International Business Environments

China Focus

Political, Economic and Technology Focus

Dr. Thomas Lairson

China and Its Region

Vincent Wang, “China-ASEAN FTA” see Tables 7 and 8

Summary

  • Relations between China and SEA are complex, a mixture of conflict and actual and potential mutual gain
  • China-SEA is a test of China as a rising power
  • SEA is weakly organized politically
  • Greater Chinese leadership must be seen as non-threatening
  • ASEAN as a substantial economic region
  • Rising levels of economic interdependence intra-ASEAN/China-ASEAN
  • Changing structures of economic interdependence
  • Potential gains from greater regional economic and political organization
  • Chinese FDI in SEA as response to rising costs
  • US role in SEA complicates outcomes

Basics

  • China sits in the most economically dynamic region in the world
  • For much of the past 30 years, China has been a follower state behind Asian Tigers
  • Following the Asian Financial Crisis, China has emerged as the regional leader
  • Negotiations in ASEAN and China-ASEAN affected by limited and poor traditions of multilateralism
  • Balancing and Bandwagoning

Political issues

  • Suspicion, fear and opportunity from other Asian states
  • Overseas Chinese in SEA; Economic competition and cooperative gains;
  • Recent increase in regional awareness
  • Region as the first step in the globalization of China
  • China’s relation to its region will be a test of how China exercises power and influence
  • Taiwan, Japan, Vietnam, India

Economic Issues

  • Explosion of regional trade via GPNs centered on China
  • China’s FDI inflows from Hong Kong, Taiwan and Singapore
  • Regional division of labor
  • Venture Capital regional system?
  • Economic cooperation via enhancing free trade in the region
  • Politically constructed Asian region creates many opportunities for Chinese business
  • Economic Dynamics – Shifting Comparative Advantage
  • How economic outcomes are politically constructed

Webs of Interdependence expressed in more extensive regional forums

Current level of regional cooperation begins with AFC 1997-98

ASEAN + 3 (China, Japan, Korea) Chaing Mau Initiative designed to pool resources to avoid the IMF in a currency crisis (only about $70 in the pool)

Asian nations are involved in a thicket of actual and proposed free trade agreements (asiafreetrd.pdf, 19-24)

As of 2005, for Asian countries (excluding China) there were 14 bilateral and regional agreements in place and 7 more were completed but not implemented

As of 2005, China had FTAs and proposed another 17. Most of these agreements focus on agreements with nations that provide raw materials to China.

China’s FTA agreements generally focus only on tariff levels and leave out dispute resolution mechanisms, IP protection, environmental and labor issues.

November 2006 APEC meeting in Hanoi proposal for Free Trade Area of Asia Pacific (FTAAP)

Main issue for any Asia-based FTA is inclusion or exclusion of the US.

US commitment to free trade expansion is in question now.

China-ASEAN FTA implemented in steps to 2015

In November 2001, China and the 10-member country Association of South East Asia Nations (ASEAN) began negotiations to set up a free trade area (FTA).

One year later, a framework agreement laying out the FTA plan was signed. The FTA, a zero-tariff market of 1.7 billion people, has been targeted to come into force in 2010 for the six original ASEAN members and in 2015 for the other four. Implementation of the framework agreement would occur in stages.

An early harvest program covering trade in goods came into force in July 2005. See

Negotiations on a dispute settlement mechanism were finalized in 2004 for implementation in 2005.

Negotiations on trade in services were completed and an agreement signed in January 2007, for implementation in July 2007. See

The China-ASEAN investment agreement is still under development.

China’s perspective on Asia FTA

1) Response to greater regionalization in North America and Europe

2) Reflects interdependence from FDI and trade

3) Basis for insuring continuing close interdependence - sources of raw materials, manufactured goods and FDI flows

4) Enhance competitiveness of the region

5) Part of a regional system of cooperation to manage globalization effects

6) Reassurance to ASEAN by China – “peaceful rise”

(7) China replaces Japan in ASEAN

Bilateral FTAs are a suboptimal means for promoting regional free trade. Many bilateral FTAs extend to many states outside the region. Further, FTAs add to transaction costs across trade networks to the extent that FTAs are not comprehensive and uniform. FTAs are an indication of the breakdown of progress toward global/regional free trade.

Regionalism in SEA

ASEAN Membership

Brunei

Burma

Cambodia

Indonesia

Laos

Malaysia

Philippines

Singapore

Thailand

Vietnam

Development of ASEAN

ASEAN is a more formal and effective international organization: more integrated and rule-based regional community in political, security and socio-cultural terms.

  • Dispute settlement mechanisms
  • Achieving standing in international law (recognition by the UN).

internal confidence building

  • Preserving the principle of non-interference in internal affairs

decision making by consultation and consensus

  • ASEAN may have begun to take on a role for obtaining collective interests: the effort to address the problems caused by smoke from Indonesian fires and the subtle condemnation of the Myanmar military government.
  • Recognizing and enhancing regional economic integration and interdependence created by the production networks of TNCs
  • Key goal is a regional free flow of goods, money and labor to enhance competitiveness in the context of economic changes in China and India.
  • Regional response is needed for the problems of climate change, environmental degradation, trans-border crime, terrorism, and competitiveness.
  • Barriers to effectiveness of ASEAN include nationalism and xenophobia, significant differences in level of economic and social development, domestic political instability and wide differences in values among political elites. ASEAN has considerable political divisions based on these differences. China can exploit these divisions.

ASEAN Free Trade Area (AFTA)

Countries that agree to eliminate tariffs among themselves:

Brunei

Indonesia

Malaysia

Philippines

Singapore

Thailand

Regular Observers

Papua New Guinea

East Timor

Countries, to join in 2012:

Myanmar

Cambodia

Laos

Vietnam

The most recent ASEAN meeting was observed by:

People's Republic of China

Pakistan

India

South Korea

Japan

Australia

New Zealand

ASEAN Regional Forum – security issues

Shanghai Co-operation Organisation (SCO) - China, Russia, Kazakhstan, Kyrgyzstan, Uzbekistanand Tajikistan—was formed to resolve remaining border issues, reduce military tensions and build confidence. It has evolved to embrace issues such as drug-smuggling, energy and now economic co-operation in Central Asia.

Asia as an Economic Region

Asian region has developed a regional economy after about 1995 centered on TNCs and regional production networks. The most sophisticated components are manufactured in various more advanced Asian nations and then shipped to China for final assembly. The final destination is the US and Europe.

ASEAN data

  • ASEAN has a GDP of $850 billion (non PPP) (larger than India)
  • ASEAN GDP at PPP is $2.4 trillion
  • ASEAN per capita GDP: Nominal $1,400; PPP $4,200
  • Population of ASEAN is 550 million
  • Inward FDI to SEA in 2005 was $38 billion. China inward FDI in 2005 was $53 billion.
  • ASEAN exports in 2005 were $650 billion, 22 per cent of Asia’s total exports.

Inward FDI to ASEAN and China, 2001-2005 (billions $US)

2001 / 2002 / 2003 / 2004 / 2005
ASEAN / 18.46 / 13.82 / 18.45 / 25.65 / 38.1
China / 46.9 / 52.7 / 53.5 / 60.6 / 53.3

Source: ASEAN Statistical Yearbook, 2005; UNCTAD.

The FDI totals for ASEAN must be modified by the fact that Singapore received nearly ½ of the total.

Trade relations between ASEAN and China

  • Focus is on exporting commodities and components from ASEAN to China.
  • Raw materials once dominated; manufactured goods in GPNs grow more rapidly
  • ASEAN states accounted for 9% of China’s total imports in 2004 and more than two-thirds of this was in manufactured goods
  • In 2003, exports from ASEAN to China were $47.3 billion and imports from China were $30.9 billion.
  • Total trade between China and ASEAN doubled between 2000 and 2003 and is growing at 25%
  • Between 1997 and 2004, ASEAN exports of office machinery, telecommunications equipment, and electrical machinery rose from $2.6 billion to $32.2 billion.
  • Regional division of labor in manufacturing: labor intensive assembly in China; higher value components in ASEAN
  • The processing and assembly of imported parts and components now accounts for more than half of all China’s exports.
  • Example is a talking toy: the plush fabric was made in Korea and the voice chip in Taiwan, and the final assembly was done in Shanghai.
  • More than 75% of the value added for processed exports from China comes from foreign sources.

Changes in China’s price advantage:

Yet even for some of the cheapest goods, productivity increases have more than offset a deterioration in the terms of trade. A new paper by staff at America's Federal Reserve points out that between 1989 and 2005 China increased its share of exports to America in 41 industries, among them clothing and shoes. It is too early to write off China's export machine, even at the cheap end.

Sources of rising prices in China

  • Energy
  • Raw Materials
  • Labor shortages
  • Efforts to upgrade China’s position in global value and innovation chains through development of its education and scientific capabilities
  • The effort of the Chinese government to encourage higher value production. The government has reduced or eliminated incentives such as tax rebates and cheap rent.
  • Efforts to improve income inequality, labor rights and pollution
  • Efforts to enhance worker welfare, including giving state-controlled unions the power “to negotiate worker contracts, safety protection and workplace ground rules,
  • New labor laws alone will increase wages by 50%.
  • 1,000 shoe factories closed in Guangdong province in 2007as a result of labor shortages, rising costs for labor, increasing value of RMB, and increasing raw materials and energy costs.
  • Other industries such as furniture have also been affected in similar ways.

Will TNCs be able to relocate more easily than domestic Chinese firms?

Relative inflation rates

Rising RMB

Shifting comparative advantage, flying geese, upgrading across the value chain, reallocation of assembly FDI by TNCs.

Student Case – Chinese FDI to Vietnam

  • Doing Business in Vietnam

Assume you are the head of a business operating in a labor intensive and low margin environment. Examine the option of relocating your firm in Vietnam. Discuss the risks, problems, benefits and uncertainties associated with such a move.

Open discussion: What are some of the issues that should be considered in making a decision to relocate a firm to Vietnam?

Logistics

Labor laws

Communications infrastructure

Doing Business Website

Doing Business National Rankings

Global Competitiveness Report

Doing Business Abroad Checklist

Vietnam Rankings

Some conclusions about the globalization of Chinese firms:

  • Chinese companies are on the threshold of becoming truly global. A few—fewer than might be suspected from recent headlines—have already passed through the door by moving to acquire resources, talent, intellectual property, and customers beyond China’s borders. More will follow as the successes accumulate.
  • To succeed abroad, Chinese companies must carefully examine the obstacles they face because of their inexperience and corporate structures geared to serving a single market. They will have to gain capabilities quickly and re-create their organizations to function smoothly in a global environment.

WIR 2007 45

Vietnam Data

Shoe exports 2008 appx. $4B

Electronics exports 2008 appx. $3B; predictions for 2010 $6B

chinaaseanfta2.pdf

chinaaseanfta2.pdf