Recent Development of ASEAN's Economic Relationship with China and India

1. Recent Development of ASEAN's Economic Relationship with China and India By: Hendri Saparini, Ph.D Managing Director ECONIT Advisory Group saparini@econit.co.id IDEAs Workshop New Delhi, 5-6 November 2009

2. Presentation Outline • Economic characteristics and its development of ASEAN members, China and India. • ASEAN China Free Trade Area (ACFTA) and ASEAN India Trade in Goods Agreement (TIG): The Basic Agreement and Current Development • Trade and Investment between Indonesia – China and Indonesia – India, and their impacts on Indonesian economy.

3. Introduction • ASEAN is very aggressive to enter into a Free Trade Agreement (FTA). In fact, the country members of ASEAN have not all been ready to commit in such FTA. • A review on ASEAN-China and ASEAN-India FTAs is very crucial as ASEAN will have to deal with two economic giants, not to mention that they are highly competitive. • A review on Indonesia, as one of ASEAN members that has huge economic potentials, is expected to give significant result in form of relationship development pattern, as well as the potential benefit and negative impact from the economic integration on process.

4. List of ASEAN Free Trade Agreements

5. Countries Economic Characteristics: ASEAN Needs to Define A Better Strategy • China is an economic giants to ASEAN • GDP and Foreign Reserve of China are far above those of ASEAN members • Trade structure between China and ASEAN members show that Chinese products are highly competitive • Almost all ASEAN members face trade deficit against China • Chinese attractiveness for foreign investment is above that of ASEAN members in average.

6. Economic Growth:ASEAN Behind China and India Source: IMF

7. GDP Comparison:ASEAN’s GDP only 34% of the Chinese (2008) Source: 2008 figure, IMF

8. GDP Structure:ASEAN members, China and India Source: ADB

9. High Growth of FDI in China:Impact of Economic Reform Source: UNCTAD

10. FDI Inflow (1998-2008): China is far Above ASEAN Source: UNCTAD

11. 1428.5 China 879.3 ASEAN 187.4 India 241.4 Singapore 194.5 Malaysia Exports 175.0 Thailand Imports 137.0 Indonesia 61.8 Viet Nam 49.0 Philippines 8.8 Brunei Darussalam 6.6 Myanmar 4.4 Cambodia 0.8 Lao PDR 0 200 400 600 800 1000 1200 1400 1600 Billions of USD Exports and Import:Huge Surplus of China’s International Trade Source: Asean Economic Community Chartbook, 2008

12. Top 5 ASEAN Exports to China:Dominated by Electonics Parts and Primary Commodities Source: Asean Economic Community Chartbook, 2008

13. ASEAN Commodities Export to China:Main Source for China’s Demand , 2008 Source: ASEAN Economic Commonity Chartbook 2009

14. 5 Top ASEAN’s ImportASEAN from China, 2008 Source: ASEAN Economic Commodity Chartbook, 2009

15. Main ASEAN Countries’ Exports to India: India Dependent for Raw Materials (2008) Source: ASEAN Secretariat Office

16. ASEAN Imports from India (2008)Why being dominated by Petroleum Oils? Source: ASEAN Economic Community Chartbook 2009

17. ASEAN trade with China:Continuous increase of deficit Source: ASEAN Statistical Yearbook, 2008

18. ASEAN - India Trade:Surplus with Value Added? Source: ASEAN Statistical Yearbook, 2008

19. ACFTA:Gates to Liberalization • ACFTA was agreed in November 2002. Both sides have targeted the realization of ACFTA in 2010 for Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, Thailand and China, and 2015 for Cambodia, Lao PDR, Myanmar and Viet Nam. • Under the ACFTA, tariffs on certain products as known as the Early Harvest Program (EHP), were reduced before the onset of the FTA (came into effect on 1 January 2004). • Others agreements by sectors have also been agreed under ACFTA.

20. Agreements Under ACFTA #1 • The ASEAN-China MOU on Strengthening Sanitary and Phytosanitary (SPS) Cooperation was signed in November 2007. • ASEAN-China MOU on Agricultural Cooperation in November 2002 in Phnom Penh; a more direct cooperation in the agricultural sector between the lead national agencies in ASEAN and China. An extended ASEAN-China MOU on Agricultural Cooperation for 2007-2011 was signed in January 2007 in Cebu. • ASEAN and China strategic partnership in Information and Communications Technology (ICT) to promote international cooperation in terms of investment in human resources development on ICT and to explore the possibility of establishing Greater Mekong Sub-region (GMS) information highway.

21. Agreements Under ACFTA #2 ASEAN and China cooperation: the MOU on Transport Cooperation in November 2004 in Vientiane, promoting: i) transport infrastructure construction; ii) transport facilitation; iii) maritime safety and security; iv) air transport; v) human resources development; and vi) information exchange. The 7th ASEAN-China Maritime Transport Agreement (ACMTA), November 2008 agreed in principle with the Strategic Plan for ASEAN-China Transport Cooperation, identifying transport infrastructure projects aimed at enhancing international and cross-border transportation and facilitation.

22. Early Harvest Product Source: ASEANSEC

23. Tariff reduction on ACFTA Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Co-operation ACFTA starting on January 1, 2005

24. Average Tariff Applied (2007) * #1 *Simple average across all partners countries Source: ITC

25. Average Tariff Applied (2007) * #2 *Simple average across all partners countries Source: ITC

26. China Financial Aids and Investment:Aggressiveness due to Huge Foreign Reserve • Investment cooperation fund totaling US$10 billion (infrastructure construction, energy and resources, information and communications) • Credit of US$15 billion (including loans with preferential terms of 1.7 billion dollars in aid for cooperation projects) • Special aid of 39.7 million dollars to Cambodia, Laos and Myanmar • Provide 300,000 tons of rice for to strengthen food security • Donate 900,000 dollars to the cooperation fund of ASEAN plus China, Japan and the Republic of Korea • Inject 5 million dollars into the China-ASEAN Cooperation Fund • Offer of 2,000 government scholarships and 200 Master's scholarships for public administration students

27. Relationship of ASEAN-China and ASEAN-India • ASEAN economic is relatively much smaller than China in terms of GDP, which is around 2.9 times of ASEAN’s. It is difficult for ASEAN to compete with China in FTA. Chinese population is 2.3 times ASEAN’s and a very huge market for ASEAN products, but even before FTA ASEAN products can hardly penetrate Chinese market due to lack of competitiveness. • ASEAN members (excl. Singapore) have similar characteristics, rich of natural resources, but low industrial productivity and competitiveness. This means that they compete each other, rather than complementing. Considering this characteristics, it needs a very hard work to develop AFTA for they are competing in same existing market and not creating a new opportunity.

28. ASEAN has already signed a free trade agreement and will be followed by other agreements. ASEAN should develop a joined-marketing strategy to increase their bargaining, for example for CPO, Indonesia and Malaysia are the biggest producers, so they have a very strong position in determining price. When ASEAN is able to become a unified economy, then ASEAN will be able to offer an economic cooperation for mutual benefit of ASEAN, China and India. In investment, for instance, it is encouraged to China and India to establish processing industry in ASEAN, so China and India will not only absorb raw materials from ASEAN, but also give higher value added ASEAN. Should ASEAN not transform into an economic power, ASEAN would not get more benefit from FTA. Trade and investment after FTA will indeed encourage economic growth, but such growth will not give much value added into the economy. Although exist, value added will only be limited and unable to raise social welfare. Relationship of ASEAN-China and ASEAN-India

29. Indonesian Economic Relationship with China and India

30. China, India dan Indonesia: Different Economic Characteristics Chinese GDP showed that investment has the biggest share in GDP, while in China and Indonesia the second of the biggest share in GDP. China and India focus on exporting manufactured products, not natural resources materials. More competitive industrial sectors has made trade liberalization have more positive impact to China and India, otherwise to Indonesia. Export of manufactured products, due to more competitiveness and productivity, has an important role in increasing Chinese and Indian foreign reserves.

31. 120 100 80 Statistical discrepancy Percent 60 Net Export Gross domestic capital formation 40 Government consumption Private consumption 20 0 -20 China India Indonesia GDP Structure:Indonesia, China and India Source: ADB

32. Manufacture Productivity and Competitiveness Increasing Foreign Reserve of China Source: State Administration of Foreign Exchange Bureau of PRC

33. Economic Reform:Increasing India Foreign Reserve Source: Reserve Bank of India

34. 60 50 40 30 Billion USD 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Indonesia Foreign Reserved:Unstable, Not a Result of Productivity and Competitiveness Source: Bank of Indonesia

35. China’s Export:Focusing on Manufacturing Goods Source: Ministry of Commerce PRC

36. India Exports Dominated by Manufactured Goods Primary Product Source: Reserve Bank of India

37. 100% 90% 80% Non Primary Commodity 70% 60% 50% 40% Primary Commodity 30% 20% 10% 0% 2002 2003 2004 2005 2006 2007 2008 Indonesian Export:Increasing Shares of Primary Commodity Source: CBS

38. Trade Balance Indonesia-ChinaSurplus for Oil & Gas, Deficit for Non Oil & gas Source: Ministry of Trade

39. Indonesia-India Trade BalanceSurplus for Non-Oil & Gas, Mainly Raw Materials Source: Ministry of Trade

40. Top 10 Exports Indonesia to ChinaDominated by Natural Resources (2008) Source: CBS

41. Top 10 Exports Indonesia to IndiaDominated by Natural Resources, too (2008) Source: CBS

42. Top Imports Indonesia from China (2008)Mostly Manufactured Products, but Agricultural, too Portable Digital Automatic Data Processing Machines 306 Structures And Parts Of Structures Nesoi, Of Iron Or Steel 194 Parts And Accessories For Automatic Data Processing Machines 181 Auxiliary Plant For Use With Steam Or Other Vapor Generating Boilers 155 Garlic, Fresh Or Chilled 151 Aluminum Nonalloyed Rectangular 147 Superphosphates Fertilizers 145 Disodium Carbonate 138 Parts And Accessories Of Motorcycles 125 Petroleum Oils And Oils From Bituminous Minerals, Crude 121 Parts For Auxiliary Plant For Use With Steam 99 Steam And Other Vapour Turbines 93 Flat-Rolled Products Of Iron Or Non-Alloy Steel 92 Parts For Machinery Making Or Finishing Paper Or Paperboard 90 Antennas And Antenna Reflectors 87 Mandarins (Including Tangerines And Satsumas), Fresh Or Dried 85 Apples, Fresh 83 Tobacco 81 - 50.00 100.00 150.00 200.00 250.00 300.00 350.00 Millions of dollar Source: CBS

43. Top 10 Import of Indonesia from IndiaDominated by Manufactured Goods (2008) Source: CBS

44. China’s and India’s FDIInsignificant in Indonesia Source: Indonesia Investment Coordinating Board

45. China, India dan Indonesia:Trade and Investment Indonesian trade balance against China and India: surplus for oil and gas, but deficit for non-oil & gas Indonesian top 10 export to China and India are natural resources commodities. It is almost 80% for Indonesian export to India and 70% to China Import Indonesia from China and India: mostly manufactured products and final goods. Furthermore, on EHP implementation since 2004, Indonesia has imported a huge amount of agricultural products from China. Chinese and Indian FDI in Indonesia was relatively insignificant. Currently, there is a trend of acceleration of Chinese investment in Indonesia in infrastructure and oil & gas, while India in financial sector.

46. China Investment to IndonesiaIt Will Increase, Soon

47. Indonesia government has received standby loan ofUSD 5.5 billion and Bilateral Currency Swap Agreement (BCSA) up to US$ 17.5 billion. The BCSA scheme will strengthen rupiah value and maintain financial stability, as well as encouraging trade and investment. China trade with Indonesia will be pushed on natural resources and raw materials. Indonesian trade will be continuously dominated by Chinese manufactured products. As China has agreed to provide Special Buyer Credit Facility (SBCF) for Indonesia. China Loan to Indonesia Increased During 2008 Crisis

48. China will focus their investment and trade on natural resources and raw materials, as well as infrastructure. On the other hand, Indonesian will be continuously importing Chinese manufactured products. This trend will make Indonesia become natural resources and raw materials exporter, as a consequence, employment opportunity growth will be stagnant, even slowing down. China-Indonesia Trade and Investment Need Improvement for Mutual Benefit

49. ……Before ACFTALow Competitiveness of Indonesian Products Growth of Textile and Leather Product Source: CBS

50. Indonesia Exporting Raw Tin ........ Source: CBS