Zhang Jianping * National Development and Reform Commission FTA 1 is one of the most important forms of regional trade arrangement in the world. In recent years, it has been developing rapidly as an approach of regional economic cooperation, facilitating free trade and investment. In the 21 st Century, China s economy has been increasingly integrated into the world. As a result of globalization, and to respond to the needs of a market economy opening to the outside world, the Chinese government has geared up its efforts in exploring, negotiating, and establishing FTAs in different regions. * Department of the International Regional Cooperation, Institute for International Economics Research 1 Free Trade Agreement is an arrangement between separate tariff territories on free trade and relevant matters. In WTO documents, Free Trade Agreement, Preferential Trade Agreement (PTA), and Customs Union Agreement (CUA) are considered Regional Trade Agreement. These arrangements may not be distinctive sometimes as many FTA have limitations on free trade, so they are in fact RTAs. In other cases, FTA or RTA also refers to free trade areas or semi-free trade areas based on certain trade agreements.
I. China s FTA The dynamic development of regional trade arrangement in the world coupled with China s economic boom has provided sound foundation for China to seek regional economic and trade cooperation. So far, more than 20 economies have approached China for FTA, of which the FTA between China and ASEAN, Closer Economic Partnership Agreements (CEPA) respectively between China s mainland and Hong Kong and Macau are being implemented; the FTA with Chili has been signed; and FTAs respectively between China and the 6 Gulf Cooperation Council member countries, Pakistan, India, New Zealand, and Australia are in negotiation. China is also exploring the possibility of FTA with South African Customs Union countries, Iceland, and South American Common Market (Mercosur), Peru. 1. The Launch of China ASEAN FTA This is the first FTA that China initiated and negotiated. In Nov. 2002, the two parties signed the framework agreement on overall economic cooperation, kicking off the FTA development. The FTA covers investment and economic cooperation, as well as trade of commodities and services. The priority areas include agribusiness, information technology, human resources development, investment promotion and the development of Mekong area. The plan is to reduce tariffs since 2005, and forms FTA with 6 early ASEAN members and later members respectively in 2010 and 2015. China ASEAN Early Harvest Program was launched in Jan. 1, 2004, to gradually reduce the tariffs of 500 commodities (mostly agriculture products) to 0 by 2006. In Nov. 2004, the two parties entered into Commodity Trade Agreement aiming at reducing tariffs on ordinary commodities to 0-5% from July 1, 2005 to 2010. The tariffs on 400 sensitive items will also be reduced to 5% and less from 2012 to 2018. 117
2007 KPSA International Conference [The Rise of Asia and Its Future] 2. Closer Economic Partnership Arrangements (CEPA) between China's Mainland and Hong Kong and Macao. China's central government entered into CEPA with Hong Kong SAR and Macao SAR respectively in June and October 2003, which became effective on Jan. 1, 2004. According to CEPA, the Mainland and Hong Kong / Macao gradually have free trade of commodity and services, and implement other trade and investment facilitation measures. As follow up measures, CEPA II and III are signed to open the market further: the Mainland gives 0 tariffs on the products of Hong Kong and Macau under 273 tariff items, removes tariff quotas and non-tariff barrier, and gives different access to Hong Kong and Macau companies in 26 industries. 3. Bangkok Agreement This is a preferential trade arrangement initiated by UNESCAP among its members. Pursuant to "enabling clauses", China acceded to the Agreement, first of its kind, in May 2001. Since Jan. 1, 2002, China implemented place of origin interim regulation and other preferential tariff measures to ROK, Sri Lanka, Bangladesh, Laos, and India, by which China gives reduced tariffs to 902 products of under 8-digit tariff code category made by these countries. As reciprocity, China enjoys the tariff reduction of 188 tariff items of 6-digit category of India, 214 tariff items of 6-digit category of ROK, 288 tariff items of 8-digit category of Bangladesh. On top of that, China offered special preferential treatment to 20 tariff items under 8-digit category. 4. China Signed FTA Agreement with Chile This is the first FTA between China and a North American country. In April 2004 China and Chile announced launch of a joint FTA feasibility study. The study concluded that a China Chile FTA will provide institutional guarantee for the development of their economic relations, facilitate trade and investment, and promote overall bilateral relationship on a mutually benefit basis. Consequently, the two parties started FTA 118
negotiation on Nov. 18, 2004. Chile officially recognized of China's full market economy status and the two parties had a friendly negotiation on equal basis. Several rounds of negotiation over the free trade agreement were held between Jan. to Oct. 2005, before Agreement was signed on Nov. 18, 2005. 5. China Pakistan FTA China and Pakistan signed preferential trade agreement on Nov. 3, 2003. According to the Agreement, China would give Pakistan an average of 18.5% tariff reduction on 893 items. Pakistan, reciprocally, would give China same treatment as what it offered to India under Bangkok Agreement, which is about 27.7% tariff reduction. In December 2004, the two parties jointly launched the feasibility study of the China Pakistan FTA, and kicked off FTA negotiation in April 2005. Two governments signed an Early Harvest Agreement to mutually reduce tariffs within 2 years since Jan. 1, 2006. China will reduce tariffs on 52 items under 4-digit category and Pakistan will reduce tariffs on 51 items under 4-digit category. Two parties also entered into quarantine protocol on rice, orange and live goat, and agreed on cooperation in high-tech, energy, and infrastructure development. 6. China SACU FTA Negotiation This is China's first FTA negotiation with African countries. The negotiation with SACU (South Africa, Botswana, Namibia, Lesotho, and Swaziland) started in June 2004. South Africa recognized China's full market economy status, and two parties started FTA negotiation with a goal to complete it in 2 years. This is a new initiative of China to strengthen its trade and economic relationship with African nations. 7. China GCC FTA Negotiation The economic and trade relationship between China and GCC developed very quickly. The annual growth of bilateral trade was above 40% during 1999 to 2004. GCC as an 119
2007 KPSA International Conference [The Rise of Asia and Its Future] economic entity with 6 member nations has become China's 8 th largest trade partner, 8 th largest market, and 9 th largest importer. The cooperation in the areas of construction, labor, energy, and investment has been expanding constantly. After 2 years research and consultation, two parties signed Framework Agreement on Economy, Trade, Investment and Technology in July 2004, kicking off the FTA negotiation. As the 6 members of GCC have 45% of the world oil reserve and 20% of global oil export, entering into free trade agreement with them would assure China a more reliable source of crude oil. On the other hand, GCC members imports large amount of manufactured goods and consumer products, where China is very competitive. Convinced of the mutual benefit of FTA, China and GCC held their first round of negotiation in April 2004. 8. China New Zealand FTA Negotiation Has Made Impressive Progress The healthy political relationship and economic complimentality between China and New Zealand is a good foundation for FTA. New Zealand is the first developed nation signing the bilateral WTO agreement with China and recognizing China's full market economy status. The bilateral trade reached 2.5 billion USD in 2004, twice as much as 2001. The annual trade growth is more than 12%. China's export of manufactured goods and New Zealand's export of livestock and wood products are growing rapidly. China has become New Zealand's 4 th largest trade partner and market. The two countries have great potential for education, tourism and service cooperation, which could be better realized by FTA. As a result, the two governments launched FTA negotiation in Dec. 2004. China is interested in fostering cooperation with New Zealand in trade, agriculture, forestry, quarantine, education and tourism. The two parties have concluded 3 rounds of talks, and made impressive progress. 9. China Australia FTA Negotiation Launched China and Australia signed China Australia Trade and Economic Framework Agreement to explore the feasibility of FTA in Oct. 2003. The research concluded that the two countries could supplement each other in trade, and FTA will benefit both parties. 120
Australia is China's 9 th largest trade partner whereas China is Australia's 3 rd largest trade partner, 2 nd largest market and importer. An FTA will not only expand bilateral trade, but also promote mutual investment and other cooperation, especially for Chinese companies to participate in the iron ore development in Australia, and for Australia to export more agriculture products and livestock to China. In April 2005, Australia recognized China's full market economy status, and the two parties officially started the FTA negotiation. 10. China is Interested in Negotiating FTA with Other Countries Southeast Asia is the top priority for China's regional economic cooperation program, though the economic integration for the region is faced with tremendous challenges. In 2001 to 2003, the Chinese government designated relevant institutions to work with the teams from ROK and Japan to look at the feasibility of establishing FTA between the three nations. Since 2004, China and ROK have been exploring the possibility of FTA, and conducted comprehensive research of FTA's impact on the two countries. Because it is unlikely to set up a three-nation FTA, China is keenly seeking an FTA agreement with ROK. China and India are highly complimentary in trade. India is more competitive in service industry and computer software, and has mineral resources, pharmaceutical products and steel that China needs. China's advantages are in computer hardware and infrastructure development, and can supply telecom equipment, chemical products, electronics and machinery to India. The two parties have great potential in service trade, investment and other areas. In April 2005, China and India launched the study of regional trade arrangement, agreed on the objective of establishing an FTA. The two countries are promoting trade cooperation to accomplish the target of 20 billion USD and 30 billion USD trade by 2008 and 2010. In May 2005, China and Iceland had a discussion on FTA possibility and cooperation in geo-thermo, fishery, healthcare, aviation, transportation, education and tourism. 121
2007 KPSA International Conference [The Rise of Asia and Its Future] Iceland recognized China's full market economy status. The two parties decided to engage in FTA research and conclude FTA agreement by 2007. Iceland is the first West European country accepting China's full market economy status and discussing FTA with China. Currently, China is also exploring the FTA possibility with Mercosur Peru and Norway. II. Major Characteristics of China's Regional Economic Cooperation 1. Asia, or Asia Pacific is the key area for regional economic cooperation Of all FTAs signed and in negotiation, only SACU, Iceland, Chili and South Africa are not in this region. This demonstrates that in its process of global economic integration, Asia and Pacific region, with ¾ of China's total import and export, has become the most important economic arena for China. 2. More FTA with neighbors than other countries in the region China has 15 immediate neighboring countries. Except DPRK, Mongolia, Afghanistan, Bhutan, and Sikkim all have signed or are negotiating FTA with China. China ASEAN FTA covers Viet Nam, Burma, and Laos. China India, China Pakistan FTAs are in negotiation. Central Asia countries and Russia are under the framework of Shanghai Cooperation Organization, and may move a step further to establish into FTAs with China. Among its 14 non-immediate neighbors, China discussed FTA with Japan and ROK, and is negotiating FTA with the two countries separately. In Southeast Asia, Philippine, Thailand, Malaysia, Singapore, Brunei, Cambodia, and Indonesia are under the umbrella of China ASEAN FTA, Sri Lanka and Bangladesh are parts of Bangkok Agreement. 122
3. More FTA with newly industrialized countries and developing countries than with developed countries Of all economies having, or seeking FTA arrangements with China, most are newly industrialized countries or developing countries, including 10 ASEAN members, Chili, Pakistan, and others. China is also negotiating FTA with many other developing countries including 6 members of GCC, 5 members of SACU; and doing FTA research with ROK and Mercosur. New Zealand, Australia, Iceland, HKSAR and Macau SAR are the only developed economies having or negotiating FTA arrangements with China's mainland. III. FTA Related Issues Faced by China 1. A late comer China didn't start FTA negotiation until 2001, when China became a member of WTO. Comparing with many other countries, it is a late comer in this area as well as in other aspects of economic globalization. When China begun to negotiate FTA with other economies, there were already more than 200 FTAs globally, so it need to catch up with the rest of the world quickly. 2. Small in number The FTA signed and being negotiated by China covers more than 20 economies, but many of them are under the umbrella of other FTA frameworks (10 ASEAN nations for example.) The number of bilateral FTA agreements is very small. There are only 5 FTA agreements are being implemented: China ASEAN FTA, Bangkok Agreement, China Chile FTA, and CEPAs respectively between China's Mainland and Hong Kong and Macau. All other FTA initiatives are being discussed. China is still on the learning curve of FTA arrangement. 123
2007 KPSA International Conference [The Rise of Asia and Its Future] 3. The potentials of FTA yet to be fully utilized According to the general theories of FTA, if a developing country establishes FTA with a developed economy, the resources will be optimized and the industry structure of the developing countries will be upgraded due to trade transfer. However, China has not implemented FTA with any developed country yet. Based on its experience with ASEAN and CEPA, there are some progresses in the investment and trade areas, but the impact on China's overall economy is very limited, and further efforts need to be made in trade and investment facilitation. 4. An overall strategy and plan need to be formulated FTA partner composition and regional priority is the basis of a country's FTA strategy. So far China doesn't declare such a long terms strategy and priority. It needs to do more research on the global FTA trend, and better understand the trend and impact of future regional economic integration process. 5. China needs to improve the FTA research and negotiation framework. Regional trade agreement covers a wide range of topics, and is becoming ever sophisticated. In addition to commodity trade, service, investment, migrant labor, labor protection and environment also become parts of the FTA agreements. The research, negotiation and signing of FTA is a complicated subject requires the close cooperation of government officials, researchers, and industry specialists. There are some best practices in US, ROK and Chile. China needs to set up such systems to safeguard its national interest. 124
IV. China has a wide choice for regional economic integration. China has a vast territory and many neighboring countries. It should take a multi-party, multi-approach FTA strategy different from NAFTA and EU. 1. Asia Asia is falling behind other regions in terms of economic integration. China has initiated regional economic and trade cooperation with different parties. For example, while pushing forward its cooperation with ASEAN, which has 10 member countries, China is seeking similar cooperation with neighbors like GCC, Central Asia, Russia, Mongolia, DPRK, ROK, and Japan. The establishment of FTAs between China's mainland and Hong SAR, Macau SAR and China's Taiwan is also high on its agenda, because participating in future FTAs as a single party, instead of four different economies, will better serve China's national interest. China needs to take different approaches when cooperating with its neighbors whose development level, economic structure, resources are very different. China must be flexible in the process of seeking regional economic integration. Sound economic and political relationship between China and ROK in recent years has provided a good foundation for FTA, and the two parties should reach agreement as soon as possible so as to further promote bilateral trade ties, and economic cooperation in the East Asia. South Asia has witness rapid growth in the past couple of years and is strategically more important. China and India, while improving their overall relationships, are seeking the possibility of signing FTA agreement. Due to the complexity of East Asia regional economic cooperation, there will be a long way to go before establishing the EAFTA. There are two possible ways to get there. The first one is to establish and later merge China ROK, China Japan and Japan ROK FTAs into a Northeast Asia FTA, and then combine with ASEAN to form an EAFTA. 125
2007 KPSA International Conference [The Rise of Asia and Its Future] The second approach is for China, ROK and Japan independently establish FTAs with ASEAN, and then merge the three into EAFTA. China-ASEAN FTA negotiation has made a good start, and will play an active role in the East Asia economic integration. 2. Other regions China is exploring and discussing FTA with countries in American, Oceania and African countries, especially with the countries of strategic importance like Egypt and Nigeria in Africa, Mexico in North America and Iran in Mid-East. Mexican is not only an important trade partner with China, but is the only country has FTA agreements with both US, EU and Japan. So far it is not negotiating FTA with China, so it is not benefiting as much from China's growth. China and Mexico should go a step further on top of their strategic partnership to establish an FTA, which will reduce trade conflicts and improve bilateral trade relations. Brazil is the largest economy in South America and China's most important partner in the region. It is one of the most influential developing countries in the world. As an influential member, it is very critical in China's cooperation with Mercosur. China's development requires stable suppliers of strategic resources, like Argentina for its crude oil, Chile for its cooper, and Brazil for its iron ore, rather than relying solely on US. China needs to open a new route in the South Pacific for energy and industry products.. Conclusion China is one of the largest developing countries with a short FTA history (started in 2001) so it is faced with many challenges. In a narrow sense, China only signed two comprehensive FTA agreements so far, i.e. with ASEAN and Chili, and many others are still in negotiation. China's influence in regional economic cooperation is limited, and has a big potential. Its FTA strategy is to focus on Asia and Pacific and expand to other 126
regions. China's active participation in regional economic integration will contribute to the development of Asia and Pacific, and the world at large. 127