Amid much fanfare, the Association of South-east Asian Nations (ASEAN) and China officially launched a free-trade area on January 1, 2010.

The ASEAN-China Free Trade Area (ACFTA) is the world’s largest free-trade area by population, covering a combined market of 1.9 billion consumers with total trade volume hitting $4500bn. In terms of GDP, ACFTA is the third largest in the world, trailing only the EU and the North American Free Trade Agreement.

The major benefits of ACFTA lie in tariff reductions, such as:

Tariff reductions under ACFTA cover about 7000 products, spanning multiple sectors. The trade-promoting effects of tariff cuts are expected to be especially pronounced in the agriculture sector. This is illustrated by the effects of a bilateral trade deal signed between China and Thailand before ACFTA came into being. According to a report issued by the ASEAN secretariat, the volume of trade in fruits between China and Thailand surged after cuts in duties came into force.

The import of apples, pears and grapes from China to Thailand grew by 117%, 346% and 4300%, respectively. Thai producers benefited as well as their Chinese counterparts; they exported nearly 10 times more longan, 19 times more mangosteen and 200 times more durian to China than before the deal.

Agricultural exports

Following the implementation of ACFTA, long lines of carts carrying agricultural produce awaiting distribution are a daily feature on both sides of the China-Vietnam border.

Bolstered by tariff reductions and the Chinese new year holidays, the import of fruits from ASEAN via Guangxi province totalled 60,000 tonnes in January 2010, a 51% increase compared to the same month last year, customs authorities report. Beijing is the top domestic destination in China for imported fruits. Demand for fruits from ASEAN jumped five times this year in China’s capital city.

Guangxi province has been China’s major beneficiary of and participant in ACFTA. Located in the south-western part the country, Guangxi enjoys two geographical advantages: it lies adjacent to Vietnam and has a coastline facing south-east Asia. This means that Guangxi can effectively build land and port linkages with ASEAN countries, greatly facilitating trade. The economic effects of linkages between Guangxi and south-east Asia are apparent. Between 2004 and 2008, trade between Guangxi and ASEAN tripled. Contractual investments of Guangxi in ASEAN increased 26 times, while those of ASEAN in Guangxi quadrupled during this period.

The Guangxi provincial government has been promoting its bonded logistics system. Specialised logistics zones have been established, including the Qinzhou Port Zone, the largest in the country, and the Beihai Export Processing Zone. The Beihai zone, the closest exporting zone in China to ASEAN, offers tax rebates and streamlined administrative procedures. Notable advances are also being made in land transport. Nanning, the capital city of Guangxi, is connected by highway to Vietnam. In January 2009, a daily passenger train service from Nanning to Vietnam’s capital, Hanoi, started. Nanning is the second city in China after Beijing to offer a train service to Vietnam.

Three implications for investors

The establishment of ACFTA holds important implications for foreign investors and manufacturers. First, ACFTA presents a combined market of 1.9 billion consumers, almost four times that of the EU. Although the average GDP per capita in China and the ASEAN region is lower than in the European and American blocs, there is plenty of untapped potential for growth and spending.

Second, investors will benefit by leveraging on China and ASEAN as an integrated production base. While many ASEAN countries are key exporters of raw materials and semi-finished products, China is the world’s top assembly location.

“To optimise ACFTA to its full advantage, [multinational corporations] need to re-examine their existing operations in ASEAN-China from this integrated perspective,” says Cindy Luar, manager at PricewaterhouseCoopers Worldtrade Management Services. “This is done by identifying the supply chain which brings about the greatest advantage via the elimination of customs duties under the free-trade agreement.”

The third and final implication is that investors will need to develop new strategies for improving logistics arrangements. As Hwee Chong Lok, regional customs and regulatory affairs manager at TNT Express WorldWide, explains, ACFTA will not significantly improve logistics performance standards in the case of crossborder trade. However, companies can – and should – make full use of bonded logistics centres such as the ones created in Guangxi, which remove border controls and thus slash transport time.

As ASEAN secretary-general Surin Pitsuwan summed up in an interview with the China Daily newspaper: “ACFTA will serve as a catalyst for the development of the single market and production base.” Hence, whether in product development, marketing or logistics planning, investors cannot afford to miss the ASEAN-China bloc on their business radar screens.

• China is the third largest trading partner of ASEAN.
• ASEAN is China’s fourth largest trading partner, trailing only the EU, US and Japan.
• Among the 10 member nations of ASEAN, Singapore boasts the largest trade volume with China.
• ASEAN exports to China grew from $41.3bn to $85.6bn from 2004 to 2008.
• ASEAN imports from China grew from $47.7bn to $107.1bn in the same period.