Chiang-China ASEAN Economic Relations After Establishment of Free Trade Area

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China–ASEAN economic relations after

establishment of free trade area
Min-Hua Chiang
To cite this article: Min-Hua Chiang (2019) China–ASEAN economic relations after establishment
of free trade area, The Pacific Review, 32:3, 267-290, DOI: 10.1080/09512748.2018.1470555
To link to this article: https://doi.org/10.1080/09512748.2018.1470555
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THE PACIFIC REVIEW
2019, VOL. 32, NO. 3, 267–290
https://doi.org/10.1080/09512748.2018.1470555
China–ASEAN economic relations after establishment

of free trade area*
Min-Hua Chiang
East Asian Institute, National University of Singapore, Singapore, Singapore
ABSTRACT
This paper aims to contribute to an understanding about the major changes in China–
ASEAN economic relations after establishment of the China–ASEAN Free Trade Area
(CAFTA) in 2010. First, China’s merchandize trade balance with ASEAN has shifted from
deficit to surplus since 2012. This reflects China’s improving comparative advantage in
manufacturing production vis-a-vis ASEAN as a whole. Second, with China’s wage hike,
ASEAN investors can no longer take advantage of China’s cheap labor force.
Concurrently, China’s investment in ASEAN has been increasing and become more
diversified, ranging from energy to manufacturing and services. Singapore has
remained the most important investment destination for Chinese investors and the
largest foreign investor in China among ASEAN countries. Third, China has
comparative advantages in providing construction, telecommunications, computer
and information services and other business services to ASEAN. On the other hand,
ASEAN, led by Singapore, has opportunities in the financial services and tourism
markets in China. Finally, the development of economic regionalism, notably the
Regional Comprehensive Economic Partnership and Trans-Pacific Partnership, will
remain critical for the CAFTA’s relevance in regional economic integration, as well as
China–ASEAN relations in the future.
KEYWORDS China-Association of Southeast Asian Nations Free Trade Area (CAFTA); Regional Comprehensive
Economic Partnership (RCEP); Trans-Pacific Partnership (TPP); China–ASEAN trade in goods; China–ASEAN trade in
services; China’s investment in ASEAN
Introduction
The China-Association of Southeast Asian Nations (ASEAN) Free Trade Area (CAFTA) has
been in force since 1 January 2010. Subsequent to the relaxation of rules on trade and
investment under the CAFTA, economic ties between China and ten countries in ASEAN
have been increasingly strengthened. The total trade between China and ASEAN has
surged from US$292 billion in 2010 to US$475 billion in 2016. ASEAN now ranks as Chi-
na’s largest import source and the third largest export destination, after the US and
Hong Kong. Meanwhile, China is ASEAN’s largest import source and export market.
Beyond the closer trade relations, the bilateral investment has also witnessed a
CONTACT Min-Hua Chiang [email protected]

An earlier draft of this paper was presented at the 7th Southwest Forum & the first Lancang-Mekong Coopera-
tion Think Tank Forum, 17–19 October 2016, in Pu’er City, Yunnan Province, China
© 2018 Informa UK Limited, trading as Taylor & Francis Group
268 M.-H. CHIANG
progressive development, from US$10.7 billion in 2010 to US$15.8 billion in 2015 (CEIC,
2016; Ministry of Commerce, People’s Republic of China, 2016).
The CAFTA’s development can be traced back to the 1990s. The end of the Cold War
and China’s growing involvement in the regional production network offered an initial
impetus for establishing institutionalized economic relations (Chung, 2010). Nonethe-
less, China’s perception of multilateral institutions in the first half of the 1990s still
largely remained cautious and suspicious (Kuik, 2005). It was not until the latter half of
the 1990s that China shifted its position from passive involvement to active participa-
tion. The economic engagement with other regional economies was considered as
hedging options in case global trade talks did not proceed in China’s interests (Bernar-
dino, 2004; Chin & Stubbs, 2011). With no big power intervention in the formation of
ASEAN, China felt more comfortable participating in the ‘ASEAN way’ of developing the
region-wide forum and regional cooperation amongst the Southeast Asian countries
(Kuik, 2005). China’s embrace of multilateral economic cooperation reached new heights
when it proposed the idea of establishing the China–ASEAN FTA during the ASEAN+3
summit and China–ASEAN official meeting in November 2000 (Choo & Boissear du
Rocher, 2007; Kuik, 2005; Sheng, 2003). In the following years, Chinese officials made
other proposals such as tariff reduction and other preferential treatments between
China and ASEAN on different official occasions.
The Asian financial crisis was another impetus for Sino-ASEAN economic rapproche-
ment (Zha, 2002). The crisis had alerted Asian leaders of the need to construct a more
cooperative framework among the states in the region so as to pre-empt future financial
chaos. Many ASEAN countries were hard hit by the crisis; at the same time, ASEAN lead-
ers considered the US and Asia-Pacific Economic Cooperation (APEC) less than helpful
during the crisis and the conditionality imposed by the International Monetary Fund
(IMF) unpalatable. The ASEAN+3 (namely ASEAN plus China, Japan and South Korea)
became an important means to re-establish ASEAN’s status and relevance. Owing to dis-
agreement between China and Japan over the future formation of regionalism, the
ASEAN+3 did not make significant advancement in the subsequent years (Chiang, 2013;
Chung, 2010). The progressive development of the CAFTA became an outstanding
achievement of regional economic engagement (Cheng, 2004).
From China’s perspective, a stable and cooperative relation with ASEAN is important
for Beijing to maintain its economic growth and social stability. The Communist party’s
political legitimacy rests largely on the country’s economic success (Sun, 2009). The
CAFTA also complements China’s ‘go out policy’ which aims at promoting Chinese out-
ward direct investment (ODI). The Chinese government believed that ODI in
manufacturing sectors would promote its exports of intermediate goods to developing
countries for final assembly and facilitate its domestic industrial upgrading (Ministry of
Commerce). The cheap labor force, geographic proximity and similar culture made
ASEAN an ideal investment destination for Chinese entrepreneurs. Chinese firms could
also actively participate in the highly developed regional division of labor through ODI
in ASEAN. In addition, China was motivated by developing ASEAN’s market. The over-
dependence on the Western market proved fragile after the Tiananmen Square incident
in 1989. The economic sanctions after 1989 from the Western countries made Chinese
leaders realize the necessity to diversify its export destinations (Wang, 2013). There
were also considerations of accelerating the development of China’s central and west-
ern provinces through economic cooperation with ASEAN countries which share bor-
ders with China (Chen, 2017; Cheng, 2013; Kuik, 2005; Zha, 2002).
THE PACIFIC REVIEW 269
Beyond the economic considerations, the establishment of the CAFTA was expected
to create considerable political advantages for China. First, from Beijing’s point of view,
big powers would enhance their future competitiveness by engaging in economic inte-
gration in each of their own region (Chen, 2017). Owing to the slow progress of eco-
nomic cooperation between China, Japan and South Korea, the CAFTA was considered
as a strategic priority to facilitate China’s power expansion in the region (Qiu, 2006). Sec-
ond, Chinese leaders were aware of the ‘China threat’ perspective circulating within
ASEAN countries. The CAFTA was expected to transform China–ASEAN economic rela-
tions from competition to ‘interest sharing’. The dispute over the South China Sea could
be diverted to trade negotiations. Overall, the hope was that closer economic coopera-
tion with ASEAN could promote ‘peaceful coexistence’ between China and ASEAN
(Chen, 2017; Cheng, 2004; Greenwald, 2006). Third, China’s economic engagement with
ASEAN was intended to reduce the US’ and Japan’s containment on China’s influence in
the region (Cheng, 2013; Wang, 2007). Some considered China’s reassurance to its
Southeast Asian neighbors about its power rise was to send a benign signal to the US
(Sun, 2009). Fourth, China’s economic engagement with ASEAN was to reduce Taiwan’s
diplomatic space (Chung, 2010). Taiwan promoted the Southward policy in the 1990s in
order to divert the island’s economic dependence from China to Southeast Asian coun-
tries. With greater economic cooperation between China and ASEAN, ASEAN countries
would likely choose not to deepen economic ties with Taiwan because of the greater
economic interest with China (Qiu, 2006; Sun, 2009).
For ASEAN, the economic reasons of attracting more FDI and having an inroad to
China’s huge consumer market were the primary motivations (Leong, 2005). From a stra-
tegic point of view, ASEAN countries have tried to engage China as well as other powers
through the use of multilateral institutions since the 1990s. The idea is to encourage
these powers to develop closer economic and political relations with ASEAN so as to
deepen interdependence and maintain regional stability. As Goh argued, Southeast
Asian countries fear an unstable multipolar regional system with major powers compet-
ing against one another. Therefore, ‘…the Southeast Asian countries have in fact
adopted a broader, multidirectional, omni-enmeshment strategy’ to hedge against the
potential instability in the region (Goh, 2008). However, the omni-enmeshment strategy
does not go far as establishing security community. It emphasized engagement in
regional institutions as well as bilateral arrangement in order to develop norms and
institutionalize cooperative procedure. Through several regional forums such as East
Asia Summit, ASEAN+3, and Asia regional Forum, ASEAN has successfully engaged sev-
eral countries into discussion of conflicting issues. With China, ASEAN sought to
‘enmesh’ this emerging power through a complex web of economic interdependence.
There are two levels of ASEAN’s ‘economic enmeshment strategy’. One is through mar-
ket force. ASEAN hoped to enmesh China through the greater trade and investment
relations with it. The other is through institutional approach. ASEAN sought to maintain
a balance of power by bringing China and other powers into ASEAN-led regional institu-
tions (Laksmana, 2017; Ryu, 2013; Wang, 2007). ASEAN’s unity is a necessary condition
for its enmeshment strategy to succeed. However, its member countries’ diverse devel-
opment needs have made it increasingly difficult for ASEAN to maintain its ‘ASEAN cen-
trality’. The key purposes and objectives of enmeshment have become to vary from
state to state (Goh, 2008). As such, critics say that ASEAN has been undergoing ‘reverse
enmeshment’ due to its incapability to manage big power relations (Shekhar, 2012).
270 M.-H. CHIANG
How has the CAFTA, established with political and economic considerations, altered
the bilateral economic ties over the past few years? Several studies have indicated the
potential economic gains for China and ASEAN from the CAFTA (ASEAN-China Expert
Group on Economic Cooperation, 2001; Chirathivat & Mallikamas, 2005; Elliott & Ike-
moto, 2004; Lakato & Walmsley, 2012; Park, 2007; Yang & Martinez-Zarzoso, 2014). How-
ever, there is a lack of understanding on the structural changes of Sino-ASEAN
economic relations. In other words, this paper looks beyond the growing economic
exchanges and aims to further examine the major structural changes in bilateral eco-
nomic interdependence. More specifically, after the CAFTA took effect, how have the
goods and services traded between China and ASEAN developed? How have bilateral
investments by sector and by country evolved? Indeed, China–ASEAN economic ties are
part of the regional production network, encompassing Japan, South Korea and Taiwan.
Hence, the transformation in China–ASEAN economic ties can also reflect the changing
pattern of the regional production network. Therefore, another important question is:
what do the changes in China–ASEAN economic relations imply for the broader regional
economic integration? Is the flying geese model, used to describe a process of coordi-
nated regional economic structural change with Japan as the leading goose followed by
other Asian countries, still workable?
Any FTA would create winners and losers. Several studies showed that the most com-
petitive sectors in a country would gain from FTA whereas the less competitive indus-
tries would be in a vulnerable position (Kim & Shikher, 2015; Parra, Martinez-Zarzoso, &
Suarez-Burguet, 2016; Siriwardana & Yang, 2008; Yaylaci & Shikher, 2014). By comparing
the bilateral trade and investment before and after the CAFTA’s establishment, this
study also purports to shed light on initial effects of the CAFTA and implications for
overall China–ASEAN relations. Moreover, the CAFTA is not the only factor that affects
China–ASEAN economic relations. As China and ASEAN are actively involved in various
kinds of bilateral and multilateral FTAs with other regional economies, how the progress
on economic regionalism would have impact on the CAFTA’s future development will
also be examined.
The paper is organized as follows. The next section reviews China–ASEAN economic
relations in existing literature. The third section examines the major economic opening
up measures under the CAFTA. The third section analyzes the major changes in China–
ASEAN economic relations in terms of trade in goods, investment and trade in services.
The fifth section evaluates the CAFTA’s prospect amid the rapid development of eco-
nomic regionalism, in particular the Regional Comprehensive Economic Partnership
(RCEP) and Trans-Pacific Partnership (TPP). The final section summarizes the main argu-
ments raised in the previous sections and highlights opportunities and challenges that
China and ASEAN may face in the future.
A review of the literature on China–ASEAN economic relations

With China’s adoption of the opening up policy at the end of the 1970s, China–ASEAN
trade relations have progressively increased. Nonetheless, China and ASEAN were not
major trading partners of each other during the 1980s and 1990s. The resource-based
commodities accounted for an important share in Sino-ASEAN trade before the 1990s
(Chen & Liao, 2005). These primary goods with little value-added explained the insignifi-
cant trade amounts between them (Zhang & Hock, 1996). The low trade volume
between the two sides can also be explained by their competitive (rather than
complementary) trade structure. Both sides were economically oriented toward the
industrialized countries for their exports of manufactured goods and imports of capital
and technology (Wong & Chan, 2003; Zhang & Hock, 1996).
Since the end of the 1990s, China and ASEAN have gradually shifted their bilateral
trade structure from primary commodities to manufactured products, especially infor-
mation and communications technology (ICT) goods. ASEAN countries, in particular Sin-
gapore, Malaysia, the Philippines and Thailand (ASEAN-4), supplied the key parts and
components to China for the final assembly of ICT products. As such, the intermediate
goods for producing ICT products became China’s main import items from ASEAN (Ber-
nardino, 2004). The share of machinery and electrical equipment in China’s imports
from ASEAN grew from 12.4% in 1993 to 48.3% in 2001. In comparison, China’s exports
to ASEAN comprised not only machinery and electrical appliances but also labor-inten-
sive manufactured goods such as textiles, clothing and footwear (Wong & Chan, 2003).
Foreign direct investment (FDI) played an important role in promoting trade between
China and ASEAN. FDI from ASEAN was once an important segment of investment in
China in the 1980s but it declined after the mid-1990s (Chakraborty & Kumar, 2012).
Other East Asian economies, such as Hong Kong, Taiwan, South Korea, Japan and Singa-
pore, continued to make up an important share in China’s FDI (Wong, 2006). China’s
greater economic opening up to the outside world, fast growing economy and huge
consumption market potential made it more attractive than ASEAN for foreign investors
since the latter half of the 1990s (Chia & Sussangkarn, 2006; Felker, 2003). This is in sharp
contrast to the early 1990s when the combined FDI in ASEAN-5 was still larger than that
in China (Wong & Chan, 2003).
With similar levels of economic development and export-oriented policy, China and
ASEAN were unavoidably competing in a variety of manufactured goods in the third
market. Many countries in Southeast Asia became concerned about losing their compet-
itive position vis-a-vis China. Several studies were conducted with regard to the export
competition between China and ASEAN. Holst and Weiss’s econometric analysis indi-
cated that the main ASEAN economies were exposed to increasing competition from
China in both the US and Japanese markets during 1996 and 2000 (Holst & Weiss, 2004).
Some pointed out that owing to China’s lower level of technology, the impact from Chi-
nese manufacturers’ competition for ASEAN’s exports in the third market was limited.
The comparative advantage indices in 2000 showed China had clear comparative
advantage in labor-intensive exports (e.g. textiles and clothing, footwear and other mis-
cellaneous products) than ASEAN countries. It had no comparative advantage in
machinery and electrical appliances, as well as chemical products, amongst others, as
compared to the more advanced ASEAN countries (Tongzon, 2005). By investigating the
export items to the US in 2000, it is found that China’s value-added was lower than that
of ASEAN-5. In particular, Singapore, Malaysia, Thailand and the Philippines had formed
comparative advantages in producing industrial electronics while China had compara-
tive advantage in making household appliances and office machines (Chen & Liao,
2005). In sum, China’s greater involvement in the global economy did not crowd out
other countries’ opportunities for international specialization. Instead, China’s increas-
ingly important role as a final product assembler allowed it to procured greater amounts
of components from Southeast Asian countries (Athukorala, 2009).
Despite its late industrialization, the Chinese government has been actively upgrad-
ing the domestic industries by directing FDI into high-technology sectors since the mid-
1990s. The results have been encouraging. China has become a globally important ICT
272 M.-H. CHIANG
product assembly location. Between 2004 and 2011, 63%–69% of China’s ICT exports
were made by wholly foreign owned firms which invested in China. In 2012, China was
the largest exporter and importer in integrated circuits and electronic components in
the world. It was also the largest exporter and second largest exporter of telecommuni-
cations equipment (Chiang, 2016). As China became more vigorously involved in high
technology manufacturing production, its trade link with more advanced ASEAN coun-
tries weakened. According to Tham et al.’s analysis, the share of ICT exports and imports
in ASEAN-4’s trade with China fell progressively between 2005 and 2013. The little-to-
zero product upgrading in manufacturing parts and components from the ASEAN-4
countries explains the fall in ICT components exported to China (Tham, Kam Andrew, &
Abdul Aziz, 2016).
In the late 1990s, when many ASEAN countries were plagued by the Asian financial
crisis and domestic political instability, China’s economy has sustained itself relatively
well. Its GDP expanded 15 times whereas ASEAN-5 grew only 3.5 times from 1995 to
2015. In 1995, China’s economic size was only US$153 billion more than that of ASEAN-
5. In 2015, the difference was enlarged to US$9090 billion (IMF, 2016). The bilateral FTA
was therefore considered important for ASEAN to tap into China’s booming market.
With China’s continuous economic development, there would be a strong demand for
energy and raw materials from ASEAN countries (Tongzon, 2005). ASEAN’s close eco-
nomic linkage with China was also seen as a boost in the region’s attractiveness for FDI.
China’s greater opening up to the global economy would offer opportunities for ASEAN
countries to expand their external trade and investment. For China, ASEAN as a collec-
tive single market would help China to diversify its export destinations and import sour-
ces (Park, 2007). The intra-regional production between China and ASEAN could be
strengthened through the CAFTA, helping countries to reap benefits of specialization
and scale economies (Chakraborty & Kumar, 2012). Nonetheless, there was a concern
about Chinese products flooding ASEAN’s markets after the bilateral FTA took effect
(Chirathivat, 2002). The greater imports of China-made manufactured goods could be
disadvantageous for ASEAN countries’ industrialization. The extent of the impact for
China and ASEAN countries resulting from an FTA would differ depending on their trade
structure, resource endowments and stages of development of each country (Wong &
Chan, 2003).
In a nutshell, China–ASEAN economic relations have evolved mostly due to
China’s economic development and industrial upgrading. In the first two decades
of its economic reforms, China was competing with ASEAN countries in exporting
final goods to the global market. With its more rapid economic growth and techno-
logical advancement, China has climbed up within the global value chain whereas
the technical level and manufacturing capacity of developing countries in ASEAN
progressed comparatively more slowly. Chinese firms’ increasing capability of sup-
plying medium and high-tech products to their own markets have substituted their
imports of medium- and high-tech products from the advanced economies in
ASEAN (Cheong, Wong, & Goh, 2016). Hence, China’s rapid industrial development
allowed it to change its position in the ‘flying geese model’ which is commonly
used to discuss the evolution of industrialization in Asia: first, Japan, followed by
the newly industrialized economies (NIEs), advanced countries in ASEAN and China.
With China’s rapid technology progression, the country is now considered to have
exceeded some ASEAN countries and it ranks in the third row, behind only Japan
and the NIEs (Sanidas, 2009).
Successive development of the CAFTA

As suggested by the Chinese Premier Zhu Rongji at the ASEAN Summit in Singapore in
2000, the ASEAN–China Expert Group was formed to study the bilateral economic rela-
tions. The study report was presented at the ASEAN Summit in November 2001 where
ASEAN and Chinese leaders endorsed the proposal for a framework on bilateral eco-
nomic cooperation (Chirathivat, 2002). In 2002, the Framework Agreement on ASEAN–
China Comprehensive Economic Cooperation was officially signed as a legal instrument
to govern China–ASEAN economic cooperation (Leong, 2005). The leaders also agreed
that an ‘early harvest program’ would be implemented for a list of products and services.
Based on the ‘early harvest program’, the tariff reduction between the two sides began
on 1st January 2004. The early harvest program allowed more than 500 product items,
mostly agricultural goods, traded between China and the six most advanced countries
in ASEAN (Singapore, Thailand, Malaysia, Brunei, Indonesia and the Philippines, collec-
tively termed ASEAN-6) to be tax-free from 2006. For the other four ASEAN countries,
the zero tariffs under the early harvest program were to be implemented between 2008
and 2010.
The CAFTA is composed of three major agreements: Agreement on Trade in Goods
signed in November 2004, Agreement on Trade in Services signed in January 2007 and
Agreement on Investment signed in August 2009. The gradual development of the
CAFTA is illustrated briefly in Figure 1. The above agreements in goods and services
have been upgraded and revised several times in the following years. For instance, in
2006, the ‘Protocol to Amend the Agreement on Trade in Goods’ was signed in the Phil-
ippines. The purpose was to incorporate the Memorandum of Understanding between
China and Vietnam signed in 2005 and first package of product-specific rules into the
China–ASEAN trade in goods agreement. In October 2010, China and ASEAN signed the
second protocol to amend the Agreement on Trade in Goods in Malaysia with an aim to
update the ‘operational certification procedure for the rules of origin’. The revised FTA
on goods soon took effect on 1st November 2010.
The Agreement on Trade in Goods aimed at reducing tax rates for over 90% of prod-
uct items. As shown in Table 1, the products items traded between China and ASEAN
are divided into four categories, including normal track 1 and 2, sensitive products and
highly sensitive products. The tariff reduction schedule took effect based on product
category and country. China and ASEAN-6 began tax reduction for the products listed
Agreement on trade Protocol to amend the Second protocol to

Framework agreement
in goods agreement on trade in goods amend the agreement
(2002)
(2004) (2006) on trade in goods
Protocol to amend the Agreement on trade Protocol to implement the (2010)
framework agreement in services second package of specific
(2003) (2007) commitments under
Second protocol to amend agreement on trade in
the framework agreement services
(2006) (2011)
Third protocol to amend the
framework agreement Agreement on
(2012) Investment
Protocol to amend the (2009)
framework agreement
(2015)
Figure 1. Brief summary of CAFTA’s evolution.

Source: ASEAN–China Free Trade Agreement, Association of Southeast Asian Nations: http://asean.org/?static_post=asean-china-
free-trade-area-2# (accessed 7 December 2016).
274 M.-H. CHIANG
Table 1. Tariff reduction schedule under CAFTA.

China+ASEAN-6 China+ASEAN-10
2010 2012 2015 2018 2015 2018 2020
Normal products track 1 (91% of total 0% 0%
products items)
Normal products track 2 (2% of total 5% 0% 5% 0%
products items)
Sensitive products 7% of total Below Below Below Below
product items 20% 5% 20% 5%
Highly sustentative Below Below
products 50% 50%
Source: Ministry of Commerce of the People’s Republic of China (2007).
on the normal track 1 in 2005. The zero tariffs for 91% of goods (normal track 1) began in
2010 and the remaining four ASEAN countries have followed suit since 2015. China and
ASEAN-6 began zero tariffs for products in normal track 2 in 2012 and the other four
ASEAN countries will join from 2018 onwards. The tax rates for sensitive and highly sen-
sitive products, accounting for 7% of total products items, will remain unchanged.
The services agreement which took effect from July 2007 is based on a positive list
approach which means that liberalization commitments are only taken on the listed
sectors. The mutual opening up of different service sectors are summarized in Table 2.
China’s major commitments to ASEAN include construction, environment, transporta-
tion and commercial services. China’s major extra opening-up measures in the above
sectors include the investment by a sole investor, relaxation of foreign shareholding
ratio and national treatments for ASEAN investors. In return, ASEAN-6 agreed to offer
greater opening-up measures than their commitments in services under the World
Trade Organization (WTO) for the sectors listed in Table 2. Some of them agreed to
open up certain sectors that they did not open to other WTO members. For example,
Malaysia agreed to open up extra sectors such as exhibition, theme park services, sea
transportation and air transportation. Thailand agreed to open up Chinese education,
garden design and tourism. For the less developed ASEAN countries, such as Vietnam,
Cambodia and Myanmar, their commitments are the same as their commitments to
other WTO members, mainly in commercial services, telecommunications, construction,
financial services, tourism and transportation. Laos also agreed to open up its banking
and insurance sectors. Overall, comparing China’s obligations under the CAFTA with its
Table 2. Major commitments in services under CAFTA.

China Singapore Malaysia Thailand Philippines Brunei Indonesia
Construction V V V V V
Environment V
Transportation V V V V V
Sport V V
Commercial services V V V V
Financial services V V
Entertainment V
Travel services V V V V V
Energy services V V
Professional services
Medical services V V
Education services V
Source: Ministry of Commerce of the People’s Republic of China (2007).
WTO commitments, there is not much difference. Shepherd and Pasadilla argued that
the services agreement under the CAFTA has only allowed for a limited amount of addi-
tional liberalization through the addition of new bindings or the extension of bindings
to new sectors. Similarly, for ASEAN countries, the liberalization of services is limited
except in the case of Singapore, whose schedule of commitments goes substantially
beyond its General Agreement on Trade in Services (GATS) bindings under WTO (Shep-
herd & Pasadilla, 2012).
In terms of the revised version of the services agreement, China and ASEAN signed
the ‘Protocol to Implement the Second Package of Specific Commitments under the
Agreement on Trade in Services’ in November 2011. It came into force on 1st January
2012. Compared with the first package, China made adjustments in commercial services,
telecommunications, construction, distribution, finance, tourism and transportation.
Meanwhile, ASEAN countries also included more sectors in the second package. Fuku-
naga and Ishido compared the services commitments in the first and second packages
under the CAFTA and WTO services and trade agreements. They concluded that most of
the additional commitments made in the second package of services commitments are
not new. In fact, they are old commitments which had existed since 2003 under WTO’s
GATS (Fukunaga & Ishido, 2016).
Unlike agreements on trade in goods and services, the China–ASEAN agreement on
investment has not had any update since its implementation in 2010. The context showed
that the investment agreement has emphasized more on ‘investment protection’ rather
than ‘investment liberalization’. For instance, the agreement has specific rules for the com-
pensation for losses, transfers and repatriation of profits, measures to safeguard the bal-
ance of payment, subrogation, and solutions to investment disputes. Although the
‘investment promotion’ and ‘investment facilitation’ were also stated in the agreement,
there are no detailed measures on how to promote and facilitate the investment.
Beyond the agreements on trade and investment, China and ASEAN also commit to
economic cooperation in five priority sectors, including agriculture, information and
communications technology, human resources development, investment and Mekong
River basin development. Other areas of cooperation include, but are not limited to,
banking, finance, tourism, industrial cooperation, transport, telecommunications, intel-
lectual property rights, small and medium enterprises (SMEs), environment, bio-technol-
ogy, fishery, forestry and forestry products, mining, energy and sub-regional
development.
In 2015, China and ASEAN held negotiations to upgrade their FTA on a wide range of
issues, including goods, services, investment, and economic and technological coopera-
tion. As most of the goods are already tax-free, the focus of the upgraded CAFTA is on
further facilitation procedures on trade in goods and more opening-up measures in
services. Based on the upgraded CAFTA, the rules of origin provisions would be
improved, and a new section on customs procedures and trade facilitation would be
introduced. China and ASEAN would open up their services markets even more in engi-
neering services, integrated engineering services, construction services, sporting and
other recreational services, securities services and travel agency & tour operator services.
Both sides also agreed to simplify the investment procedures. With an upgraded version
of the CAFTA, China aims to reach US$1000 billion of bilateral trade in 2020, from
US$465 billion in 2015 (Ministry of Commerce of People’s Republic of China, 2015c).
In sum, the CAFTA comprises not only trade and investment but also a variety of
cooperation in different sectors. An important feature is its various tariff reduction
276 M.-H. CHIANG
schedules for merchandize trade and dissimilar sectors opened for FDI according to
each country’s different development level. Indeed, this ‘customized’ tariff reduction
schedule approach has been practiced during the trade negotiations among ASEAN
countries (Elms, 2014). Compared to agreement on trade in goods, the width and depth
of service trade agreement is relatively limited. Although the investment agreement
emphasized more on ‘investment protection’ rather than ‘investment liberalization’, the
former is undoubtedly fundamental for attracting greater investment in China and
ASEAN in the future.
Changes in China–ASEAN economic relations after the CAFTA

China–ASEAN economic relations have experienced some changes after the CAFTA took
effect, including changes in the trade in goods and investment direction. Due to the lim-
ited statistics on bilateral services trade, the potentiality of bilateral services trade is
examined by China and ASEAN’s respective services trade figures.
Changes in bilateral trade relations

As shown in Figure 2, China’s exports to ASEAN have had a robust growth after the
global financial crisis, from US$106 billion in 2009 to US$292 billion in 2016. Though
China’s imports from ASEAN also grew from US$106 billion to US$183 billion during the
same period, the import growth was relatively less significant compared with its export
growth. As a result, China has gradually reduced its trade deficit with ASEAN and turned
the deficit into trade surplus since 2012. The shift from deficit to surplus began two
years after 91% of goods on normal track 1 were fully liberalized between China and
ASEAN. The trade surplus further enlarged from US$8 billion in 2012 to US$110 billion in
2016. The reason behind China’s changing trade relations with ASEAN can be explained
by its trade surplus by country and by product items.
Among the ASEAN countries, Vietnam is the most important contributor to China’s
growing trade surplus with ASEAN. In 2016, China’s trade surplus with Vietnam
350
300
China's trade balance with ASEAN
250
China's imports from ASEASN
200
US$ Billion
China's exports to ASEAN

150
100
50
-50
20002001200220032004200520062007200820092010201120122013201420152016
Figure 2. China’s trade balance with ASEAN 2000–2016.

Source: CEIC (2016).
amounted to US$33.7 billion, ahead of China’s trade surplus with other major ASEAN
countries, such as Singapore (US$23.7 billion), Indonesia (US$11.6 billion) and the Philip-
pines (US$13 billion) (World Trade Atlas, 2017). China’s large sum of trade surplus with
Vietnam can be largely attributed to their established manufacturing production net-
work in ICT sectors. In 2016, Vietnam was China’s second largest export destination for
electrical machinery, after Singapore, among ASEAN countries. Electrical machinery is
mainly composed of intermediate goods for making ICT products. Vietnam’s large
imports of ICT parts and components from China are linked to its massive exports of
final ICT products. In 2015, 28% of Vietnam’s exports were computers, electrical compo-
nents, phones and spare parts (CEIC, 2016). FDI played a key role in the formation of the
China–Vietnam production network. In Vietnam, around two-thirds of its external trade
is driven by foreign companies in manufacturing sectors. In China, the share is 46% in
the same year, according to China’s official statistics. Following China’s wage hike in
recent years, Vietnam’s cheaper labor force and improving business environment has
made it an attractive low-cost production site for foreign companies in manufacturing
sectors. While Vietnam has gradually become an important final goods assembly place,
China is an important supplier of intermediate goods to Vietnam.
Steel and iron are the most important products in China’s trade surplus with ASEAN.
China’s growing trade surplus in iron and steel can be reasoned by its overproduction
of steel in recent years. The ten countries in ASEAN accounted for 33% of China’s exports
of iron and steel in 2015. Vietnam is a particularly important export destination for
China’s iron and steel. In 2015 for example, Vietnam is the second largest export market
for China’s iron and steel, after South Korea. (Data source: World Trade Atlas.) Although
some developing countries in ASEAN can benefit from importing cheap steel products
from China to facilitate local construction and manufacturing production, some have
voiced their concerns that the overdependence on Chinese steel products could harm
their domestic steel sectors and further hamper their domestic industrialization. Viet-
nam in March 2016 imposed temporary anti-dumping tariffs ranging from 14% to 23%
on steel imports from China and elsewhere. Thailand’s commerce ministry is also work-
ing on the final draft of an anti-dumping law (Pham & Jittapong, 2016).
Another reason for China’s growing trade surplus is its decreasing demand for electri-
cal machinery and mineral fuel from ASEAN. As shown in Table 3, China’s trade deficit in
mineral fuel vis-a-vis ASEAN declined from US$15.7 billion in 2013 to US$9.9 billion in
2016. Its trade deficit in electrical machinery also dropped from US$23.1 billion to
US$19.1 billion during the same period. The lower oil prices in recent years might have
reduced China’s import value for mineral fuel from ASEAN. The declining trade deficit in
electrical machinery is mainly due to increase in exports of Chinese electrical machinery
to ASEAN than its imports from ASEAN. China’s imports of electrical machinery from
ASEAN increased by US$3.8 billion from 2013 to 2016 whereas its exports of electrical
machinery to ASEAN increased even more by US7.8 billion.
China’s greater exports of electrical machinery to ASEAN indicate its greater
manufacturing capacity than ASEAN. The bilateral trade agreement has reinforced
China’s comparative advantage in manufacturing vis-a-vis ASEAN. The comparative
advantage came from China’s quick industrial upgrading that has enlarged the technol-
ogy gap with most of the ASEAN countries. As many developing countries in ASEAN are
lagging behind China in terms of technology, they are in need of industrial goods sup-
plied by China to support their domestic manufacturing production and industrializa-
tion. The technology gap, once formulated, is difficult to overcome in a short period of
278 M.-H. CHIANG
Table 3. China’s trade balance with ASEAN by selected items 2013–2016 (unit: US$ billion).
HS code 2013 2014 2015 2016
China’s imports from ASEAN
Electrical machinery 85 68.4 67.6 72.0 72.2
Machinery 84 21.1 21.6 19.7 19.4
Mineral fuel, oil, etc. 27 26.2 24.2 19.8 18.8
Plastic 39 9.6 10.7 9.3 8.0
Iron and steel 72 and 73 0.7 1.4 1.3 1.5
Vehicles, Not railway 87 0.6 0.8 1.0 1.4
China’s exports to ASEAN 2013 2014 2015 2016
Electrical machinery 85 45.3 51.9 58.1 53.1
Machinery 84 36.6 38.4 37.0 36.3
Mineral fuel, oil, etc. 27 10.5 10.9 8.0 8.9
Plastic 39 7.4 8.2 8.5 8.9
China’s trade balance with ASEAN 2013 2014 2015 2016
Electrical machinery 85 ¡23.1 ¡15.6 ¡13.9 ¡19.1
Machinery 84 15.5 16.8 17.2 16.9
Mineral fuel, oil, etc. 27 ¡15.7 ¡13.3 ¡11.9 ¡9.9
Plastic 39 ¡2.2 ¡2.5 ¡0.8 1.0
Source: World Trade Atlas (2017).
time. In this regard, China’s trade surplus with ASEAN is likely to remain in the following
years.
Changes in bilateral investment relations

ASEAN has been left behind in the race with China for FDI over the last two decades.
Due to appreciation of the Chinese yuan in the last few years, ASEAN is in a relatively
more competitive position in attracting foreign investment in manufacturing produc-
tion. Rising wages in China also pushed Chinese firms to transfer their factories to South-
east Asia. Other factors such as resource endowment, market size and geographic
proximity are factors that motivate Chinese investment in this region. As shown in
Table 4, China’s ODI in ASEAN has displayed clear growth from US$0.3 billion in 2006 to
US$7.8 billion in 2014. However, compared to its total ODI in Asia, China’s ODI in ASEAN
Table 4. Bilateral investment 2006–2015 (unit: US$ billion).

ASEAN investment in China China’s investment in ASEAN
2006 3.4 0.3
2007 4.4 1.0
2008 5.5 2.5
2009 4.7 2.7
2010 6.3 4.4
2011 7.0 5.9
2012 7.1 6.1
2013 8.3 7.3
2014 6.3 7.8
2015 7.6 8.3
Source: Ministry of Commerce of People’s Republic of China (2011, 2013,
2015a, 2016); National Bureau of Statistics of China (various years).
THE PACIFIC REVIEW 279\
Table 5. China’s investment in ASEAN by sectors 2008–2014.

2008 2009 2010 2011 2012 2013 2014
Electricity/heat/coal and water supply 47.3 13.0 18.0 17.0 17.7 11.3 8.3
Transportation 11.3 2.3 1.9 18.4 1.5 2.0 1.4
Rental and business services 6.5 5.6 3.5 9.6 7.2 8.5 15.9
Wholesale and retail 3.7 33.6 3.9 12.7 11.2 17 14.3
Construction 6.6 6.8 7.9 7.5 9.9 9.6 10.2
Mining 9.7 17.3 20.4 7.6 28.1 17 8.6
Manufacturing 9.5 10.2 11.0 9.6 16.2 16.4 19.5
Financial services 1.7 5.3 24.5 10.5 1.5 7.5 8.6
Others 3.7 5.9 8.9 7.1 6.7 10.7 13.2
Total 100 100 100 100 100 100 100
Source: Ministry of Commerce of People’s Republic of China (2015a); National Bureau of Statistics of China
(various years).
is not particularly large though the shares have progressed from 4.4% in 2006 to 9.2% in
2014. The insignificant shares could be explained by the colossal Chinese ODI headed
toward Hong Kong, likely made by mainland Chinese companies seeking access to
global capital markets. If Hong Kong’s share was excluded, ASEANs’ share in China’s total
ODI would have ranged between 34% and 69% during the 2006–2014 period. Singapore
has been China’s most invested destination in ASEAN. In 2014, China invested about
US$2.8 billion in Singapore, accounting for 36% of China’s total ODI in ASEAN. As for Chi-
na’s investment in ASEAN by sector, most of it was in manufacturing and services. This is
different from a decade ago when most of Chinese investment was flowing to ASEAN’s
energy-related sectors. As shown in Table 5, in 2008, 47.3% of China’s ODI in ASEAN was
in electricity, heat, coal and water supply, followed by 11.3% in transportation sectors
and 9.7% in mining and manufacturing, respectively. In 2014, over half of China’s ODI
was invested in services, including rental and business services, wholesale and retail
trade, construction, and financial services, followed by 19.5% in manufacturing sectors.
In the same year, the share of electricity, heat, coal and water supply and transportation
shrank to 8.3% and 1.4% respectively. In fact, the investment amounts in energy-related
sectors did not decrease. However, with the much greater investment in manufacturing
and services, the shares in energy-related sectors became smaller. From the perspective
of ASEAN, investments from China are welcomed, especially when investments from
Japan and the US have been decelerating in recent years. China’s diversifying investment
from energy to manufacturing and services fit with the different ASEAN countries’ eco-
nomic structures. The Chinese investment in transportation is expected to promote more
commercial exchanges between China and ASEAN’s economic development. The growing
Chinese investments in manufacturing sectors would continue to support ASEAN’s export-
led economic growth pattern. For the more advanced ASEAN countries, China’s invest-
ments in services are seen as providing support for their sectors’ development.
Unlike China’s robust growth of ODI in ASEAN in recent years, ASEAN’s investment in
China has seen relatively less significant development. China’s rapid industrial upgrad-
ing has made it unattractive for ASEAN investment in labor-intensive industries. After
the investment agreement was signed in 2009, ASEAN investment in China hovered
between US$6.3 billion and US$8.3 billion during the period 2010–2014 (Table 4). Singa-
pore’s investment in China continued to grow steadily. In comparison, other ASEAN
countries’ (such as Malaysia, the Philippines and Indonesia) investments in China have
shown a declining trend over the past few years. As a result, Singapore’s share of total
ASEAN investment in China progressed significantly over the last few years. In 2014,
280 M.-H. CHIANG
92.4% of ASEAN investment in China was by Singapore, from 67.3% in 2006 (China Sta-
tistical Yearbook, various years). Like other foreign investors in China, Singaporean com-
panies have also focused on investing in China’s manufacturing sectors. Following
China’s economic transformation from manufacturing to a more consumption-based
economy, as well as its wage hike in recent years, there has been an inward investment
shift towards services. In 2012, 55% of Singapore’s investment in China was in
manufacturing sectors, compared to 43% in services and 3% in agricultural sectors and
others. Among various subsectors in services, Singaporean investors are especially inter-
ested in real estate sectors (China Foreign Investment Report, 2011, Report on Foreign
Investment in China, 2013).
Bilateral services trade potential

China and ASEAN countries are still manufacturing-based economies and depend on
exporting manufactured goods to the global market in exchange for high value-added
services from developed countries. China and ASEAN’s services trade share in the world
is compared in Table 6. In 1994, China’s service exports only accounted for 1.6% of
global service exports, far less than 5.1% of ASEAN’s share. Twenty years later, the share
of China’s service exports increased to 6.2% of total world service exports while ASEAN’s
share progressed to 8.1%. In terms of service imports, China’s share has achieved more
significant growth from 1.5% in 1994 to 10.3% in 2014. ASEAN’s share of global service
imports grew from 5.5% to 8.5% during the same period. China’s quicker development
of service imports over its exports has resulted in rapid growth in its services trade defi-
cit from US$0.6 billion in 2004 to US$150 billion in 2014. In comparison, ASEAN’s services
trade deficit has developed steadily. It is worth noticing that Singapore has been the
most important driver of ASEAN’s services trade development. In 2014, Singapore
accounted for 46% of total ASEAN service exports and 45% of its total service imports
according to ASEAN Statistics.
China and ASEAN’s respective comparative advantages in services can be seen from
their services trade balance by items (Table 7). First, both China and ASEAN ran services
trade deficit in ‘transport’ and ‘charge for the use of intellectual property rights (IPR)’.
This means that both have less comparative advantage in providing ‘transport’ and ‘IPR’
services to other countries so that they need to pay more for acquiring these two serv-
ices from abroad.
Second, China ran large deficit in travel services (US$107.8 billion) whereas ASEAN
had travel services in surplus (US$43.6 billion). China’s travel service deficit indicates its
greater outbound tourist spending over inbound tourism receipts. China’s huge popula-
tion, rise of middle class and deregulation of outbound tourism have made the country
an important source of the global tourism market in recent years. With double digit
growth in tourist expenditure every year since 2004, China has been the leading global
Table 6. China and ASEAN’s global service trade share in 1994, 2004 and 2014.
China’s service trade share in the world ASEAN’s service trade share in the world
Exports (%) Imports (%) Balance (US$ billion) Exports (%) Imports (%) Balance (US$ billion)
1994 1.6 1.5 0.6 5.1 5.5 ¡5.3
2004 2.9 3.4 ¡9.5 4.1 5.3 ¡23.0
2014 6.2 10.3 ¡150 8.1 8.5 ¡8.1
Source: ASEAN Statistics; WTO (2005) and WTO (2015).
Table 7. China and ASEAN’s service trade balance by service items in 2014 (unit: US$ billion).
China ASEAN
Manufacturing services n/a 2.8
Maintenance and repair services n/a 7.0
Transport ¡57.9 ¡40.2
Travel ¡107.8 43.6
Construction 10.5 ¡2.0
Insurance and pension services ¡17.9 ¡8.5
Financial services ¡0.9 15.2
Charge for the use of IPR ¡22.0 ¡27.2
Telecommunication, computer and information services 9.4 0.0
Other business services 26.8 1.9
Personal, cultural and recreational services n/a ¡0.5
Government goods and services n/a ¡0.3
Source: ASEAN Statistics; Ministry of Commerce of People’s Republic of China (2015b).
outbound tourism market (World Tourism Organization, 2016). On the contrary, ASEAN’s
trade surplus shows its greater inbound tourist receipts than its outbound tourist spend-
ing. Unlike China, the consumption power in ASEAN overall is less significant. Inbound
tourism is an important source of revenue for many ASEAN countries. Southeast Asian
countries’ international tourist arrivals increased from 36.3 million in 2000 to 102.2 mil-
lion in 2015 with around 12% coming from China (ASEAN, 2016; UNWTO, 2016). There-
fore, China’s booming outbound tourism market can provide lucrative opportunities for
ASEAN countries to further explore.
Third, China had trade deficit in financial services (US$0.9 billion) while ASEAN ran
trade surplus (US$15.2 billion) (ASEAN, 2016; Ministry of Commerce of People’s Republic
of China, 2015b). Financial services, led by Singapore, are another comparative advan-
tage that ASEAN can develop in China’s market. Despite China’s great market potential
in financial services, it is not easy to grasp this business opportunity. Since 11 December
2006, foreign banks have been allowed to have greater access to China’s domestic retail
banking sectors without restriction on geographic locations or customers. However, the
market shares held by foreign investors are still tiny. In 2011 for example, foreign banks
held just 1.6% of China’s deposit and 1.7% of its loans. Although China claimed that it
has fulfilled the financial market opening up requirements under WTO, foreign banks
argued that the Chinese government used various administrative power to restraint
their business expansion so as to favor local banks’ development (Chiang, 2016).
Fourth, China had relatively more trade surplus in construction, telecommunications,
computer and information services and other business services. In comparison, ASEAN
has insignificant trade surplus or in deficit in these sectors. As such, the bilateral service
agreement in the above sectors may allow China to explore more market potential in
these sectors in ASEAN countries.
The CAFTA in the Asia-Pacific economic regionalism

China and ASEAN are active players in the rapid development of economic regionalism.
As of December 2016, China has implemented bilateral FTAs with important economies
in the region, such as South Korea, Australia, New Zealand, Singapore and ASEAN. Apart
from China, ASEAN has carried out FTAs with Japan, South Korea, India, Australia and
New Zealand. The growing number of bilateral FTAs between Asian economies has
paved the way for the development of broader pan-Asian regionalism. Region-wide
FTAs currently under negotiations are the RCEP and the TPP.
282 M.-H. CHIANG
The RCEP is an FTA between the ten member states of ASEAN, Australia, New Zea-
land, China, South Korea, Japan and India. RCEP negotiations were formally launched in
November 2012 at the ASEAN Summit in Cambodia. The RCEP is intended to pull all the
ASEAN’s bilateral FTAs with other countries together and become a comprehensive
trade agreement (Elms, 2014). It could consolidate all ASEAN+1 framework, including
CAFTA and thus reduce the transaction cost due to the complexities of different bilateral
FTAs. The RCEP based on existing ASEAN+1 implies that it might have a significant level
of flexibility regarding product inclusion and level of commitment (Mikic, 2016). RCEP’s
‘lower standard’ allows it to provide a platform for developing countries to join the mul-
tilateral trade talks. Hence, it serves as a more suitable arrangement for developing
countries to deepen their trade with other regional economies. Since the first round of
talks held in Brunei in May 2013, progress has been made on the preliminary consensus
in the areas of tariff concessions, rules of origin, customs procedures, and trade and
investment facilitations. However, the negotiation process failed its expected conclusion
in 2015.
Compared with the CAFTA, the RCEP is a more inclusive FTA. It comprises trade in
goods, services, investment, economic and technical cooperation, intellectual property,
competition, and dispute settlement, amongst others. Given the greater number of
countries involved in the RCEP, the enlargement of economic regionalism from the
CAFTA to the RCEP, if successful, is expected to further enhance the regional production
network even more. The closer economic ties with several regional economies are
expected to promote economic growth for the whole region. Within the RCEP, China is
likely to retain its dominant role in the regional economic dynamism. Since its economic
opening up in the 1970s, China has gradually developed itself into a manufacturing hub
with a growing merchandize trade. The model of ‘manufacturing in China and consump-
tion in the US and Europe’ is still the driving force behind China’s external trade with
neighboring countries. RCEP countries, especially ASEAN members, South Korea and
Japan, have played important roles in supporting China as a regional manufacturing
center. China’s main export items to other RCEP member states are similar, mainly elec-
trical machinery and machinery. China’s imports from them are varied, however. Its
imports from South Korea, Japan and ASEAN are mostly electrical machinery and
machinery; with ASEAN, its imports of mineral products are quite sizeable. China imports
mostly cotton and ash from India and Australia, while its imports from New Zealand are
chiefly dairy products.
The implementation of trade and investment liberalization under RCEP is likely to
reinforce China’s role as a regional manufacturing hub and as a potentially important
center for the business in services. Nevertheless, the expansion of trade and investment
among RCEP members may have its limit due to the lack of effective demand within the
region. East Asian region has acted as a production center while the Western countries,
in particular the US and EU, have been the main final goods consumption market in the
world. In other words, the region’s growth dynamism based on vertical specialization is
deeply dependent on its extra regional trade in final goods. As such, the region’s FTAs
with the United States and the EU are important to further expand trade and investment
activities in the region.
RCEP’s completion is quite challenging. The 16-member countries are at different
stages of development which made it extremely difficult to reconcile their different
interest in trade negotiations. Hence, there is a risk that RCEP can only achieve limited
trade and investment liberalization (Mikic, 2016). As RCEP will be based on five ‘10+1’
FTAs that ASEAN signed with five different countries, the problem is to determine which
version to use as the benchmark (Chen, 2017). The different tariff levels will not easily
be harmonized (Zhang, 2017).
Unlike the RCEP which is Asia-Pacific based, the TPP began as a cross-regional FTA
encompassing countries across different continents, including Malaysia, Singapore, Bru-
nei, Vietnam and Japan in East Asia; Australia and New Zealand in Oceania; Chile, Peru
and Mexico in Latin America; and the US and Canada in North America. RCEP restricts its
membership to the preselected set of 16 countries whereas TPP’s open architecture per-
mits new members to join (Nehru, 2017). Despite the several rounds of disagreements,
the trade deal of TPP was eventually concluded in October 2015. The final proposal was
signed in February 2016 in Auckland, New Zealand by the 12 countries. Each member
state now has to complete the ratification process. TPP is expected to remove behind-
the-border barriers to trade and drive domestic reform. This is different from RCEP which
allows ‘special and different treatment’ for member countries and let the pace of domes-
tic reform to drive the pace of trade liberalization (Nehru, 2017). Despite the TPP’s
‘higher standard’, it could offer developing countries in Asia greater access to other mar-
kets. Other Asian countries’ interest in the TPP may increase further if foreign companies
from advanced countries begin favoring Vietnam or Malaysia for new investment
because of the access it gives to TPP nations. On the other hand, the TPP’s emphasis on
IPR implies that it would merely increase certain large corporations’ control of the mar-
ket, often referred to as ‘legal monopolies’ (Krugman, 2014). The US’ withdrawal from
the TPP in early 2017 raised concerns of whether this multilateral FTA is still meaningful.
Politically, America’s departure from the TPP appears to leave a power vacuum for China
in directing the future development of multilateral FTAs in the region. However, as Presi-
dent Trump wishes to promote more American exports to Asia, the US is less likely to
walk away from other FTAs in the region. The US’ shift from the multilateral to bilateral
approach is likely to enhance its flexibility and bargaining power vis-a-vis other smaller
countries. Economically, the TPP without America may not be so harmful for the other
11 countries. The US market is already relatively opened up to the world compared with
other TPP members. As such, the extra benefit for the other 11 countries in the TPP for
greater access to the US market is less likely. On the other hand, given TPP’s ‘high stan-
dard’, the implementation of TPP ‘rules’ will be a significant step up for the other TPP
members to access one another’s markets.
While the RCEP serves as a region-wide FTA, the TPP is considered as an attractive
vehicle for ‘multilaterizing regionalism’ with cross-regional membership. Seven coun-
tries including Singapore, Malaysia, Vietnam, Brunei, Australia, New Zealand and Japan
are participating in both trade talks. South Korea, the Philippines and Thailand, current
RCEP members, have also expressed interest in the TPP. The more countries with over-
lapping membership indicate the greater the possibility of a convergence between
RCEP and TPP. If both the RCEP and TPP were to proceed smoothly, TPP’s wider cover-
age of members from different continents and ‘higher standard’ suggests it has greater
capacity to incorporate the RCEP into its framework of economic liberalization in the
future rather than vice versa. Nevertheless, the smooth development from the CAFTA to
the RCEP and the TPP indicates ASEAN’s declining role as a norm-building institution
designed to manage regional affairs. Regardless, uncertainties remain. The territorial dis-
putes over the South China Sea and distrust between Japan and South Korea may hin-
der the negotiation process of the RCEP. On the other hand, the conclusion of the RCEP
would be a milestone in advancing China–Japan–Korea relations. China may consider
284 M.-H. CHIANG
the CAFTA important in promoting other forms of multilateral FTAs through which
China can exert more power if both the RCEP and TPP fail.
Some have voiced concerns that RCEP and TPP could come to compete with each
other because of rivalry between the US and China. TPP represented the economic
dimension of the US’ ‘pivot to Asia’ policy announced by the Obama administration in
fall 2011. In President Obama’s words, his (pivot to Asia) policy goal is to ensure that
‘the United States will play a larger and long-term role in shaping this region (the Asia-
Pacific) and its future’ (Manyin et al., 2012). However, after President Trump withdrew
the US from TPP, the role of TPP in America’s strategic policy towards the region was
downplayed. Moving along without the US, the remaining 11 countries of the TPP on
8 March 2018 signed a new version of the multilateral trade pact, namely Comprehen-
sive and Progressive Agreement for TPP (CPTPP). The content of the new trade deal is
no big difference from the previous one except the suspension of IPR clause in CPTPP
(Channel NewsAsia, 2018). As such, the US withdrawal from TPP does not mean China
can easily join in this trade deal. TPP’s ‘high standard’ including high requirement on
labor right protection and restriction on State-Owned Enterprises will continue to hinder
China from entering into this trade agreement. For ASEAN, implementation of CPTPP
would marginalize the central role of ASEAN in waving the regional cooperation net-
work. It may also divide ASEAN since only few ASEAN countries are involved in CPTPP.
Conclusion
The tightly connected economic relations, trend toward regionalization and the geopo-
litical considerations have all motivated the CAFTA to proceed. Theoretically, the tariff
reduction and elimination of non-tariff barriers through a bilateral FTA are expected to
benefit both sides. The benefits received often differ based on each country’s compara-
tive advantages. The major changes in bilateral economic relations after establishment
of the CAFTA can be summarized as follows.
First, in terms of merchandize trade relations, China’s trade balance with ASEAN as a
whole has changed from deficit to surplus since 2012. Vietnam is the most important
contributor to China’s growing trade surplus. Steel and iron is the most important prod-
uct in China’s trade surplus with ASEAN, reflecting China’s overproduction of steel in
recent years. From a theoretical point of view, this also indicates that China’s exports of
steel products are meeting ASEAN countries’ demand for construction projects or for
their domestic manufacturing purposes. Electrical machinery, composed of mainly
essential components for making ICT goods, is the second most important contributor
to China’s growing trade surplus with ASEAN. This is in contrast to few years ago when
China still imported more electrical machinery from ASEAN rather than vice versa. In the
regional production network, China’s role as a final assembly place which relied on
importing intermediate goods from advanced economies in ASEAN has reversed to
China now supplying intermediate goods to developing countries in ASEAN for
manufacturing.
In the old flying geese model, China was a follower, behind certain advanced coun-
tries in ASEAN. Now the changes in merchandize trade relations imply that China is sur-
passing or is keeping pace with some of them in the same row. For the more developed
economics in ASEAN, China’s quick industrial rise and economies of scale in production
has squeezed their exports of intermediate goods. On the other hand, for the less devel-
oped countries in ASEAN, due to their less advanced technology level, trading with
China would facilitate their domestic manufacturing production. In the case of Vietnam,
importing intermediate goods from China has allowed it to become an important export
platform of ICT goods to the global market.
Second, like bilateral trade, the bilateral investments have also experienced some
structural changes over the past few years. ASEAN’s investment in China has been slow-
ing down whereas China’s investment in ASEAN has had noticeable growth. China’s
wage hike and industrial catching up means investors from ASEAN countries can no lon-
ger take advantage of China’s cheap labor force for producing labor-intensive goods.
Unlike AEAN investors’ focus on manufacturing and services sectors in China, China’s
investment in ASEAN has changed from energy-related sectors to manufacturing and
services over the last decade. Singapore remains the most important source of foreign
investment from ASEAN to China and the largest Chinese outward investment destina-
tion in ASEAN. China’s investment in ASEAN is expected to rise further. Many developing
countries in ASEAN are in need of inward investment to promote economic develop-
ment and China is also eager to build up its overseas business presence. China’s growing
manufacturing investment is expected to enhance the bilateral trade relations. The
emphasis on ‘investment protection’ in China–ASEAN investment agreement is an
encouraging factor for boosting bilateral investment. Furthermore, China’s ‘belt and
road initiative’ is expected to promote more of its infrastructure investment in ASEAN
countries. The infrastructure investment will add to the forces of economic integration
between China and Southeast Asia. The declining transportation and communication
cost would only intensify the regional production network.
Third, the bilateral services trade relations have much potential to develop though
the current bilateral services trade is less significant than merchandize trade. Indeed,
services account for a large share in China and Southeast Asian economies. However,
most of the services sector is non-tradable and low value-added. Over the last two deca-
des, China’s external services trade has grown faster than ASEAN’s, indicating the former
could become a more important driver for ASEAN services trade development in the
future. Financial services and tourism are the two important sectors that ASEAN can
take advantage of from China’s booming market whereas China holds comparative
advantage in construction services, telecommunications, computer and information
services and other business services. The liberalization in service sectors is still limited.
The benefits from trading in services will be realized only if both sides could make more
commitments in the service agreement. Nonetheless, as both the economies of China
and ASEAN are not fully service oriented, their demand for value-added services, such
as IPR, from advanced countries will remain large.
The CAFTA is not the only factor in directing China–ASEAN economic relations. The
structural changes in bilateral trade and investment can be a result of greater develop-
ment gap between the two sides. In other words, the changes in bilateral economic rela-
tions are a reflection of China’s economic rise. The CAFTA has facilitated this process.
China’s more rapid technological advancement has allowed it to change from a final
assembly place to an important intermediate goods supplier to ASEAN countries. The
deepening trade interdependence between China and less developed ASEAN countries
will remain in the long run. Given China’s more abundant resources for R&D, it is difficult
for developing countries in ASEAN to catch up with China. China’s rapid economic
development also made it an emerging foreign investor in ASEAN. The growing invest-
ment from China is expected to benefit the development needs of developing countries
in ASEAN. China’s diversified investment in ASEAN, from energy to manufacturing and
286\ M.-H. CHIANG
services, reflects China’s dynamic economy that can match up with different develop-
ment objectives in various ASEAN countries. The long-run economic interdependence
between China and less developed countries in ASEAN is likely to be strengthened
through the greater physical connectivity. However, for the more developed countries
in ASEAN, such as Singapore, Thailand and Malaysia, they will face more competition for
high technology and capital-intensive goods, as well as services imported from China.
Despite the exclusion of some sensitive sectors and little progress on investment lib-
eralization, the significance of the CAFTA is that it provides an opportunity for develop-
ing countries to join the regional economic agreement. Developing countries in ASEAN
are expected to benefit through greater access to other countries’ markets without
sacrificing much of their economic interests. China considers it is a show of its ‘soft
power’ as the agreement would allow ASEAN countries to take advantage of its boom-
ing market. The increasingly intensified Sino-ASEAN economic relations are regarded to
increase Chinese influence in the region. Some developing countries may lean toward
China given the importance of China in developing their economies. For ASEAN, China’s
huge economic size and geographic proximity to Southeast Asia will continue to make
it an important driver in this region’s economic development.
Despite China’s booming market potential, its transition to a more sustainable
growth path is paved with uncertainty. China’s slower than expected economic growth
might also have significant impact on ASEAN’s economic development. As such, ASEAN
leaders would have to ensure that the region has diversified export destinations. More-
over, the growing China–ASEAN economic dependence could probably weaken
ASEAN’s bargaining power. Hence, ASEAN will have to reposition itself in the political
economic alignment in the region and in the world.
Beyond the commitments to liberalization in trade and services, the CAFTA also
serves as an important bridge for a wider regional economic integration. In other words,
the gradual development of CAFTA would facilitate its adoption into the RCEP, TPP or
other larger regional economic agreements. However, the smooth development of the
CAFTA cannot guarantee the path toward the RCEP and TPP. Indeed, the prospect of
these two region-wide agreements is still very uncertain. If both are successfully con-
cluded, the importance of the CAFTA in promoting regional economic integration would
be decreased. On the other hand, if both fail, the CAFTA would become an important
mechanism in promoting other forms of multilateral FTA in the region. Furthermore,
China and ASEAN are deeply connected with the other regional economies and the rest
of the world. The effect of CAFTA on China and ASEAN will also depend on other bilat-
eral pacts between Asian economies that could cause change in trade flows and
patterns.
Over the past few decades, East Asian economic integration has long been driven by
market force rather than institutional approach. The development of institutionalized
economic integration is only a recent phenomenon. As we have seen in the case of
China–ASEAN economic relations, the CAFTA does not set out to change the nature of
bilateral economic ties but to reinforce existing economic relations based on each coun-
try’s comparative advantage. The development gap between China and developing
countries in ASEAN would continue to drive the bilateral commercial exchanges. In the
long run, the development of bilateral economic ties may have its limit. Both China and
ASEAN are not the most important final consumption markets in the world. The bilateral
economic ties based on the manufacturing production network are actually driven by
the consumption demand in the Western countries, notably the US. The greater
economic integration in the region did not weaken its economic links with the rest of
the world. The development of regional economic integration attracted more foreign
firms from other regions to take advantage of the facilitation measures in trade and
investment. More bilateral trade and investment growth can be expected if China and
ASEAN can extend their economic linkage with the rest of the world, in particular the
United States.
Acknowledgments
The author would like to thank the two anonymous reviewers for their insightful comments and
suggestions.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes on contributor
Dr Chiang Min-Hua is research fellow at the East Asian Institute (EAI), National University of Singapore.
She obtained her PhD in economics from Universite Pierre-Mendes-France, now part of Universite Greno-
ble Alpes, in 2008 (avec la mention: Tres honorable avec felicitations du jury). Before joining EAI, she held
research positions at the Institute of International Relations, Chengchi University (2009), Taiwan External
Trade Development Council (2009–2010) and Commerce Development Research Institute (2010–2011) in
Taipei. Her research interests include Asia-Pacific regionalism, trade and investment, issues related to
economic growth and development in East Asia. Her most recent publications are China–Taiwan Rap-
prochement: The Political Economy of Cross-Strait Relations, Routledge, London in 2016 and Contempo-
rary South Korea economy: challenges and prospects, World Scientific, Singapore in 2017. She is
currently editing a special issue: ‘New wave of economic globalization: development opportunities and
challenges for countries in the Global South’ for Bandung: Journal of the Global South (https://bandung
journal.springeropen.com/newwaveeconomics). For more on her research interests, follow on Twitter
(https://twitter.com/MHChiang628) or Research gate (https://www.researchgate.net/profile/Min_Hua_
Chiang).
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The Pacific Review

ISSN: 0951-2748 (Print) 1470-1332 (Online) Journal homepage: https://www.tandfonline.com/loi/rpre20

China–ASEAN economic relations after

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China–ASEAN economic relations after establishment

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A review of the literature on China–ASEAN economic relations

Successive development of the CAFTA

Agreement on trade Protocol to amend the Second protocol to

Figure 1. Brief summary of CAFTA’s evolution.

Table 1. Tariff reduction schedule under CAFTA.

Table 2. Major commitments in services under CAFTA.

Changes in China–ASEAN economic relations after the CAFTA

Changes in bilateral trade relations

China's exports to ASEAN

Figure 2. China’s trade balance with ASEAN 2000–2016.

Changes in bilateral investment relations

Table 4. Bilateral investment 2006–2015 (unit: US$ billion).

Table 5. China’s investment in ASEAN by sectors 2008–2014.

Bilateral services trade potential

The CAFTA in the Asia-Paciﬁc economic regionalism

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