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China-ASEAN FTA to boost regional integration —Merrill Lynch

Philippine Daily Inquirer, Jun. 01, 2005

China-ASEAN FTA to boost regional integration—Merrill

John Bishop

BEIJING — The China-ASEAN Free Trade Agreement (CAFTA) will spur regional integration and address China’s security issues relating to food and energy supply, Merrill Lynch said.

The agreement, which will be concluded by the end of June and implemented in 2010, will have significant implications for both China and the ASEAN nations, and marks a watershed moment in China’s development into a major player in the region, the brokerage said in a research note.

"CAFTA represents an important milestone in the growing influence of China throughout the well as having potentially significant implications for non-trade related issues, such as security," Merrill Lynch said.

The firm noted that the agreement promises many benefits to China with relatively low risks.

Trade between China and ASEAN has increased 15 percent annually since 1995, but ASEAN remains China’s fifth-largest trading partner.

"Our sense is that entering into an FTA agreement would not materially disrupt China’s trade balances nor its trajectory of economic growth," the firm said, adding that this move may be paving the way for similar agreements with South Korea and Japan.

The agreement might also further marginalize Taiwan, and increase China’s goodwill in the region, according to the research note.

China will also benefit from improved trading access to ASEAN’s customer base of 410 million people, and increased imports of much needed raw materials and food, Merrill said.

China is currently a net importer of palm oil, LNG, rubber and tin—all of which are key Malaysian export products.

Tariff reductions will help Thailand boost its exports of fruits and vegetables as well as coal.

China’s coal supply is expected to fall further into deficit by 2020 to 1.3 billion tons, from 500 million tons this year, Merrill said, citing data from the Chinese government.

The Philippines, which currently runs a small trade surplus with China, will see increased trade in electronic components and refined oil to China.

Indonesia, which boasts an abundance of coal, gas and crude oil, will also see exports increase.

Singapore, which already has FTAs with the US, Japan and Australia, will establish itself as regional corporate headquarters and a supply chain hub for soft commodities, Merrill said.

But the agreement does present significant challenges, according to Merrill.

The first is a diverse ASEAN without a central nucleus to broker consensus.

"ASEAN’s leaders lack a common goal or vision. The bloc requires common institutions or policies, policies that go beyond trade liberalization in order to cement the free trade area," Merrill said, adding that intra-regional exports make up only about 20 percent of total exports from member countries, compared to 61 percent in the EU and 57 percent among North American Free Trade Agreement members.

ASEAN nations’ auto industries will also likely be swamped by cheaper products from their mainland competitors, Merrill Lynch said.

In addition, while CAFTA will boost ASEAN exports of agricultural products and raw materials, member-nations will still be at a competitive disadvantage to China’s low-cost manufacturing industries. The result: ASEAN will likely export lower-value natural resources to China, while ASEAN will absorb higher-value manufactured prouducts from China, leading to higher trade deficits for ASEAN nations, it said.

However, Merrill Lynch added that CAFTA will beneficial to both China and ASEAN in that the agreement should lead to increased megers and acquisitions in the region.

Furthermore, increased cooperation in trade and policy may counterbalance the unilateral policies of the US, and make ASEAN countries less dependent upon US economic growth, it said.

 source: PDI