Impact of China’s Entry into WTO on ASEAN Economies

1
Impact of Chinas Entry into WTO on ASEAN
Economies
Alicia CHEONG Karim Fakhoury Sawoar
JAHAN Veronika TANOTO
2
The Final Report

• Introduction
• ASEAN
• China (Economic Profile)
• WTO
• Economic implication on Chinas Entry into WTO on
  China
• South East Asia in Crisis
• Impact of Chinas emergence on ASEAN economies
• Economic Outlook of ASEAN

3
OVERVIEW OF PRESENTATION

• Two major parts of the final report
• ASEAN Overview
• -- presented by Karim
• Short-term and Long-term impact of Chinas
  emergence on ASEAN
• -- presented by Jahan
• Short Question Answer
• -- Karim, Jahan, Veronika Alicia

4
ASEAN OVERVIEW

• ASEAN , The Association of Southeast Asian
  Nations) is a regional alliance of ten
  independent countries that promotes stability and
  economic growth in Southeast Asia.

• ASEAN Founded in 1967 by
• Malaysia,
• Thailand,
• Indonesia,
• Singapore, and
• Philippines
• Subsequently joined by Brunei, Vietnam, Laos,
  Myanmar and Cambodia.

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ASEAN Overview
6
ASEAN OVERVIEW

• ASEANs aims and purposes Accelerate economic
  growth, social progress and cultural development
  in the region , and promote regional peace and
  stability.

• ASEAN current status The ASEAN region
• has a population of about 500 million, a
• total area of 4.5 million square kilo
• combined gross domestic product of
• US737 billion, and a total trade of US720
• billion.

7
Selected some of the ASEAN country
membersperformance figures in year 2000
8
Selected some of the ASEAN country
membersperformance figures in year 2000
9
ASEAN OVERVIEW

• Launch of AFTA in 1992 The strategic objective
  of AFTA is to increase the ASEAN regions
  competitive advantage as a single production
  unit. In fact, Within three years from the
  launching of AFTA, exports among ASEAN countries
  grew from US43.26 billion in 1993 to almost
  US80 billion in 1996, an average yearly growth
  rate of 28.3 percent.

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ASEAN OVERVIEW

• In addition to trade and investment
  liberalization, regional economic integration is
  being pursued through the development of
  Trans-ASEAN transportation network consisting of
  major inter-state highway and railway networks,
  principal ports and sea lanes for maritime
  traffic, inland waterway transport and major
  civil aviation links.

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ASEAN OVERVIEW

• ASEAN vital sectors coverage Trade, investment,
  industry, services, finance, agriculture,
  forestry, energy, transportation and
  communication, intellectual property, small and
  medium enterprises and tourism.

12
Selected ASEAN indicators, 2000
13
ASEANs External Trade 1999

• US, EU and Japan collectively account for 61 of
  ASEANs total external trade.

14
World Trade Organization Overview

• 1947 Foundation of the General Agreement on
  Tariffs and Trade (GATT) in Geneva, Switzerland.
  At that time, it imposed some trade policies as
  forbiddance of export subsidiaries except for
  agricultural products, interdiction of imposing
  unilateral quotas on import excluding the case of
  imported goods threatening the local markets.

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World Trade Organization Overview

• 1967 A new decision was stopped during the
  Kennedy Round. It stated that all tariffs should
  be reduced by 35 except for specified industries
  in which tariffs were left unchanged. Then,
  during the Tokyo round, new codes were
  established in order to control the imposture of
  non-tariff barriers such as voluntary export
  restraints.

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Economy situation in China

• It will be transformed from agriculture into
  technological sectors in the next 10-20 years.

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Economy situation in China
Result

• Chinas share of world exports will be
• around 6.8 in 2005, from 3.7 in 1995.

• The Chinas output will also rise from
• 3.4 to 5.1 in 2005.

• Several analysts predict
• that FDI in 2002 it could
• rise 12 from 48bn to
• 54bn

18
Economy situation in China

• Foreign companies might take the best employees
  and customers. Furthermore, they will dominate
  all high-margin sectors, whereas the domestic
  companies will only focus on less competitive
  commodity

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Chinas trading goods

• REGULATION

• Opening to private traders of Chinas state
• monopoly on importing crude and
• processed oil, and fertilizer and Chinas
• state monopoly on exporting silk will be
• completely removed by 2005.

• Under WTO agreements,
• the global textile quota will
• be ended in 2005.

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Chinas trading goods
RESULT

• The textile production of China, which is
• ready to take off, will be increased.

• China will capture a whopping 47.1
• percent of the world apparel export
• market, up from 19.6 percent in
• 1995, and will be producing 20
• of the worlds apparels, up from 7

21
Chinas infrastructure

• REGULATION

• Foreign operators are allowed to have 49
• of joint ventures in telecommunication
• sectors in Beijing, Shanghai and Guangzhou
• within three years. But most of the rest of
• the country is effectively off-limits until
  2005.

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Chinas infrastructure
RESULT

• It takes several years to know the impact,
• because until now the rules of foreign
• investment are still unclear. However, even
• though the foreign investors have taken the
• pie, the domestic investor will still be the
• winner.

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Chinas business sector

• REGULATION

• China will further open its banking,
• insurance, trade, tourism, business and
• service sectors to the outside world.

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Chinas business sector
RESULT

• The local companies will focus on less
• competitive product, whereas foreign
• companies will be in branding products,
• which are the key to build sustainable
• business

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Chinas agricultural

• REGULATION

• China will cut agricultural tariffs, end export
• subsidies and ease quotas after it joins WTO.
• The average bound tariff level should
• decrease to 15, within a range from 0 to
• 65, with higher rates being applied to
• cereal.

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Chinas agricultural
RESULT

• The agriculture exports will increase of
• about US 2 billion (1US RP 3.8)

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Chinas industry

• REGULATION

• Some tariffs are changed, such as auto parts
  tariffs
• from 23.4 to 10 , the abolition of the 13
• duty on IT products, a more than halving of the
• 14.7 duty on civil aircraft.

• For industrial goods the average bound tariff
• level will drop to 8.9, within a range from 0
  to
• 47, with the higher rates applied to
• photographic film and automobiles and related
• products.

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Chinas industry
RESULT

• The protection which China used to impose
• for automobiles and certain petrochemical
• industries will give bad impact for the
• industrys capability to compete with foreign
• companies.
• In fact, they will be the biggest losers.

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Overall China

• Right now the unemployment rate is just 3.3/
  However, this number is expected will be
  increased, estimated 65.5 from 1995 to 2005, as
  the increasing of imports and competition from
  firms which have foreign investment.

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SE Asia in Crisis

• End of the East Asian economic miracle

An era of phenomenon economic growth since
the 1980s came to an abrupt end with the Asian
financial crisis from 1997 to 1998.
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SE Asia in Crisis
The Bubble has BURST
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SE Asia in Crisis
When the storm begun . . .
July 1997 Asian Financial Crisis (originated from
Thailand The Tom Yam (soup) effect ala The
Tequila effect of Mexico)
1999 to mid-2000 Economic recovery
Mid-2000 to now US-led global economic
downturn Further trade disruptions as a result of
11 September terrorist attacks in US
33
GDP, 1996-2000

• Rates of Growth of Real GDP, 1996-2000(in
  percent)

34
Exports
ASEANs External Exports 1996-2000
US led recovery
Financial crisis
35
US The Saviour and Villain

• US economys continuing growth momentum
  instrumental in pulling SE Asian countries out of
  the crisis of 1997-1998.

• Unfortunately it is also the very factor
  contributing
• to the 2nd crisis that is currently unraveling
  

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US The Saviour and Villain
The Global Economic Downturn
When the US economy catches a chill, the rest of
the world gets the flu . . .
EXCEPT for SE Asian economies
They get pneumonic!!!
37
US The Saviour and Villain
The Global Economic Downturn
38
US The Saviour and Villain
The Global Economic Downturn

• Signs of trouble mid-2000

• The deterioration of the information,
• communications and technology (ICT) sector in
• the US.

• deepened into a general demand-driven global
• cyclical slowdown.

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US The Saviour and Villain
The Global Economic Downturn

• US economic slowdown 11 September attacks
• in US

• adverse spillover effects to the global economy.

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SE Asians Major Trading

• Economic Woes of SE Asians Major Trading
  Partners

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US, EU JAPANs Real GDP Growth Rate
42
Out of The Wok into the Fire
2nd Crisis Global Economic Downturn
SE Asias Major Trading Partner
US Economy
EU
Recession
Recession?
Japan Economy
Recession
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Out of The Wok into the Fire
2nd Crisis Global Economic Downturn

• Impact of slowdown coupled with the macro-
• impact of the 11 September attack had been
• broad-based and significant with export,
• investment and consumption growth all slowing
• down.

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Out of The Wok into the Fire
2nd Crisis Global Economic Downturn

• Major SE Asian countries already in recession

• SE Asias real GDP growth is now expected to
• slow from 5.2 in 2000 to 2.4 in 2001. It
• was originally projected by ADB to be 4.

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Out of The Wok into the Fire
2nd Crisis Global Economic Downturn

• The main areas in which the effects of the global
  downturn, worsened by the terror
• attacks, generally felt in SE Asia are as
  follows
• Adverse effect on global commerce reduction in
  revenues from tourism.
• Fall in capital flows due to increase in risk
  aversiveness and increase in risk premiums.
• Increase in burden of debt servicing.

• All the above bore negative impacts on the
• Balance of Payment of the SE Asian countries

46
Tourism Receipts as Percent of GDP, 2000
For those countries with relatively large tourism
industries, the 11 Sept attacks represent a new
and significant adverse shock.
47
Tourism Receipts as Percent of GDP, 2000
48
Trade Openness Year 2000

• (Export Import)/GDP

49
Reliance on Trade/Exports
50
Reliance on Trade/Exports
51
Impact of Global Economic Downturn

• Fall in Capital Flows

• Second, capital flows (FDIs and Short-term
  Capital
• inflow) have been falling and likely to fall
  further.

• This is due to increase in investors risk
• aversiveness and rise in risk premiums as a
• result of the attacks.

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Foreign Direct Investment

• Major ASEAN countries 1996-1999

53
Foreign Direct Investment

• Change of Foreign Direct Investment 1996 to
  1999

54
Impact of Global Economic Downturn

• Fall in Capital Flows

• . . . net private capital flows to all
  developing
• economies (including SE Asian economies) will
• turn slightly negative for the first time in
  over a
• decade for 2001.
• -- World Economic Outlook, October 2001

• Further contraction of FDIs to SE Asia is
  expected.

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Impact of Global Economic Downturn

• Increase in Debt Servicing

Rising risk premiums Devaluation of currencies
Increase cost of debts
56
Total External Debt
Major SE Asian Countries 1996-1999 (US million)
57
Total External Debt/GNP 1996-1999
58
Currencies lost

• Average lost in value of local currencies against
  US1 from 1996 to 2000

The devaluation of currencies in ASEAN countries
since the Asian Financial Crisis had increased
the burden of debt servicing.
59
SE Asia in Crisis

• Adverse effect on global commerce reduction in
  revenues from tourism.

• Fall in capital flows due to increase in risk
  aversiveness and increase in risk premiums.

• Increase in burden of debt servicing.

ASEAN Economies
60
SE Asia in Crisis

• Global recovery expected from mid-2002

• Is the worst over for the ASEAN countries?

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SE Asia in Crisis

• . . . Chinas emergence is triggering a second
  Asian economic crisis more severe than the first.
  But unlike the currency speculators who
  triggered the 1997 crisis, China wont go away.
• -- Kenichi Ohmae

62
What would be the economic fate of ASEAN

• Chinas entry into WTO, will undoubtedly change
  China and have important implications on its
  neighbors like ASEAN countries and developing
  world.

• Brings new opportunities as well as
• challenges to the Asian Pacific region
• including ASEAN.

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What would be the economic fate of ASEAN

• ASEAN competes with China in many markets,
  including FDI

• Prosperity in the long term for every one
• but in short term ASEAN may observe a
• divergence of investment from South
• East Asia to China.

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What would be the economic fate of ASEAN

• Pu Yonghao, an analysist at Nomura Asia in Hong
  Kong, predicted in a report, as the result of
  WTO entry of China, foreign trade would be
  doubled to more than USD 1000 bn by 2006, with
  export growing by 15 annualy from 2002 to 2006.
  FDI would grow by 16 annualy from 2002 to 2006.

• At present 60 of FDI goes to China while only
  16 go to East Asia

65
What would be the economic fate of ASEAN

• Incoming WTO Director General Supachi said With
  the China in the WTO can corner a huge 80 of the
  total FDI. Only half of the 16 will be in the
  region.

• That might swell the economic path of ASEAN in
  the near future.

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What would be the economic fate of ASEAN

• So China access into WTO may not be a
  positive sum of game for the ASEAN- shall it be
  win-win or lose-win???

Lose Win situation (Fight againest a
tireless power house), may be in the short run
Win Win situation, may be in the long run
67
What would be the economic fate of ASEAN
68
What would be the economic fate of ASEAN
69
What would be the economic fate of ASEAN

• Asian financial crisis and Chinas market opening
  have diverted attention away from ASEAN to China

• Position between ASEAN and China Reversed

• More and more FDIs are directed to China in
• the run up to its WTO accession. -
• (ABN Amro report)

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What would be the economic fate of ASEAN

• Economic slowdown across the west-leading
  companies to relocate in search of cheaper labor

• Chinas supply of cheap labor virtually in
• exhaustible, prime driving force behind
• Chinas remarkable economic expansion
• over the past 21 years.

• Cheapest destination offering the best
• returns

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Chinese Economy

• Changing from Agriculture to manufacturing

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What would be the economic fate of ASEAN

• Lee Kuan Yew (Singapores Senior
• Minister) says What Taiwan has done,
• what Hong Kong has done, there is no
• denying that China will do and excel at.
• So you multiply Taiwans 21 m people by a
• factor of 50 and you get an idea of the
• impact of the over the next 30-40 years.
• Some will be sharper and shrewder, and
• their research and development will be
• more productive.

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What would be the economic fate of ASEAN

• Its not just China, Friedrich Wu of World
• Economics says the NEA region will out
• perform ASEAN in real GDP growth by 2.2
• and 1.4 points in 2002 and 2001
• respectively.
• Hong Kong, South Korea and Taiwan
• together attracted USD 80 billion last
• year.

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What would be the economic fate of ASEAN

• Hong Kong attracted FDI last year as the
• combine total of the 10 ASEAN countries
• (UNS world investment report)

• China Hong Kong Macau
• Forbidding and unstoppable for ASEAN

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What would be the economic fate of ASEAN

• The Salomon Smith Barney report says,
• ASEAN economies are losing share to Latin
• America and to Eastern Europe. IMF figure
• show that FDI flows into Latin America
• increased four fold to nearly USD 80 billion
• last year from 1985.

76
Win Win Situation??

• Strategic imperative of close ASEAN-China
  linkages and interaction is evident

• Trade between ASEANs six older members
• and China has been expanding steadily
• from USD 8.9 billion in 1993 to USD 32.6
• billion in 1999 a leap of three and a half
• times in six years.

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Win Win Situation??

• As trade and other economic linkages
• increases between them, becomes active
• competitors and above all, for investments.

• Competition is the basis of globalisation,
• commerce, and economies, provided it is fair

• Competition will impel ASEAN member
• countries to shore up their strengths and fix
• up their weaknesses.

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Win Win Situation??

• Which will push ASEAN into more integration
• of the regional market. Large integrated
• markets,

• Major impulse for achieve the AFTA earlier
• than originally scheduled (less then seven
• months)

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Win Win Situation??

• Impulse for build up their competitiveness-
• undertaking financial and corporate
• reforms, strengthening the rule of law,
• improving transparency, embracing
• information technology, integrating the
• ASEAN market at a faster pace.

• China will offer a large and new market for
• ASEAN exporters

80
Win Win Situation??

• ASEAN now comprises half a billion people,
• almost half of the population of China. It
• has a combined gross domestic product
• about the size of Chinas.

• ASEAN and China as a potential market, a
• market of 1.7 billion people.

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Win Win Situation??

• Bilateral agreement will explore then previous

• Economic ministers of ASEAN and China have
• formed an experts group, a possible ASEAN-
• China free trade area is part of the scope of
• the experts groups work.

82
Win Win Situation??

• Larger dimension to this is known as the
• ASEAN-plus three process, including ASEAN,
• China, Japan and the Republic of Korea.

• The dynamics between ASEAN and China
• as competitors and partners will then prove
• of tremendous benefit to Asia Pacific
• Region.

83
Win Win Situation??

• Salomon Smith Barney study says FDI
• flows into China and other regions tend to
• be complementary rather than competitive,
• because

• ASEAN economies are in different stages of
• development and thus tend to specialise in
• the production of different type of goods.
• The FDIs may thus be drawn to differing
• comparative advantages.

84
Win Win Situation??

• Recent capital flows seems often
• motivated by a desire to be closer to
• the end customers and various other
• suppliers or partners.

• There is thus an incentive to diversify FDI
• placement if the ultimate market place in
• Asia is diversified.

The UNIDO Director General summarised the out
come of the debate with the following conclusion
85
Win Win Situation??

• China's entry to the WTO can be expected
• to change substantially the competitive
• outlook and prospects of numerous
• industrial activities in the Asia Pacific
• region, as well as the volume and
• composition of the respective trade and
• investment flows

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Win Win Situation??

• China's entry to the WTO is also likely to
• improve the bargaining standing of
• developing countries and introduce greater
• equity in multilateral trade negotiations

• China's entry to the WTO may attract FDI
• inflows to the Asia Pacific region

87
Win Win Situation??

• China's entry to the WTO is likely to
• catalyse the development of intra-industry
• trade specialization in the Asia Pacific
• region, which will also be triggered by intra-
• regional trade agreements already under
• way

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Win Win Situation??

• These developments make it highly
• advisable to establish a mechanism for the
• systematic and permanent monitoring of
• productivity and competitive performance
• across industry.

89
Win Win Situation??
We can concluded the situation by Singapores
senior minister Lees comments recently China
had the potential to grow in to an
economic power house five to six times the the
size of Japan. It was mainly Japanese
investments raised South East Asia and the four
dragons or the four tigers. Now can you imagine a
world with five six Japans.
90
Win Win Situation??
This win win scenario is attractive but not
inevitable, it begs several What if questions.
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Conclusion

• Short run
• With the Chinas entry into WTO, ASEAN countries
  will face a lot of challenges to compete with
  China. In short, we can say that the future of
  ASEAN is gloomy.

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Conclusion

• Long run
• China will replace the role of Japan as economic
  engine for the ASEAN region, which has played for
  past 3 decades. As a result, ASEAN economies can
  take benefit of this situation.

93
Conclusion

• A strong and economically
• dynamic China would create
• many more opportunities for
• ASEAN members.
• (Singapore minister trade
• and Industry George Yong Boon)

• Reinforcement of economical and cultural ties
  between China and ASEAN members.

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Suggestion

• To meet the economic challenge of China's
  attractiveness to foreign investments, the
  members of the Association of South East Asian
  Nations will have to combine their markets in an
  ASEAN Free Trade Area (AFTA).

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Suggestion

• Southeast Asia needs to invest more in
  infrastructure, technology and human capital
  resource, particularly as New Economy industries
  emerge.

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Bibliography

• Financial Times
• www.aseansec.org
• www.cnn.com
• www.wto.org
• www.asiaweek.com
• The Straits Times Interactive