On Nov. 6, Chinese Premier Zhu Rongji (朱鎔基) reached an agreement with ASEAN leaders to establish the world's largest free-trade zone. Expected to be completed in 10 years, it will be the world's largest free-trade zone in terms of population. It will focus on agriculture, communications, the development of human resources, mutual investment and the development of the Mekong River as key areas for cooperation. It will also have a far-reaching impact on Taiwan.
Apart from strengthening trade and investment relations with ASEAN countries, China's active pursuit of a free-trade zone also reflects its ambition to become Asia's leader and expand its influence in global multilateral forums after WTO entry.
With a massive population and a vast area, China has considerable market potential. If the Chinese economy continues to grow at its current rate, it will be able to compete with the Japanese economy within 10 to 20 years and become Asia's leader as well as a global economic giant. Pushing for cooperation with ASEAN could expand the scope of China's influence.
ASEAN was initially wary about setting up an East Asian free-trade zone with China, Japan and South Korea. This was because, with its rapid economic growth since the 1990s, China has become the biggest competitor of ASEAN nations. More than two-thirds of all foreign investments into Asia's emerging markets have gone to China.
A considerable portion of ASEAN's exports have also been replaced by China's -- one of the reasons behind the 1997 Asian financial crisis. With China's entry into the WTO, European and US multinationals are all optimistic about the economic prospects of the China market. They have been eagerly preparing to enter China and expand their investments -- a development that particularly worries ASEAN countries.
Since the Asian financial crisis, however, not only has ASEAN failed to gain timely support from the US, but the countries that asked for help from the IMF have also been forced to accept exacting conditions and to pay heavily for the assistance.
Also, countries with serious banking problems such as South Korea, Malaysia, the Philippines and Thailand have been facing an accelerating capital drain due to the global economic recession and the Sept. 11 terrorist attacks. The net private capital flow into those countries is likely to turn negative this year. Singapore is also likely to post negative economic growth this year. With these gloomy prospects, ASEAN countries have no choice but to seek cooperation with China -- in addition to self-reliance through an ASEAN free-trade zone -- in order to seek expansion for their weak economies, as well as markets with growth potential.
Singapore and Thailand are now eager to enter the China market. China has also promised to add US$5 million into the China-ASEAN Cooperation Fund and participate in the establishment of an "e-ASEAN." China has also promised to provide capital to open transportation routes within Laotian and Burmese territory and cooperate with Laos, Thailand and the Asian Development Bank to build roads in Laos, in order to hasten the completion of the Kunming-Bangkok high-way. This proves especially attractive to an ASEAN facing a foreign capital drain.
Certainly, to realize the ASEAN-China free trade area within 10 years will be very difficult. Progress has been slow in the promotion of AFTA due to the vast differences between member countries regarding the pace of economic development.
Given the key areas for cooperation, however -- agriculture, communications, human resources and the mutual investment in and development of the Mekong River -- future benefits from the free-trade zone will come largely from the expansion of the China market's hinterland. Another benefit would be a readjustment of ASEAN's industrial structure and improvements in its investment environment. These benefits, if realized, could change the patterns of economic competition in Asia and will naturally have a far-reaching impact.
The impact of the ASEAN-China free trade area on Taiwan will depend on the extent to which it is realized. Apart from the questions of trade cooperation and competition across the Taiwan Strait, Taiwan will also have to face up to the contraction of the space in which its small and medium-sized enterprises can expand their markets in ASEAN as trade between members and non-members shifts to trade between members.
If it is not a member of the ASEAN-China free-trade zone, Taiwan will have to pay tariffs on its exports. Also, Taiwan will be unable to participate in regional cooperation in information technology, electronic commerce coordination and information infrastructure. This will affect the information industry's expansion in that market.
At the same time, Taiwan's ability to attract foreign investment will also be affected. In particular, various investment protections and trade codes will encourage mutual investment between members of the free-trade zone. Liberalization in the flow of production factors will also increase incentives for investment in the region, as well as mutual cooperation between businesses in the region.
This will undercut foreign investment in Taiwan and cause investments to move to the free-trade zone, creating a capital outflow in Taiwan.
In the face of such developments, Taiwan must actively upgrade its industries if it is to avoid being consigned to the garbage heap of economic history. An urgent task is to plan -- with an eye on global logistics and global market expansion -- foreign investment strategies that can help Taiwanese businesses take up positions in the East Asia and China markets.
Tsai Horng-ming is vice secretary-general of the Chinese National Federation of Industries.
Translated by Francis Huang
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