China and ASEAN Reach Terms for Tariff Reductions--First Step Toward a Free Trade Agreement

October 28, 2004

China and the Association of Southeast Asian Nations (ASEAN) announced on Tuesday that they would begin tariff reductions on merchandise trade in January 2005 leading to an eventual free trade area (FTA) that would seek to integrate China's rapidly growing economy with the economies of Southeast Asia. The agreement, to be signed at the November leaders' meeting of the China-ASEAN Free Trade Area Commission, will also create a dispute settlement mechanism.

China's Ministry of Commerce, in a press release (Chinese only), announced that the agreement would reduce the tariffs on most merchandise trade to zero by 2010. In reporting on the announcement, the Wall Street Journal (subscription only), speculated that many products may not be included as the actual terms of the agreement have yet to be released. In addition, the article points out that the lack of any statement on trade in services or investment indicates that the parties have not reached any agreement covering those sensitive areas.

Because the tariffs of ASEAN and China are already low, the direct economic effects of the agreement may not be large. The agreement is significant for three reasons, however. First, it demonstrates China's growing economic and diplomatic clout as it convinced ASEAN countries to agree to treat it as a market economy in dumping cases before agreeing to FTA negotiations. China is currently in exploratory FTA talks with Australia, but it will not begin formal negotiations until Australia issues a similar market economy finding for China. Second, China appears to have embraced a strategy of moving forward on bilateral and regional trade liberalization due to the lack of progress in world trade talks under the auspices of the World Trade Organization (WTO), known as the Doha Development Agenda or Doha Round. Finally, the agreement will almost certainly spur greater regional economies of scale as ASEAN countries increasingly provide the inputs to finished goods exported from China.