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26 Oct 2006

International Economy

ASEAN-China: Enhancing on 15-Years of Close Economic Relations (Current Issue No.1911)

The Thai Prime Minister, Gen. Surayud Chulanont is scheduled to attend the ASEAN-China Commemorative Summit on October 30-31, 2006, at Nanning, in the People's Republic of China, on the occasion of the 15th anniversary of the ASEAN-Chinese relationship. This is the first ASEAN summit to be attended by the new Thai premier since he took the helm of power.

On the economic front, China is currently one of ASEAN's key markets. Its role as an export destination is set to increase in the future, as part of ASEAN's efforts to reduce its dependence on the markets of the US, European Union and Japan, whose economies are likely to slow in the coming year. Meanwhile, the Chinese economy has exhibited double-digit growth since 2003. The rapid growth of China has been supported by its huge foreign reserves, which are the largest in the world. Chinese exports grew an average of 30 percent per year between 2002 and 2005, which has resulted in a trade surplus for China for several consecutive years.

China is the first country to clinch an FTA deal with ASEAN. So far, this bilateral agreement only covers trade in products. Still, both ASEAN and China have set a future goal of liberalizing their service sectors and investment as part of the FTA pact Negotiations on liberalization in services and investment between China and ASEAN are expected to reach a conclusion and be submitted to the ASEAN-China summit slated for December of this year in Cebu, the Philippines. If this is achieved as scheduled, ASEAN and China will become a comprehensive free trade area by 2010.

The ASEAN-China FTA agreement came into effect with mutual tariff reductions on January 1, 2004, thus leading to a burgeoning bilateral trade value. Based on the data from the Chinese Ministry of Commerce, two-way trade between ASEAN and China totaled USD100.94 billion during the first eight months of this year. Under these circumstances, the bilateral trade turnover (exports plus imports) between China and ASEAN is expected to double that, reaching USD200 billion by 2010. Also by 2010, China and founding ASEAN member countries, i.e., Thailand, Singapore, Malaysia, Indonesia, the Philippines and Brunei are scheduled to cut import tariffs on more than 90 percent of their respective products to a range of 0-5 percent. Meanwhile, China and other four new ASEAN countries, namely Cambodia, Laos, Myanmar and Vietnam will have slashed tariffs on most products to 0-5 percent by 2015. Among ASEAN countries, Singapore has recorded the highest bilateral trade figures with China, followed by Malaysia, Thailand, the Philippines and Indonesia, in that order.

Referring to trade between Thailand-China, in the first 9 months of 2006, Thailand posted a trade deficit with China totaling THB67,570 million, which represents a slight fall from the same period of 2005 when the deficit was THB69,585 million. This is due to a deceleration in Thailand's imports from China, which rose only 16.7 percent in that period, compared to a substantially high import growth of 36 percent seen in 2005. The reason that Thailand continuously posts a trade deficit with China, particularly after the tariff reductions designated by the ASEAN-China FTA, is because most of Thailand's imports from China are capital goods (accounting for 45 percent of Thailand's aggregate imports from China), i.e., electrical machinery and parts, computer parts and accessories, plus general industrial machinery and parts, meanwhile, intermediate products and raw materials from China represent only 40 percent of our total imports, where the majority is in chemicals, plus iron & steel products.

Although Thailand benefits from the reduced tariffs on goods import from China, which can lower the cost of raw materials and capital goods here, Thai entrepreneurs that produce many types of consumer goods are impacted by Chinese goods penetrating the Thai market because they have cheaper prices and receive import tariff reductions/exemptions as well, which even increases their price competitiveness in the Thai marketplace. Major products showing this proclivity include footwear, leather products, clothing and textiles.

Concerning Thailand's exports to China, though exports to China are growing steadily, Thai exports are mainly primary or intermediate goods that have low added value. China imports these goods from Thailand to be used as primary materials for further manufacturing there. Moreover, other significant Thai exports with potential, i.e., rice and rubber, have not received reduced tariff benefits from China under the ASEAN-China FTA because these goods are listed among China's ‘sensitive goods' that are scheduled for 7-10 years of tariff reductions, and are thus subject to competition with comparable ASEAN goods in the Chinese market, e.g., para-rubber from Malaysia and Indonesia, rice from Vietnam, etc., while Thai industrial exports have to compete with comparable ASEAN exports as well, e.g., computers and parts from Singapore, Malaysia and Philippines. Therefore, it will be necessary for Thai businesses that have markets at home to adjust themselves quite seriously to compete with imports from China, while exporters of Thai goods to China must compete with ASEAN exports to the Chinese market.

As seen in the trend where China has increasingly opened up their country and welcomed foreign investors into the service and investment sectors more and more in compliance with their commitments to the World Trade Organization (WTO), and has alluded to liberalization of their service and investment sectors with ASEAN during the process of negotiations (expected to be concluded by December 2006), this will afford opportunities for Thai business to set up service businesses more easily in China. As China has reduced their limitations and regulatory controls on investments in such new business, a bright future lies ahead for Thai businesses with high potential, such as tourism - including health tourism, plus spas, restaurants and hotels in China. Due to the fact that the purchasing power of middle-class Chinese has risen sharply, tourism both domestically and internationally, as well as demand for health and beauty services have become more popular. It is expected that these Thai business in China can earn higher profit and create more income. As a result, the potential income from Thai service sector activities in China will substantially compensate the continuously higher trade deficit in goods of Thailand with China.

However, the number of foreign tourists traveling to China in 2005 rose to around 120 million with an increase by 10 percent from 2004. That created tourism income for China amounting to around USD29,300 million in 2005.

On the part of Chinese tourists visiting foreign countries, there were around 31 million international tourist departures in that same year. Meanwhile, there are around 3 million Chinese tourists visiting ASEAN for each year. Chinese tourists are the second-ranked largest foreign tourists traveling to ASEAN, next to Japan. Chinese tourists visiting Thailand in 2005 totaled 780,000 people. In the first three months of 2006, there were 278,343 Chinese tourists traveling to Thailand, rising 130 percent over-year. Moreover, the number of Chinese tourists traveling to Thailand exhibited the highest growth in the first three months of 2006, relative to other foreign tourist arrivals.

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International Economy