Leaders of China and the ASEAN (Association of Southeast Asian Nations) countries are expected to sign a package of free trade deals late next month, enabling the two parties to formally implement a China-ASEAN free trade area (FTA) starting from 2005.

According to Chinese sources and the ASEAN Secretariat, eight documents will be signed at the ASEAN plus China, Japan and South Korea Summit to be held on November 27-29 in Vientiane, Laos.

The kernel document is an ASEAN-China plan of action to implement an FTA framework signed by China and ASEAN leaders in December 2002.

Other documents include memorandums of understanding on transportation, cultural co-operation, construction of an information highway, trade in goods, services, and dispute settlement.

"These documents mark that China-ASEAN FTA will soon be formally launched," said Xu Ningning, a Chinese member of quasi-official China-ASEAN Business Council.

Xu has long been involved in the China-ASEAN FTA negotiations.

The China-ASEAN FTA is scheduled to be fully completed before 2010. By then, the average customs duty within an ASEAN-China FTA will vary between zero and 5 per cent. Trade and investment barriers would be eliminated.

Nations within the FTA would possess 1.7 billion population, 40 per cent of the world's foreign exchange reserves, and about 10 per cent, or US$2 trillion, of the world's gross domestic product (GDP).

An Min, China's vice-minister of commerce, told reporters last Thursday that trade ministers of China and the ASEAN countries, last month in Jakarta, reached in principle an agreement on trade in goods.

At the meeting, ASEAN countries also unanimously decided to recognize China's market economy status, for which China has been struggling for years.

Despite the advance in free trade talks between the two parties, the negotiations on a number of documents scheduled to be signed next month have been delayed.

According to the schedule, negotiations concerning the agreement on trade in goods and services should have been finished before June 30. But the agreement on goods trade was not reached in principle until September and final negotiations on some other documents are not finished yet, according to insiders.

It has been questioned whether China and ASEAN can finish their negotiations and launch the formal FTA on time.

"But the strong political will of leaders from the two parties push them forward," Xu told China Business Weekly.

According to Xu, the disputes mainly lie in the rule to determine the origin of goods, tariff reduction on some sensitive commodities and the timetable of tariff reduction.

ASEAN countries, particularly those advanced ones such as Singapore and Malaysia, hoped to have greater flexibility in the origin of goods, while China at first worried this may lead more foreign goods beyond ASEAN to flood into the Chinese market.

Xu revealed that the sensitive goods include rubber and palm oil, two major exports of ASEAN countries. China has long adopted high-tariff rates on the two categories.

"China has more than 1 million rubber planters in Hainan and Yunnan provinces, a rapid tariff slashing of the product may deprive them of local jobs," Xu said.

He said that the two parties have reached consensus on the tariff reduction of rubber, plumb oil and other sensitive products, but their tariff reduction will take place at later period of the timetable to implement the China-ASEAN FTA.

Other experts suggest the sensitive products also include electronic home appliances, which are produced by many ASEAN countries but are less competitive in price than Chinese goods.

Other barriers include China's huge trade deficit against ASEAN, and the unbalanced investment flow between China and ASEAN countries.

In terms of service trade, how to co-ordinate the existing free trade deals between the Chinese mainland and Hong Kong and Macao also challenged the negotiation process, Xu added.

He said politics also impede the successful advancement of free trade pacts.

In the second half of this year, the Philippines and Indonesia held presidential elections while Singapore changed its prime minister.

Politicians of these countries had to make significant concessions to trade unions and industry associations of their countries, Xu said.

The negotiations resumed their momentum in September when the government transitions in the above three countries were finished.

Zhang Xinwei, a diplomat of Chinese Embassy in Malaysia, wrote in a paper published earlier this month that potential cultural resistance of ASEAN countries against the Chinese influence may also impede the advance of the FTA negotiations.

Zhao Zhongxiu, a professor of international trade at Beijing-based University of International Business and Economics, told China Business Weekly: "Even if China can reach a common understanding with ASEAN as a whole, the varying interests of its member countries and the different social and economic developments may impede ASEAN members to have consensus in most issues."

In recent years, the sovereign disputes over some islands between Malaysia and Indonesia, and between Malaysia and Singapore, and between the Philippines and Indonesia, have been escalating.

Unlike the European Union (EU) where internal trade volumes account to more than 50 per cent of the total foreign trade of its members, the mutual trade between ASEAN members is only about 25 per cent. And ASEAN has long lacked a powerful co-ordination headquarter.

"The influence of foreign countries, particularly Japan and the United States, also impact the process of the China-ASEAN FTA negotiation process," Zhao said.

Some ASEAN countries, especially more developed ones like Singapore, Malaysia and Thailand, have launched separate FTA talks with Japan, Australia, the United States, and other countries like India.

But the huge common interests push China and ASEAN work ahead.

The total trade volume between China and ASEAN in the first eight months of this year reached US$65.60 billion, rising 37.5 per cent over the same period last year. Chinese' exports to ASEAN countries were valued at US$25.94 billion while its imports from the block were US$39.66 billion. China's trade deficit was US$13.72 billion.

In recent years, China has emerged as a major importer of raw material from less developed ASEAN countries and primary industrial products from richer ASEAN members.

"China's rising influence in the region is inevitable, and the only way to cope with it is to co-operate with the country," said Wu Qinxue, director of the Institute of Applied Economics & Management under Beijing United University.

Another upcoming benefit for ASEAN countries is China's nearly US$500 billion foreign reserve which can become a source of foreign investment to these countries. The ASEAN countries have long complained China "snatches" foreign investment from them, Wu told China Business Weekly.

As a culturally and geographically familiar place to Chinese business people, ASEAN can become their first major destination for overseas investment. The implementation of China-ASEAN FTA will certainly facilitate this process, Wu concluded.

(Business Weekly 10/26/2004 page24)