Snapler

Touted as the world's biggest Free Trade Area, CAFTA will bring together 1.7 million consumers with a combined gross domestic product of $5.9 trillion and total trade of $1.3 trillion. Under the agreement, trade between China and Brunei, Indonesia, Malaysia, the Philippines, Thailand, and Singapore has become duty-free for more than seven thousand products. By 2015, the newer members of the Association of Southeast Asian Nations (ASEAN) — Vietnam, Laos, Cambodia, and Myanmar — will join the zero-tariff arrangement.

The propaganda mills, especially in Beijing, have been trumpeting the FTA as bringing "mutual benefits" to China and ASEAN. In contrast, there has been an absence of triumphal rhetoric from ASEAN. In 2002, the year the agreement was signed, Philippine President Gloria Macapagal-Arroyo hailed the emergence of a "formidable regional grouping" that would rival the United States and the European Union. ASEAN's leaders, it seems, have probably begun to realize the consequences of what they agreed to: that in this FTA, most of the advantages will probably flow to China.

At first glance, it seems like the China-ASEAN relationship has been positive. After all, demand from a Chinese economy growing at a breakneck pace was a key factor in the Southeast Asian growth that began around 2003 after the low growth following the Asian financial crisis of 1997 and 1998. For Asia as a whole, in 2003 and the beginning of 2004, "China was a major engine of growth for most of the economies in the region," according to a UN report. "The country's imports accelerated even more than its exports, with a large proportion of them coming from the rest of Asia." During the current international recession ASEAN governments, much like the United States, are counting on China — which registered an annualized growth rate of 10.7 percent in the last quarter of 2010 — to pull them out of the doldrums.

A More Complex Picture

But is the Chinese locomotive really pulling the rest of East Asia along with it, on the fast track to economic nirvana? In fact, China's growth has in part taken place at Southeast Asia's expense. Low wages have encouraged local and foreign manufacturers to phase out their operations in relatively high-wage Southeast Asia and move them to China. China's devaluation of the yuan in 1994 had the effect of diverting some foreign direct investment away from Southeast Asia. The trend of ASEAN losing ground to China accelerated after the financial crisis of 1997. In 2000, foreign direct investment in ASEAN shrank to 10 percent of all foreign direct investment in developing Asia, down from 30 percent in the mid-nineties.

The decline continued in the rest of the decade, with the UN World Investment Report attributing the trend partly to "increased competition from China." Since the Japanese have been the most dynamic foreign investors in the region, much apprehension in the ASEAN capitals greeted a Japanese government survey that revealed that 57 percent of Japanese manufacturing transnational corporations found China to be more attractive than the ASEAN-4 (Thailand, Malaysia, Indonesia, and the Philippines).

Snags in a Trade Relationship