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IN TOP GEAR:
VIETNAM’S MARKET ECONOMY DRIVE
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January - February 2010
CONTENT • ASEAN ENVIRONMENT
• SPECIAL FEATURE • ASEAN INVESTMENT
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• EU PERSPECTIVE • BOOK REVIEW
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The High Cost of Market Economy Label It has fascinated Vietnam watchers, particularly those from the West, to discover the metamorphosis of the country transforming itself from a closed political system into an aspiring market economy.

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OPEN FOR BUSINESS
The implications of Asean-China FTA

 

After almost ten years in the making, Asean and China launched their free trade area on January 1, 2010. The sheer size of this FTA behemoth - the world’s largest by population and the third largest regional agreement by economic value (after the EU and North American Free Trade Area, or Nafta) belies the highly disparate responses it has attracted.

In China, the press talks about the ‘glad tidings’ the deal is bringing – easier access to resource-rich Southeast Asia, which doubles as a closer, and most likely, an alternative market for manufactured goods to the United States and Europe. Asean officials, on the other hand, call a ‘strong signal’ that it is open for business. Certainly, it keeps the dream of an Asia-wide FTA where Asean plays a hub very much alive and well.

China has just overtaken the United States to become Asean’s third largest trading partner, and will leap Japan and the EU to become ‘number one’ within the first few years of the FTA, according to Sundram Pushpanathan, Deputy Secretary-General for the Asean Economic Community.

Sectors likely to reap the most benefits from the FTA included services, construction and infrastructure, and manufacturing. Other than product and service innovations, this could be a new business opportunity for the establishment of a regionally-based innovative supply chain for market reach and growth.

Not everyone is happy, though.

As the FTA was about to launch, industry groups in Indonesia, Southeast Asia's biggest economy, and the Philippines are frantically pressing their governments to keep tariffs on vulnerable sectors until 2012.

"These sectors aren't ready to compete with imported Chinese products. If the government implements free trade now, these industries are surely going to die," Indonesian lawmaker Airlangga Hartarto said.

He cited 12 sectors including textiles, petrochemicals, footwear, electronics, steel, auto parts, food and drinks, engineering services and furniture.

"For example, a local sack for sugar, rice and fertilizer costs about 1,600 rupiah ($1.70 ) each. A Chinese sack costs about 800 rupiah each," he said.

Indonesian Footwear Association chairman Eddy Widjanarko said Chinese firms would take their share of the Indonesian market to 60 percent from 40 percent, costing some 40,000 local jobs.

Indonesian Furniture Producers Association executive director Tanangga Karim blamed the government for failing to level the playing field, and called for non-tariff protection in the form of strict safety and quality controls.

"We have to admit that we aren't ready to compete now with imported Chinese products," he said. Pushpanathan conceded that some local businesses would struggle.

"In the short term there will be some adjustments that some countries have to make. Some local companies will lose their domestic market share but ultimately consumers will benefit," he said.

But officials said there was more to the deal than satisfying China’s thirst for Asian raw materials like palm oil, timber and rubber, and opening up regional markets for its manufactured products, steel and textiles.

“China and Asean countries are all export-oriented economies. A large proportion of our products target the US and EU markets... Generally neither side took the other's market as its most important target market," said Zhang Kening, the director-general of the department of international trade and economic affairs in Beijing.

"But with the establishment of the China-Asean free trade zone, we think there is potential to improve or adjust this situation... Both sides have many goods that complement each other's needs."

However, some regional analysts remain concerned that ACFTA may turn the region into a “backyard for Chinese raw material imports and manufactured exports, and hence a natural candidate for a Chinese sphere of influence”. 

Industries such as textiles, toy, and motorcycle manufactures will be negatively affected in the short term, although long-term benefits would follow.  

Meanwhile, the United States is scrambling to drum up support from a skeptical public for a regional trade deal that can boost exports and create jobs as its share of trade dwindle in the Asia Pacific, including Asean.

President Barack Obama wants the Trans-Pacific Partnership (TPP) linking the United States with an initial group of seven nations -- Australia, Brunei, Chile, New Zealand, Peru, Singapore and Vietnam -- to be the engine for a "high-standard, broad-based" regional trade agreement.

However, Demetrios Marantis, Obama’s deputy trade representative, said negotiations for a TPP agreement with rapidly growing Asia-Pacific economies could be "complex and challenging but this watershed moment in trade policy demands our focus and ambition.

“If we are to set an enduring anchor to the world's future drivers of economic growth, we must raise the stakes and push the envelope.”

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