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November 30, 2000

From Our Correspondent: Hirohito and the War
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DECEMBER 24, 1999 VOL. 25 NO. 51

The China Challenge
What the WTO entry means for Southeast Asia
By SARASIN VIRAPHOL


photo
Sarasin Viraphol
is a senior executive with the Bangkok-based company Charoen Pokphand and a former Thai diplomat
photo: Edwin Tuyay for Asiaweek

Does China's impending entry into the World Trade Organization present opportunity or problem for Southeast Asia? The WTO accession agreement with the United States signified China's willingness to further open its market and interact with other economies. Its notable concessions include tariff reductions across the board to 17% and the elimination of export subsidies. Increased foreign participation will be allowed in telecommunications, finance, retail, the auto industry, professional services, entertainment and agriculture. It's an important step in affirming the potential of China as an economic force.

But how will the agreement impact Southeast Asian trade with, and investment in, China? Perhaps more worrisome, will it take trade and investment away from countries in Southeast Asia? Singapore Prime Minister Goh Chok Tong alluded to the latter concern when he described China as becoming "a very attractive market for investment" following the WTO deal.

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The Crisis years apart, China and Southeast Asia have enjoyed a steady expansion in trade and investment. China has a growing demand for raw materials, grains and processed foods and industrial items from Southeast Asia. The flow of Chinese manufactured products and services (primarily in construction and public works) in the other direction has been increasing. And China's dramatic turnaround in agricultural output is enhancing its prospects as an important exporter of grains and produce to Southeast Asia in the foreseeable future.

As China becomes attuned to the international marketplace, Southeast Asians can hope to expand trade and investment there, but they must expect increased competition from other countries. Thailand, which has strong trade and investment ties in agriculture with China, welcomes its decision to slash tariffs, remove subsidies and quotas, and do away with the requirement for a middleman in transactions. Thai produce exports (rice, fruits, prawns), worth $800 million a year, can increase substantially. Liberalization of China's service industry will boost flourishing tourism between the two, now at 1.2 million travelers a year.

The $4 billion Thai agribusiness investment in China will be able to take advantage of lower import costs for commodities like soybeans and soymeal. Thus Thai producers of feedstock, poultry and pig meats, edible oils and other protein products stand to gain from the pact. But they may also face tougher competition from new Chinese as well as foreign entrants.

Countries such as Vietnam, Indonesia and Thailand are worried about intensifying Chinese competition for U.S. and the E.U. textile quotas. But they should also look closely at the greater opportunity for their textile products in the huge Chinese market. Singapore no doubt will be studying services and telecom. It is set to become more aggressive in logistics, the Internet and financial services, expanding the foothold it has established already in China in property development and services. In essence, Southeast Asian exporters will need to enhance their manufactured goods in price and quality, in anticipation of greater competition from abroad and, increasingly, from restructuring Chinese enterprises.

The expansion of the China market as a result of the agreement ought to be incentive enough for Southeast Asian countries to meet this challenge with imagination and effort. But they must also be prepared to accept increased trade and investment by Chinese companies and enterprises within their own borders. For Southeast Asian businessmen who establish manufacturing bases in China for export purposes, its eventual admission to the WTO translates into greater opportunity for their exports to Western countries, which are obligated to provide reciprocal provisions for Chinese imports.

With foreign direct investment (FDI) in China expected to surge, there is concern about an adverse impact on investment returning to Southeast Asia as its economies recover from the Crisis. However, investment flows to China and the Southeast are not a zero sum game. Indeed, it could be argued that the liberalization of China's economy will enhance the attractiveness of the region to FDI. Still, this concern does pose urgent questions about Southeast Asia's capabilities to compete for FDI. Each country should without delay broaden and deepen measures to minimize or eliminate barriers to foreign trade and investment. Collectively, Southeast Asia must step up development of the region for international trade and investment. Plans for the ASEAN Free Trade Area (accelerated at the recent Manila summit) should be implemented on schedule.

The WTO meetings in Seattle underlined the hazardous course of the Millennium Round of trade negotiations, while potential problems await China's accession, particularly in the U.S. extending it Normal Trading Relations status. These are reminders that agreements are often expressions of commitment which require earnest action by all parties. China can probably count on Southeast Asian support. Following its contribution to containing the Asian financial crisis, these countries invariably welcome the opportunity to foster, over time, increased business with the region's burgeoning giant.

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