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

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.

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.

List of ASEAN Free Trade Agreements SIGNING DATE EFFECTIVE ASEAN-Australia-New Zealand Free Trade Area (AANZFTA) 27 February 2009 Preparations are currently being undertaken for the ratification and the subsequent implementation of the Agreement by the parties ASEAN-China Free Trade Area (ACFTA) November 2002 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. ASEAN-India Trade in Goods (TIG) Agreement 13 August 2009 The ASEAN-India FTA will see tariff liberalisation of over 90% of products traded between the two dynamic regions. Tariffs on over 4,000 product lines will be eliminated by 2016, at the earliest. The ASEAN-India TIG Agreement will enter into force on 1 January 2010 once India and at least one ASEAN Member State notify completion of their internal ratification process. ASEAN-Japan Comprehensive Economic Partnership (AJCEP) April 2008 The Agreement entered into force on 1 December 2008. As of July 2009, Brunei Darussalam, Lao PDR, Malaysia, Myanmar, Singapore, Thailand, Viet Nam and Japan have ratified the Agreement.  ASEAN-ROK Framework Agreement on Comprehensive Economic Cooperation 13 Dec. 2005 The Framework Agreement provides for an ASEAN-ROK Free Trade Area by the year 2008 (with flexibility to 2010) for ROK, 2010 (with flexibility to 2012) for Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore and Thailand, 2016 for Viet Nam and 2018 for Cambodia, Lao PDR, and Myanmar.

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.

Economic Growth: ASEAN Behind China and India Source: IMF

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

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

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

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

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

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

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

5 Top ASEAN’s Import ASEAN from China, 2008 Source: ASEAN Economic Commodity Chartbook, 2009

Share of total export (%) Main ASEAN Countries’ Exports to India: India Dependent for Raw Materials (2008) Country Commodity Share of total export (%) Brunei Darussalam Crude petroleum oils 99.80% Cambodia Palm oil & its fraction 88.80% Myanmar Dried vegetables, shelled 61.70% Indonesia 57.40% Malaysia 39.70% Singapore Petroleum oils, not crude 22.20% Viet Nam Coal; briquettes, ovoid & similar solid fuels manufactured from coal 21.68% Philippines Parts & access of motor vehicles 18.90% Thailand 6.40% Source: ASEAN Secretariat Office 15

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

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

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

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.

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.

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. 21

Early Harvest Product Description 01 Live Animal 02 HS Description 01 Live Animal 02 Meat and edible meat offal 03 Fish, crustacean, molusc, other invrt. 04 Dairy products 05 Products Animal Origin, nes. 06 Live tree and other plant 07 Edible vegetables and certain roots 08 Edible fruits and nuts Source: ASEANSEC

Tariff reduction on ACFTA X= Applied MFN Tariff Rate ACFTA Preferential Tariff Rate (Not later than 1 January 05) 2005* 2007 2009 2010 X > 20% 20 12 5 15% < X < 20% 15 8 10% < X < 15% 10 5% < X < 10% X < 5% Standstill Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Co-operation ACFTA starting on January 1, 2005

Average Tariff Applied (2007) * #1 Industry Vietnam India China Thailand Malaysia Indonesia Agriculture and hunting 20.1% 28.2% 15.9% 21.0% 5.0% 4.8% Chemicals and chemical products 4.4% 7.9% 11.2% 3.4% 2.1% 4.3% Coke, petroleum products and nuclear fuel 5.8% 8.2% 7.1% 3.0% 0.1% 3.2% Electrical and electronic equipment 14.0% 6.0% 14.6% Food, beverages and tobacco 36.5% 34.1% 21.5% 23.1% 15.2% 10.2% Forestry and Fishing (PRODUCTS) 20.5% 24.8% 12.3% 10.8% 1.1% 4.7% Machinery and equipment 7.5% 11.5% 6.2% 2.7% Metal and metal products 9.9% 7.2% 9.3% 6.8% 12.2% 7.0% Mining and quarrying 4.2% 4.9% 4.6% 1.2% 0.7% 3.7% Mixed goods (trade data) 5.1% 9.1% 5.9% 0.6% 6.1% *Simple average across all partners countries Source: ITC

Average Tariff Applied (2007) * #2 Industry Vietnam India China Thailand Malaysia Indonesia Motor vehicles and other transport equipment 25.4% 18.3% 14.6% 18.8% 10.1% 10.2% Non-metallic mineral products 9.2% 15.9% 7.3% 7.5% Other manufacturing 28.4% 9.6% 20.4% 15.6% 7.8% 10.5% Petroleum 5.4% 6.1% 2.3% 0.3% 2.0% 3.7% Precision instruments 11.5% 7.9% 11.9% 5.1% 0.7% 4.6% Publishing, printing and reproduction of recorded media 22.0% 7.4% 7.2% 8.7% 8.5% 4.4% Recycling 0.5% 5.8% 2.9% 0.1% 1.6% Rubber and plastic products 19.4% 14.2% 10.4% 20.5% 11.6% Textiles, clothing and leather 41.6% 28.3% 19.2% 13.3% Wood and wood products 18.1% 9.4% 6.2% 11.4% 4.8% Average 16.3% 12.5% 11.7% 8.8% 6.8% *Simple average across all partners countries Source: ITC

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

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.

Relationship of ASEAN-China and ASEAN-India 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. 28

Indonesian Economic Relationship with China and India

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. 30

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

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

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

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

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

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

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

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

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

Top 10 Exports Indonesia to China Dominated by Natural Resources (2008) Source: CBS 40

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

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

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

China’s and India’s FDI Insignificant in Indonesia Source: Indonesia Investment Coordinating Board 44

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. 45

China Investment to Indonesia It Will Increase, Soon

China Loan to Indonesia Increased During 2008 Crisis Indonesia government has received standby loan of USD 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. 47

China-Indonesia Trade and Investment Need Improvement for Mutual Benefit 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. 48

……Before ACFTA Low Competitiveness of Indonesian Products Growth of Textile and Leather Product Source: CBS 49 49 49 49

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

…..But, Increasing Imports of Tin Based Products Source: CBS 51

How to Increase Benefit from FTA Prior to FTA, China investment in Indonesia is only in natural resources sectors. Soft loans to Indonesia are mostly aimed at infrastructure development and natural resources. Considering the privatization trend in Indonesia, China will have bigger opportunity to own shares of strategic Indonesian SOE, like electricity, power plant, railway, steel, etc. Chinese investment pattern is most likely to be focused on natural resources exploitation and assembling plant for components/parts imported from China, so most of the value added goes to China. If this condition continues to occur, Indonesian and other ASEAN members’ natural resources will be drained. ASEAN members will fail to create competitive and productive industrial countries. Evaluating agreements related with FTA and postponement of FTA implementation. Immediately prepared industrial policy map road in order to increase national productivity and competitiveness 52