia because if we
want to live peacefully there must be a balance," Singapore Senior
Minister Lee Kuan Yew said recently in Tokyo. "China by itself
cannot be balanced by the rest of Southeast Asia."

Both the U.S. and Japan are, in fact, seeking pacts with countries
in the region to counter China's overtures toward Southeast Asia,
where Washington's image as a champion of free trade has been hurt
(see stories on pages 16 and 19). Long-time rival New Delhi is also
taking steps to answer Beijing's growing influence in Southeast
Asia, with an annual India-Asean summit due to start in Cambodia in
November.

The concern among its neighbours, to which China is responding with
the lure of an open market, is that with China's entry into the
World Trade Organization last December, Asia's products will face
increased competition from Chinese manufactured exports in world
markets. The United Nations' recently released annual Trade and
Development Report supports those concerns. "In labour-intensive
manufacturing, including assembly operations in electronics, it is
middle-income producers, such as the members of Asean and Mexico,
that face the greatest exposure" to competition from China, the
report concluded.

Those reaching out to Southeast Asia, like Zhang, know China's
exports will put pressure on neighbouring economies' share of
global markets. "China's emergence is a fact. You can't reject it,"
Zhang says. But he suggests that "for Asean, there is only one
thing left: Figure out how to use this opportunity."

The proposed China-Asean Free-Trade Area, a Chinese initiative
endorsed by both sides last November, is set to take shape within a
decade. From China's perspective, the idea is to give China's
Southeast Asian neighbours a leg up in exporting into the Chinese
market, by offering them even greater trade liberalization than
China agreed to as part of its WTO accession agreement.

Zhang, who heads a team working on details of the China-Asean
free-trade area, predicts "a long list of quick liberalizations,"
involving "much lower tariff rates than the general commitment to
the WTO, much quicker." He says China and Asean will be able to go
further than the WTO in liberalizing agricultural trade, for
example, because largely temperate China and tropical Asean see
themselves as having complementary agricultural sectors.
Liberalization will extend to services, too.

"We should do it phase by phase, stage by stage, step by step,"
says Long, the senior Chinese trade official who led the
negotiating for China's WTO accession. "People cannot wait 10 years
to really enjoy some benefits from this negotiation of the
free-trade area."

Among those set to benefit the most are the least-developed members
of Asean such as Burma, Cambodia, Laos and, to a lesser extent,
Vietnam, says Zhang, adding that China has promised to extend to
them the same most-favoured-nation trading status that it grants to
WTO members.

For Long, the FTA serves other agendas, too. Long confesses that
his quest to bring China into the global trade regime left him with
"mixed feelings" about regional economic arrangements. He came
around to the FTA idea, he says, in part because he now sees that
"regional arrangements, if properly done, could accelerate global
trade negotiations."

Even before free-trade arrangements kick in, however, Zhang says
his research shows that China is already becoming an increasingly
significant market for Asia's exports, while Japan is becoming a
less important market. From 1990 to 2000, the share of East Asia's
exports going to China almost doubled, from 5.2% to 10.2%, he says,
while the share of East Asia's exports going to Japan fell from
14.5% to 12%.

For Taiwan, South Korea and Mongolia, China was a bigger export
market in 2000 than Japan, Zhang shows, using International
Monetary Fund statistics.

For Southeast Asian nations, Japan as an export market still
dwarfed China. But for the four largest Southeast Asian economies,
Zhang says, the share of their exports going to Japan plunged from
31.1% in 1985 to 15.8% by 2000, suggesting a powerful need for
those economies to increase their exports elsewhere.

Increasing exports to China to offset declining market share
elsewhere is all very well, but some in Asean worry about the
composition of their exports to China. The fear is that Asean
countries will become mainly low-end suppliers to China's market,
providing agricultural products and natural resources such as oil,
minerals and timber.

Zhang doesn't deny China's appetite for those kinds of products. He
argues that many members of Asean are happy for agricultural
products to make up a large portion of their exports. But he also
points to one statistic that offers hope for Asean manufactured
exports to China: Exports of electronic goods to China, he says,
leapt 30% in the past three years.

The UN's Trade and Development Report 2002 suggests this is because
China is getting more involved in so-called "production
sharing"--importing parts for computers and office machines, then
exporting onward. The report says that "an expansion of China's
exports in this sector can be expected to result in a concomitant
increase in imports of their parts and components until China fully
exploits its own potential to produce them domestically."