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The China-ASEAN Free Trade Area Author: chinamotor - Source:CHINAMOTOR     Font size: A A A                                  The Deepwater Port for Chinese Enterprises to Enter the Overseas Markets                                                           --Organised by Jiang Lei and Dolly from CHINAMOTOR The China-ASEAN Free Trade Area was officially opened on January 1st with the common expectation of the people from China and all members of ASEAN. With the biggest population in the world, this free trade area is the third largest in the world, and is the biggest free trade area made up of developing countries. The China-ASEAN Free Trade Area is made up of China and the ten ASEAN members; it has 1.9 billion consumers, nearly USD 60,000 billion GDP and a total trade volume of USD 4,500 billion. Over 90% of products will have zero tariff between China and six of ASEAN's senior members including Brunei, the Philippines, Indonesia, Malaysia, Thailand and Singapore after the opening of the free trade area. The average tariff that China places on ASEAN will drop from 9.8% to 0.1% and the average tariff that the six senior member countries of ASEAN place on China will drop from 12.8% to 0.6%. The four new members of ASEAN including Vietnam, Laos, Cambodia and Burma will also realise a zero tariff for 90% of the products. Currently, motorcycle and other related products are still on the list of the 10% non-zero-tariff, but we believe that they'll get zero-tariff in the future. The gradual elimination of the tariff barrier has created a more convenient development platform for both China and ASEAN. The establishment of the China-ASEAN free trade area makes it a trend for the Chinese manufacturing industry to transfer their industrial production base. The famous Chinese brands including Tsingtao Beer, Haier, TCL and Changhong have set up their production bases one by one in ASEAN; although these bases mostly served for their respective local countries previously before the establishment of the free trade area, they will become the real overseas bases now to form networks in the ten ASEAN countries. The advantages of setting up overseas bases include reducing production costs, weakening Chinese exports' positive impact, reducing exports tariff and trade friction; meanwhile, it can also increase brands' awareness in the region and form the long-term overseas Chinese famous brand names. Of course, the benefits for establishing overseas bases will not last forever, the survival trick for Chinese enterprises is to constantly improve Chinese branded products' added value. First, the Obvious Incentives that Attract Chinese Enterprises to Invest Directly on ASEAN Markets 1. Comparing the Cost Advantages. The ASEAN markets have relative advantages in raw materials, labour, real-estate, tax and public charges in comparison with other international markets. The national economy of most ASEAN countries is still among the developing countries; the natural resources of ASEAN countries have relative advantages and its transport cost is relatively cheap. ASEAN is rich in relatively cheap manpower resource apart from rich regions including Singapore and Brunei. The land price and taxes of most of ASEAN are cheap in comparison with that of China. The ASEAN countries' governments are all working hard to develop their economy; their market systems are growing mature and their governments' working efficiency is high; these factors help to save Chinese enterprises' public expenditure. In all, the cost factor is an important extrinsic incentive for the Chinese enterprises to invest directly on the ASEAN markets. 2. Market Potential Incentive. The ASEAN countries which are China's neighbours have strong market attractiveness. The ASEAN market has a market scale of 530 million people with the total land area of 4.5 million square kilometres; ASEAN has become an influential force which cannot be underestimated by the world in the development of the Pacific region and the world's economy. ASEAN has provided a wide regional market for Chinese enterprises to conduct overseas investment. 3. The gradually perfecting systems and the wide range cooperation mechanism. According to the China-ASEAN Framework Agreement on Comprehensive Economic Co-operation, China and all the contracting parties of ASEAN should give priority to strengthening cooperation in five fields. Meanwhile, the economy and trade cooperation of all contracting members should also be extended to finance, travel, industrial cooperation, transportation, telecommunication, medium-and-small enterprises, environment, bio-technology, energy resources and so on. The wide ranges of investment and cooperation, the constant optimisation of investment environment in ASEAN have paved the way for Chinese enterprises to develop the ASEAN markets. 4. The similarities between investment environments. The economic development of the ASEAN countries was affected by their lagging infrastructure in the 1990s. In order to solve the bottleneck problems, all ASEAN countries have made the construction of industrial departments including energy resources, transportation, telecommunication and electricity departments and the infrastructure construction the core issues of their countries' economic strategy. Meanwhile, the ASEAN countries have also devoted to achieve the upgrade for industrial structure and develop knowledge-intensive industry as well as service industry in the face of America's fast development in IT industry and new economy. They are experiencing a similar investment environment like China did in its 30 year's open-up and reform process to develop and grow. Apparently, the similarity of the ASEAN investment environment is an important extrinsic incentive to attract Chinese enterprises to invest directly on ASEAN markets. In addition, the ASEAN market's agglomeration effect, its fast-developing economy, the 'three kinds of conditions' and so on are all extrinsic factors which attracted Chinese enterprises to invest directly. Second, Chinese Enterprises Investing Directly on ASEAN Markets is an Internal Need In terms of the requirements of the national strategy: (1) Protecting and developing international market. The direct investment made by Chinese enterprises can provide service for the product export of the Chinese enterprises and increase their export competitiveness. Meanwhile, investing directly can make the producers better aware of the ASEAN markets' needs, reduce transportation costs and expand market shares. Chinese enterprises have obvious advantages in capital, technology and management in the second and third tier countries of the ASEAN markets. (2). Gaining cheap natural resources and relieving resources shortage. The fast development of the Chinese economy needs a great quantity of resources; the shortage of energy resources like petroleum and coal has affected the country's economic safety to a certain degree. The shortage of other resources also cannot be neglected. China has already begun investment cooperation in energy resources with the ASEAN countries including Indonesia and Burma. (3). Avoiding trade barriers. The fast development of the Chinese economy has made China into 'the world factory', a great amount of high cost performance products are exported around the world; this made some European and American countries very sensitive about Chinese made products and trade frictions happen often. More and more countries begin to resist Chinese products by adopting some non-trade-barrier measures including raising tariffs. Under such circumstances, Chinese enterprises can increase their exports by investing directly in ASEAN markets; enterprises are encouraged to invest in ASEAN to produce and sell products locally so that Chinese made equipment, raw materials and semi-finished goods can be exported to the ASEAN countries; this can further achieve the goal of increasing exports. Thus, trade frictions with some developed countries can also be reduced. (4). Relieving China's 'over-heated' economy. China's facing an over-heating economy at the moment, and there's a large amount of private capital. If a proper way can be found for the private 'capital', the over-heating economy can be relieved to some degree and ensure Chinese economy's sound and harmonious development. In terms of the requirements of the Chinese enterprises' production and operation strategies, it's particularly important for Chinese enterprises to carry out direct investment on the ASEAN markets. Chinese enterprises can enhance the exports of Chinese parts and other related products by direct investment; and they can transfer those industries which have lost their competitiveness or are limited in China to the ASEAN countries, especially the second and third tier ASEAN countries, so that Chinese enterprises can achieve industrial upgrade. Second, this cannot only reduce costs, improve efficiency but also improve products' price competitiveness; excessive profits can be made by Chinese enterprises' relative advantages. Three, Chinese Enterprises' Strategies to Invest Directly on the ASEAN Markets 1. It's better to choose those new and high technologies which can improve a country's or a region's industrial structure and can promote enterprise's technical improvement. Chinese enterprises should enhance their industrial transformation and increase their investment in the service industry to achieve the upgrade for industrial structure. Chinese enterprises should work hard to promote their production technical level and change the situation in which competitiveness is bigger than complementarity between China and ASEAN in their production industry; Chinese enterprises should try to difference themselves from the enterprises of the ASEAN countries or try to have different professional labour distribution and differentiated marketing. Meanwhile, Chinese enterprises should also increase their efforts on R & D, stick to the upgrade of Chinese industrial competitiveness by the development of technology, use the ASEAN platform to gain favourable positions in the international division of labour and the value chain system, get rid of the situation in which China relied heavily on labour costs to gain industrial competitiveness so as to make the Chinese enterprises achieve real international competitive advantages. 2. Chinese enterprises should choose those products and industries which have market prospect and competitiveness. Currently, the Chinese enterprises are mostly small scale companies in general, it's easy for them to get started and transformed; they should try to avoid fierce competitions with big transnational corporation and adapt to the needs of the ASEAN countries' investment environment. Also, in terms of strategic alliance, all ASEAN countries welcome the way of cooperation with foreign capital for overseas companies to enter their countries. So, this kind of Chinese enterprise can use the cheap labour in the ASEAN countries and their rich resources to export Chinese equipment, set up small scale labour-intensive companies so as to make the production costs of transnational corporation less expensive. 3. Chinese enterprises should choose those industrial fields which must be entered and those industries which must be set up locally. All ASEAN countries adopt the similar FDI incentive policies universally in order to attract more direct investment upon entering the 21st Century; this phenomenon is called 'the commonality of ASEAN's foreign investment policies.' Chinese enterprises should be aware of those facts including not to invest in those fields which can't meet the environment protection requirements, which don't comply with ASEAN countries' industrial polices and which can't put the local advantages into use when they place direct investment. In all, the purpose of analysing ASEAN's extrinsic incentives and Chinese enterprises' internal demands and making the Chinese enterprises further understand direct investment on the ASEAN market is to make the Chinese enterprises seize the opportunities brought by the fast development of the ASEAN markets and help Chinese enterprises realise their 'going global' strategies, so their internalization process can be enhanced. Of course, for those Chinese enterprises who entered the ASEAN markets by investing directly, they should choose their way and place for direct investment in terms of the objective material conditions at their early stage so as to expand their production and operation scale; in their mature stage, they should investigate ASEAN's investment environment in terms of laying stress on adjusting industrial structure and gaining economic information to decide where and how to invest; so they can fully display and maintain their strategic advantages on the ASEAN markets. As mentioned above, the training of Chinese enterprises' anti-pressure ability and the real internationalisation of their products all have to do with their high added value. ASEAN is like a deepwater port on the Chinese enterprises' way to the world's markets; it can make China go further but it's not a permanent safe haven for Chinese enterprises; some costs advantages will gradually disappear as the constant improvement of the ASEAN's economy, and Chinese enterprises have to return to the value competition of their products eventually.