The China Asean AFTA: will there be turmoil?

January 2010 was a milestone of sorts. After years of negotiations, the China Asean free trade agreement (FTA) came into force. It was a grand plan of sorts. For a start, the whole market has a population of almost two billion people. For another, tariff barriers on 90% of the goods between the two regions were slashed down dramatically. The repercussion is that Chinese goods will have very little barrier in getting into Asean. And Asean goods will get easier entry into China. Well and good on the surface but when put into practice, the picture is full of discords.

When we look into the nature of goods from the two parties, we will be able to see what is going to happen. Take the example of consumer goods like rubber shoes (more appropriately called plastic shoes since the rubber parts have been mostly replaced by plastics), we have countries like Indonesia, Vietnam, Thailand and the Philippines producing quite a large amount mostly for domestic consumptions. Now, with reduced entry barrier of Chinese made shoes into Asean, these manufacturers in Asean will not be able to compete with the imports. The result; they would probably have to close shop, just like those in Malaysia.

What about the impact on China? Well, China says since they have the economies of scale, let them make the shoes and to make the equation look good, China says it will buy more of the raw products from Asean. So Asean has to restructure its economy to that of going back to selling raw materials like palm oil, timber and maybe some rubber (for making tires, not shoes). Like wise for other consumer products, there is no future for its manufacturing in Asean. For Asean, the future is going to be raw and semi-raw materials and maybe some high tech products that China might be willing to buy, not necessary to fill its needs (they do produce high tech products don’t they) but to make the FTA viable.

Out of all those important aspects of the FTA, one thing seems to be glaringly absent. That is intellectual property protections. Due to the low level of observance of intellectual property rights in both Asean and China and the lack of solid intellectual property laws and the diverse range of maturity among the group, no agreement has been reached on IPR and it might as well be. Perhaps there is no need for intellectual property protection here! China knows that it has the muscle to produce at the cheapest cost. If any member of Asean thinks that they can make cheap counterfeits of Chinese goods and sell it in Asean, then let them do it. Which obviously they can’t. On the other hand, China is not worried about buying counterfeit raw materials because the buying method is different from consumer products. They know that their money buys the real thing, so there is no need to observe intellectual property rights.

So what about the future? OK, it will probably take a decade to overhaul the marketplace. Asean industries that don’t have economies of scale will just have to wilt. In the meantime, China will have time to ride out the world economic recession. Never mind if the US buyers are not ordering; Asean will take up the slag. Ten years down the line, Asean would have revamped its economy to complement those of China. And there would be no reverse back. China in its part might dish out some investments in Asean on high tech products that have western intellectual contents. It would not be able to attract American investments on high technologies on its shore because it can’t guarantee western IPs in China.

As a result, some members of Asean will have high tech industries with American IPs and Chinese money and they would be termed politically correct. And America would be happy for staying out of the China circle with their IPs and still makes a sale to China via Asean. So will the Japanese, the Koreans and the Europeans stay happy following the example of the Americans? OK, it looks like the best of both worlds and trade war averted. What about India? Well, they of course will gain on receiving outsourcing jobs from the industrialized countries. What more do they want? As for Brazil, Russia and Mexico, probably small investments from the west to keep them in the picture and not allow them to rock the boat!