CHINA-ASEAN On the Brink of Trade Relationship Harmony
The Indonesian government showed its intention to implement anti-dumping duties at the end of June following a surge in product inflow in the last three years and the closure of several domestic textile industries. Imported products such as textiles, ceramics, electronic devices, and cosmetics were closely observed and evaluated to determine their impact on domestic industries. The country's Trade Minister, Zulkifli Hasan, explained the decision as follows: "The US can impose a 200% tariff on imported ceramics or clothes; we can do the same to ensure the survival and growth of MSMEs."
Media immediately associated this comment with Indonesia's largest trading partner, China, and Indonesian producers were negatively impacted by flooded markets due to US tariffs on Chinese products. Pessimistic media even reported "Indonesia will implement 200% import duties on various Chinese products", which raised concerns about Indo-China trade relations. In response, various Indonesian ministers tried to extinguish the fire by explaining that they were simply re-enacting the Trade Minister Regulations which were an amendment to the existing one launched in 2023. In any case, this brought the concerns regarding China's trade relationship with ASEAN countries to the forefront.
Concerns When Bilateral Trade Is Oriented In One Direction
The Chinese economy has had a close economic partnership with the ASEAN member states since the early 2010's, when the China-ASEAN Free Trade Area (CAFTA) came into effect. After the US-China trade dispute, "Belt and Road Initiatives" and other favorable factors to ASEAN such as "CHINA PLUS ONE" strategy increased China-ASEAN bilateral trade volume by more than doubled within 10 years. A heavy tariff imposed on Chinese products also encouraged Chinese investors to invest in ASEAN in order to export their products to US and European markets. China's BYD opened a factory for electric vehicles in Thailand in July 2024, symbolizing this kind of strategic move.
As of 2020, ASEAN has become China's largest trading partner. However, the growth rate for ASEAN-China exports couldn't keep up with the growth rate for Chinese products imported into ASEAN, which caused the deficit grew to $140 billion by 2022 (up more than $100 billion from 2012). ASEAN's trade imbalance accounted for 4% of its GDP. The total trading volume increased after RCEP came into force, but the deficit gap remained.
Every Country Has Its Own Concerns
There are 10 member states of ASEAN, and some of them are aggressively boosting their emerging industries in order to become important manufacturing centers for the region or globally. Agrarian economies such as Vietnam, Malaysia, Thailand, and Indonesia have transformed into industrial economies. Initially, they welcomed Chinese investors, bringing in investment and market opportunities. But as the ball grew, some countries expressed concern when they found that they were heavily reliant on a single source of supply, investment, and market.
In his latest act, the Indonesian minister reflected this concern. In addition to creating jobs and potential, the big investments and new factories could devastate the fragile MSMEs in the country. However, Indonesia still threatens to launch import duties despite signing RCEP and entering into force for tariff adjustment.
The government of Indonesia was not alone: Thailand announced months ago that Chinese products routed through Thailand's free trade zones would be subject to 7% VAT. Originally, these products were exempt from taxes, but authorities found that they flooded the country with cheap imports, harming small businesses. Local manufacturers reduced their production by 50% due to cheap imports, according to the Thai Industries Federation.
In addition to being the world's sixth-largest exporter of semi-conductors and related products, Malaysia also faces a number of challenges. Malaysia is being seriously considered by Chinese investors and manufacturers to relocate industries such as semiconductors, batteries, and medical devices. Malaysian officials, however, are having difficulty engaging Chinese investors and manufacturers because these potential investors want guarantees that no tariffs will be imposed on Malaysian-made products, especially for exporting to the US. Despite the fact that there are no tariffs imposed by the US on electronic products assembled in Malaysia, the Malaysian authorities were not able to make any promise or prediction regarding future changes. After the China-US trade dispute, US authorities will certainly keep an eye on production lines diverted to other countries; if a line is crossed, the US authorities will take necessary actions. Malaysia has had bad experiences with tariffs on solar products imposed by the US in the past. Due to this, they were reluctant to take the risk: "If their goal is to manufacture products in Malaysia for global markets, that's a good thing. However, if the goal is to avoid tariffs, it won't help, and we can't do anything." said the president of the Malaysian Semiconductor Industry Association.
The volume of trade between China and Vietnam is the largest within ASEAN, making Vietnamese-Chinese relations the closest in the region. The advantages of Vietnam's proximity to China (the land border between the two countries makes land transportation possible), its reasonably developed industry infrastructure, and its export potential through free-trade agreements with many big economies, have made it always the first choice for Chinese companies looking for alternatives to their manufacturing bases. Most companies targeting the US market reduced their production and export activities in China and ramped up their activities and investments in Vietnam.
The US imported $114 billion of goods from Vietnam in 2023, almost double the figures in 2018, when the US-China trade dispute began. Comparatively, China exported $100 billion less to the US during the same period. According to local supply chain experts, Vietnam captured more than 60% of China's lost exports to the US, particularly in clothing and electronics. A further escalation took place in Q1 2024 when US imports from Vietnam reached $ 29 billion and China-Vietnam exports reached $30.5 billion. It was argued that the coincident figures may be seen as a way for Chinese firms to circumvent the additional tariffs imposed on their goods by using Vietnam. Because Vietnam was actively seeking "market economy" treatment from the US, the rapid growth of trade imbalance was a double-edged sword for the Vietnamese government. As a result, Vietnam will have to choose a side when a situation arises.
ASEAN in the Crossroad
As a result of the huge trade imbalance with ASEAN territories, China-ASEAN trade relations are now becoming tense. China's production lines shifting to ASEAN with large quantities of products originating in China have prompted the US and Europe to tighten their tolerance, forcing ASEAN member states to reevaluate their strategies with China. Due to their different industries and economic demographics, individual members might not share a common strategy for tackling the economic giant in the long run. Additionally, China must also review its attitude toward ASEAN: just springboard its products to other countries via ASEAN or invest seriously and expand in these countries for long-term growth.
Dialogue Channels
In order to align the interests and set up dialogue mechanism between China and ASEAN countries, the China-ASEAN Business Council (CABC) was established when China-ASEAN Free Trade Area (CAFTA) came into effect. Following RCEP agreement was signed in November 2020, an RCEP Industry Cooperation Committee (RICC) was set up in Beijing which was recommended by CABC. RICC is a non-governmental, non-profit, voluntary coalition of business communities composed of representatives of the business communities of 15 RCEP member states. The purposes of these two organizations are to strengthen the cooperation of the business communities and enhance understanding among the membership countries. It is unsure whether these organizations can help in smoothing the current situation. But it is always good to have the communication channels to prevent the situation getting worse.
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