Notes on ASEAN-China FTA
Notes on the controversy of ACFTA:
First, there are debates among economists which pros and cons of the increasing trade blocks both in regional and bilateral trade blocks. Bhagwati, a prominent leader in international trade theory disagree on the trade block establishments because it will divert the transaction from the efficient producer into inefficient one. For example, before the FTA, one country will import the certain goods from the most efficient country, while after the FTA, the import will be diverted to the FTA member which suddenly its goods become cheaper because of discrimination (for example the tariff become zero, while the previous partner country should pay the tariff). Only multilateral agreement (WTO) as the ideal type of trade liberalization. Some economists, especially government economists, from practical perspectives argue that if the other countries establish FTA, and their countries do not establish the regional or bilateral FTA, they will lose the competition. For example, the establishment of NAFTA leads the trade transaction between US and ASEAN countries diverted to Mexico which drive the ASEAN countries to establish AFTA. Even though there are disagreements among economists about trade block, they have some strong agreements: free trade is better than protection and protection is better than autarky.
Second, ACFTA should give a higher benefit both for Indonesia and the rest of ASEAN. There are some reasons for this statement: first, higher China’s growth than the ASEAN countries means higher capability of China to purchase of ASEAN’s export; second, China has a higher absolute GDP and population than ASEAN countries which means higher size that big enough to absorbs ASEAN’s export.
Third, probably we have already in the “FTA condition” because some of China’s product compete with us indirectly through the smuggling products. It means the FTA will formalize the competition that we have already faced because the smuggler will not have any incentives to smuggle anymore. We have to realize that our country has “many doors” and the cost to “watch” all doors will be very expensive because Indonesia is an islands country. Probably in the future we will have capability in protecting our country from the illegal trading, but for the time being will not be effective.
Fourth, probably the ASEAN countries producers will achieve on what so-called “economies of scale”. It means by expanding market we could achieve a lower price.
Fifth, there are some winners and some losers from ACFTA liberalization if we see from producers’ view, while the consumer is the real winners [this is the most important one for the government economists because there is a political consequences]. I have to remind us that the fear of the competition of China’s product probably will be more psychological than the real threat. We should remember that after the textile quota in US vanished we also had the same fear that we would have lost the textile market in US; however, in contrary, the Indonesia’s textile export increase after the quota released.
