Upgrading the ASEAN–China Free Trade Agreement

China's Foreign Minister Wang Yi attends the ASEAN–China ministerial meeting in Bangkok, Thailand, 31 July 2019 (Photo: Reuters/Athit Perawongmetha).

Authors: Jayant Menon and Anna Cassandra Melendez, ADB

In 2015, ASEAN and China signed an upgraded protocol to improve the original Framework Agreement for the ASEAN–China Free Trade Area (ACFTA). The upgraded protocol entered into force in July 2016 and implementation will start from August 2019.

Since ACFTA was launched, China’s share of ASEAN total merchandise trade increased from 8 per cent in 2004 to 21 per cent in 2018, making it ASEAN’s biggest trading partner with trade amounting to US$591.1 billion. China also rose to become ASEAN’s third largest source of FDI in 2017, with flows amounting to US$11.3 billion.

But how will the upgrading of the agreement likely affect these flows? The key changes relate to: simplifying Rules of Origin (ROOs) and Certificate of Origin procedures; improving services commitments from China covering the engineering, construction, sporting, securities and tourism sectors; strengthening provisions for investment promotion and facilitation; and building e-commerce capabilities — especially for micro, small and medium-sized enterprises.

The upgraded protocol does not do much to address non-tariff barriers despite evidence that they continue to grow and suppress trade. Even for tariffs, studies point to low utilisation rates for ACFTA tariff concessions. If low utilisation rates are mainly due to difficulties in complying with ROOs then the proposed simplification could see a significant increase in trade flows. But if it is mainly because margins of preference (or the difference between Most-Favoured-Nation and ACFTA preferential tariffs) are low, then the likely impacts are more complex.

Margins of preference are likely to be low — or even zero — for trade in parts and components and other intermediate goods because of various tariff exemption schemes. For instance, for trade in electronic parts and components that dominate supply chains in Southeast and East Asia, the WTO’s …continue reading