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In the Shadow of the Dragon: Free Trade With China A Win-Win?

This blog previously commented on rising opposition to and grumbling over the China – ASEAN Free Trade Agreement in Southeast Asia, which went into effect on 90 percent of products, on January 1, 2010   Times Magazine Online has an article concerning more of the downsides of the FTA.   For example, Indonesian Trade Minister, Mari Pangestu has already informed ASEAN that his nation wants to exclude 228 domestically produced items for another 2 years.  These items include such things as textiles, food stuffs, chemicals, and electronics due to the fear that they cannot compete with Chinese competition.

Indonesian Industry Minister M.S. Hidayat stated:

“If there aren’t any protective steps taken for these industries we’re afraid that there will be … layoffs and even the closure of those industries,” he said.

Some opponents are even re-stating the classic anti-free trade argument that the FTA will cause a “race to the bottom” where quality will be trumped by price.  To a certain extent this is likely, especially in ASEAN nations with extremely law product safety and health regulations, but there is little evidence being presented that this existing issue will be made worse by the FTA.

In the end, the adjustment for many industries to the new trade environment will be painful, and as in any capitalist system, some will lose, others will thrive as labor and capital shift to more competitive industries, but this is in the long term.  In the short term, Secretary Pangestu is correct.

So, expect more anger and anxiety to come from those who are feeling vulnerable.  Indonesia (and also Thailand and Malaysia), due to the current global economy, and the fact it is a democracy, maybe more sensitive to protectionist arguments, and  there maybe some merit in providing support to certain infant industries.   However, the danger is knowing how long to protect industries, and which industries are just too inefficient as to not ever be viable without public support.  These issues of what industries to subsidize, what is in the national interest, etc. will be political topics that might be important in the next round of elections.

Since the wealthier states in Southeast Asia are often ahead of China in production technology and have a firm foundation in areas that China is just trying venturing into (such as low-end electronics), it might be best for the governments to work with the private sector to create niche industries that can provide imports to China, as well as take advantage of Chinese FDI that will flow into the region.  The benefits to this agreement, potentially, far outweigh the disadvantages, but the ASEAN states must exploit these opportunities.

 

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  1. […] job tracking the increasing amount of displeasure with the The China-ASEAN Free Trade Agreement (CAFTA) in Southeast Asia.   So far there has been much grumbling in the Philippines,  Indonesia, and […]

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