INTRODUCTION

The Mekong River, the twelfth largest river in the world, is 4,990 kilometres long. Its source is in the Tibetan mountains and it passes through the southwestern part of the People's Republic of China in Yunnan and Guangxe provinces, Myanmar, Laos, Thailand, Cambodia, Vietnam and then flows into the South China Sea. The Mekong region happens to be the poorest parts of Southeast Asia. The total population of the sub-region is more than 312 million in 2005 and its total area covers more than 2,563 square kilometres. Out of the total riparian people in the region, more than 80 million people or 90 per cent of the total population of the Mekong Basin depend upon the river for their livelihood for drinking water, fish, transport, irrigation water for agriculture and forest products. It is estimated that 80–90 per cent of the Mekong water is used for agriculture from which 75 per cent of the population of the Lower Mekong Basin derive their income.

These countries share common borders, natural resources and a long history. With combined human resource and natural resources, and the location of the region, being sandwiched between booming Southeast Asia and emerging China, no one doubts that the region has immense potential. Yet, like the river that runs through it, the economic potential of the Mekong region is so far only just that potential. Since the 1950s when the Mekong Committee was formed, consisting of Thailand, Cambodia, Laos and South Vietnam, as it was then known, the dream of harnessing the hydroelectric power of the mighty Mekong River has captured the imagination of politicians and planners alike. Almost fifty years later, it is estimated that only one per cent of the region's potential hydroelectric energy is being exploited.

The Mekong has one of the most abundant fisheries in the world. About two million tonnes of wild and cultured fish are harvested each year, which represent a value of US$1,400 million at first point-of-sale.

INTRODUCTION

There is extant literature on the Association of South East Asian Nations (ASEAN-10). ASEAN's continued success as a group of developing countries seems to be by default. It had the right initial conditions internally and externally, galvanized by good leadership, relative to the speed and record of other under-performing groupings. Its progress towards its free trade area (AFTA) and ASEAN Economic Community (AEC) has been variously diagnosed. Grand ASEAN plans seem paradoxically retarded rather than boosted by individual economies' nationalist-driven success or marginalized by the Asia-Pacific Economic Cooperation (APEC21) or ASEAN+3 (APT, China, Japan, Korea).

Intra-ASEAN trade is one reason for ASEAN integration. Free trade remains the best policy. ASEAN's greater extra-regional dependence on the United States and Japan may simply be replaced by China. In other words, unless intra-ASEAN trade becomes significant, the best scenario may realistically be to have AFTA-AEC diversify to more intra-Asian trade. Whether the Asian growth engine will be more powerful and sustainable than that of the triad (United States, Europe and Japan) is one unknown, whether AFTA-AEC is better off with exclusive Asian trade pacts, is another. The geometry of regional trade agreements (RTAs) gets more complicated and fuzzy as China, India and the synergy of information communication technology (ICT) join up with globalization and hyper competition. The ascendancy of RTAs and bilateral free trade agreements (FTAs) is both a cause and effect of the dysfunctional World Trade Organization (WTO), a victim of its own success in multilateralism as quantity enlarged through membership, is not commensurate with quality, given the increasing northsouth diversity.

After its first thirty years, ASEAN's comfortable momentum, or the ASEAN Way as a de facto regional hegemony and monopoly, is challenged. This chapter will argue that instead of viewing ASEAN in a success-failure dichotomy, ASEAN's pragmatic and realistic re-invention and re-engineering3 may retain it as a lynchpin in the East Asian-Pacific equation.

INTRODUCTION

While there are varying opinions about the quantity of remaining, easily accessible fossil fuels — oil, gas and coal — on the planet, there seems to be agreement that the price of oil will remain high, that oil production facilities and transport will increasingly be the focus of terrorist activities and that the burning of large amounts of fossil fuels is causing global warming. Thus, there are many reasons why it is in the interest of ASEAN and China to strive together to attain the highest possible efficiencies in the supply and use of energy, that is, cost-effective, secure and environmentally-sound sourcing, conveyance and consumption of different types of energy.

This chapter examines the potential for ASEAN and China to cooperate in the energy sector. As there are many organizations which provide energy demand and import projections, these are not discussed here. It is taken here as a given that energy demand in both ASEAN and China will continue to increase sharply over the next decades at rates considerably higher than the world average. The particular questions addressed here are these:

1. a) What energy supply cooperation is going on now between China and ASEAN?

2. b) What more can be done in the way of energy cooperation between China and ASEAN?

3. c) What can be learned from EU experience in this area?

ENERGY SUPPLY COOPERATION

Oil

China has the largest oil reserves in the region but production growth is expected to be minimal in the coming years. In 2004, production stood at 174.5 million tons (see Table 11.1 which gives comparative production data). There is little possibility of ASEAN and China trading much oil in the future. China became a net importer of oil products in 1993 and a net importer of crude oil in 1996. Consumption of oil has increased at an average rate of about 7 per cent from 1995, while production has grown at about only 2 per cent. In 2005, dependence on imports of oil reached 49.2 per cent.

INTRODUCTION

A discernable move towards greater services trade and investment on a global scale has been detected in the past decade. Increasingly, ASEAN and China are beginning to recognize the pivotal role that services could play. The ASEAN Framework Agreement on Services (AFAS) and China's commitments under the General Agreements on Trade in Services (GATS) are examples of the efforts being made to liberalize and promote the services trade and investment in this regard. How would these developments bear out? What progress has been made on services liberalization under the AFAS, and in particular, China's GATS commitments? What is the outlook for ASEAN-China's services trade and investment, and where are the key areas for cooperation? These are some questions the chapter seeks to shed light on. Admittedly, given the wide-ranging nature of the study and nascent developments to date, there are no easy answers. What this chapter aims to do is thus to work towards a more comprehensive understanding of ASEAN and China's move towards services, which has hitherto been lacking, so as to serve as a practical starting point for further research on this increasingly vital subject.

The chapter begins with an assessment of the global trend in services trade and investment. This is followed by an examination of the growing focus on services within ASEAN and China. Developments in services liberalization under the AFAS and in particular, progress on China's commitments under the GATS would be assessed. The chapter next explores the potential for ASEAN-China services trade and highlights selected key ASEAN-China service deals before concluding.

GLOBAL TREND IN SERVICE TRADE

According to the GATS, trade in services can be classified under four modes: 1) cross border services, which are independent of supplier or consumer, 2) consumption abroad, where the consumer of the services is non-resident in the country where the services is consumed, 3) commercial, where the supplier of the service is an affiliate or branch of a foreign supplier, and 4) movement of natural persons, where the supplier is a non-resident of the country in which he is working on a temporary basis.

INTRODUCTION

There have been, arguably, too many regional free trade agreements (hereinafter “FTAs” or “RTAs”) in Asia. The ASEAN-China Free Trade Agreement (“ACFTA”), albeit only half materialized, is certainly one of those that have caught most of the attention. There is a growing body of literature on the economic and geo-political dimensions of ACFTA, while the discussion on its legal aspects is still in the nascent stage. This chapter is an attempt to explore the various legal issues concerning ACFTA, including:

1. The tariff reduction arrangement under ACFTA;

2. Some contentious trade law issues in ACFTA, including rules of origin and contingency protection policies;

3. Dispute settlement under ACFTA; and

4. The legal nature of ACFTA and its impact on the legal relations concerning the rights and obligations of the parties under ACFTA.

Why are these issues important? The chapter starts with an introduction to the negotiations and conclusion of the relevant ACFTA instruments. It proceeds to address the legal aspects of some essential — and, to some extent, contentious — issues in the free trade agreement, including the tariff arrangement, rules of origin, and trade remedy measures, followed by an examination of the dispute settlement regime of ACFTA. Based on the examination of the specific institutions of ACFTA, the chapter then begins to discuss the international legal nature of the agreement which concerns its legal status as an instrument under international law. At first glance, ACFTA is a bilateral agreement between China and The Association of Southeast Asian Nations (ASEAN). In fact, it is a multi-party agreement concluded by eleven sovereign nations, ASEAN not being allowed to appear as an independent party. This legal instrument will have a profound implication on the legal status of ACFTA, its dispute settlement mechanism, and its future negotiations. Finally the WTO consistency of ACFTA is analysed. Given that most signatories to ACFTA are WTO members and the rest are striving to join the WTO, it is important for ACFTA to comply with WTO disciplines.

INTRODUCTION

The Asian financial crisis can be characterized by “double mismatch”, overreliance on banks, quick reversal of capital flow, as well as weak corporate governance and poor regulatory quality. In particular, short-term debt financing long-term project and excessive borrowing abroad demonstrate the systemic risk of an unbalanced financial structure. In contrast, a highly diversified, deep and liquid financial market would be less fragile and more efficient in capital allocation. Furthermore, a mature domestic longer-term debt security market could alleviate the effect of double mismatch, and bond valuation would also provide the correct signal for corporations and speculators to make their decisions, enhance efficiency in financial intermediations, and promote stable economic growth and development in the region.

The stability of Asia's economic growth is under threat now for three reasons: global imbalance and the depreciation of the U.S. dollar; U.S. interest rate hikes and the reversion of international capital flows; and finally, the surge in oil price. All these make the situation tough for Asian economies.

FINANCIAL STRUCTURE IN ASIAN COUNTRIES: A THEORETICAL AND INTERNATIONAL PERSPECTIVE

According to Goldsmith, the three stages of financial structure in economic development are: 1) the beginning stage, when the financial interrelation ratio is as low as 0.2 to 0.5, dominated by debt security and direct financing; 2) the take-off stage, when the financial interrelation ratio is still low and debt security prevails, loans extended by banks are predominant and governments begin to play a significant role; 3) the last stage, when the financial interrelation ratio is as high as 1 to 2, equity financing is growing at the same time and non-bank financial institutions are expanding their services.

The common trend of financial structure evolution is as follows: 1) accompanying economic growth, growth in the financial sector is faster than in other sectors, and the financial interrelation ratio will keep increasing until it reaches 1–1.5; 2) when the financial interrelation ratio comes to a plateau, the financial intermediate ratio can still keep on rising, and debt financing surpasses equity financing; 3) financial growth is often led by bank growth, but lending by banks will decrease.

BACKGROUND

The China phenomenon hardly needs any introduction, except that it is amazingly unabated, growing from strength to strength economically, politically, even socio-culturally. In time to come, some technological breakthrough may happen. By its geographical proximity and historical ties, it is inevitable that the Association of Southeast Asian Nations (ASEAN) is tied to the China factor. To capture the multi-dimensional aspects of ASEANChina economic relations, the Institute of Southeast Asian Studies hosted the “ASEAN-China Economic Forum: Economic Cooperation and Challenges Ahead” on 20–21 April in Singapore. This edited volume of fourteen chapters contains the eleven revised conference papers and three additional nonconference essays to give it the well-rounded balance.

An overview in this chapter is meant to tease out the main findings and perceptions of each chapter, the details of which deserve the readers' perusal. It also aims to draw together the common denominators and issues in ASEAN-China economic relations, identifies the areas and topics which deserve continuing research efforts and work in the Institute of Southeast Asian Studies and beyond. The dynamism in both ASEAN and China in the global economy context requires a constant pre-emptive mapping of emerging trends and developments for the future research agenda.

MAIN FINDINGS

John Wong's insightful consideration of “China's Economy in Search of New Development Strategies” is backed by statistical portrayals from 1990 to 2005. Readers are brought up to speed on China's new spurt of high growth, the present state of the Chinese economy, the need to change gears and reorient with China's rising international economic profile, sources of growth and need to fix many growth problems. Since China's first debut in the world economy in the early 1990s, the current high growth trajectory has witnessed the “WTO effect” and domestic investment impetus. While the rest of Asia was mired in the 1997 financial crisis, China's 2005 gross domestic product (GDP) almost trebled that of the early 1990s, a testimony of apparently unassailable growth.

INTRODUCTION

ASEAN-China relations appear to be successfully entering a new phase, as both sides emphasize a mutually-enriching relationship. Of particular importance are China's reduction of its “threat” to its southern neighbours, as well as its “soft power” projection, so as to stabilize the region, before effectively contributing to economic and financial cooperation across Southeast Asia.

Firstly, China, in its “peaceful rise”, has inexorably succeeded in reducing ASEAN's threat perception of Beijing, thus contributing to regional peace and stability; this could probably be the foremost contribution of both China and ASEAN (reciprocally) towards laying down the foundation of the future East Asian Community, as this project would never have been possible in the 1960s and 1970s, when there was significant mistrust between Beijing and the ASEAN capitals.

Secondly, China's attempts in reducing its “threat” have in fact, also increased its “soft power” projection across Southeast Asia through its cultural prowess and an active but more discreet diplomacy; this is currently bearing fruit within ASEAN, at least much more effectively than the more heavy handed American diplomacy. Southeast Asian governments and public opinion seem to have by and large accepted China, an emerging Chinese role in Asian politics and economics and its cultural position, thanks also to the special role played by the Chinese diaspora in the region.

Lastly, ASEAN and China have increased their economic and regional cooperation in four areas, which could clearly lay down the foundation and basis of the future East Asian Community. The roles of Beijing and ASEAN capitals, based on a foundation of peace and stability, and in pursuing greater economic cooperation, could even form the core of East Asian Community-building, as what Beijing hopes to achieve through its “Ten+1” initiative with ASEAN.

These three aspects have indeed formed the strategic dimension of China's long-term relations with ASEAN.

TOWARDS A MUTUAL RELATIONSHIP OF REGIONAL TRUST AND CONFIDENCE

Lowering the “China threat” and establishing mutual confidence and trust between China and ASEAN appear to be Beijing's first priorities, especially in the last fifteen to twenty years of their relationship.

Under the ASEAN-China Study Programme launched in 2003, the Institute of Southeast Asian Studies (ISEAS) organized the ASEAN-China Forum: Realities and Prospects on 23–24 June 2004. From this forum, a book entitled ASEAN-China Relations: Realities and Prospects edited by Saw Swee- Hock, Sheng Lijun and Chin Kin Wah was published in the following year to provide a more permanent source of useful information for a wider audience. Under the same Programme, the Institute of Southeast Asian Studies and the East Asian Institute (EAI) of the National University of Singapore jointly organized the Conference on Southeast Asian Studies in China: Challenges and Prospects on 12–14 January 2006, and a book bearing the title Southeast Asian Studies in China edited by Saw Swee-Hock and John Wong was published jointly by the two institutions in late 2006.

The third event under the ASEAN-China Study Programme was the ASEAN-China Economic Forum: Economic Cooperation and Challenges Ahead on 20–21 April 2006. This forum was designed to evaluate the present status, challenges and prospects with regard to the economic linkages and cooperation between ASEAN and China. This book on ASEAN-China Economic Relations incorporates not only the revised version of the conference papers in eleven separate chapters, but also four specially commissioned chapters appearing as Chapters 1, 6, 8, and 12 to provide a greater insight into the dynamics of the economic relations between ASEAN and China. The book discusses the economic relations in terms of many important topics such as trade, the ASEAN-China Free Trade Agreement (ACFTA), investments, services trade, energy cooperation, cooperation in developing the Mekong sub-region, China's aid to Southeast Asian countries, developing stronger business networks, and the political dimensions of China's economic relations with ASEAN. The book, with contributions from specialists intimately familiar with their topics, will be useful to businessmen, analysts, academics, students and policy-makers.

FTA is the abbreviation for Free Trade Agreement or Free Trade Area when it is referred to regional cooperation, and it is more popularly used than PTA (preferential trade agreement) or RTA (regional trading agreement). FTA can be seen as a part of the WTO system for free trade and comprehensive economic cooperation; it is rule-based and member-driven. All decisions should be made by consensus and the agreements are the outcome of negotiations between or among members. The one-vote-down principle of WTO decisions is also applied to FTAs. This makes the negotiation slow but it allows for different ideas and protects the interests of the small or weak economies. As an FTA is much smaller with fewer members, it is much easier to make a decision than at the WTO.

ASEAN-CHINA FTA: FROM PROPOSAL TO FRAMEWORK

Relatively speaking, Asia paid attention to FTA later than other areas in the world, especially Europe and America. In 1990, the Prime Minister of Malaysia, Mahathir Mohamad proposed to establish a regional cooperation group named “East Asia Economic Group” (EAEG) consisting of ASEAN, China, Japan and Korea (South Korea, or Republic of Korea), but the proposal was not accepted mainly because it was opposed by the United States of America, one of the initiators of APEC. However, the situation changed a year later after the United States initiated in 1991 to establish the North America Free Trade Area (NAFTA) with Canada and Mexico. ASEAN quickly responded by establishing the ASEAN Free Trade Area (AFTA) in 1992 as a qualitative leap in the history of ASEAN economic cooperation. In 1992, Singapore, the most active free trade promoter, successfully encouraged Thailand to initiate the AFTA at the ASEAN summit held in Singapore. This is the first FTA in Asia. Through careful negotiations, ASEAN completed most negotiations on trade and investment in the 1990s, especially on tariff and non-tariff arrangements.

THE EVOLUTION OF BUSINESS ENTERPRISES IN CHINA

Business dynamics determines the pace of connectivity of and impacts on the relative wealth and influence of the state. Multinational corporations (MNCs) are major transaction agents of the global business process. For the past decade or so, MNCs have figured prominently in China's remarkable transformation as a global business force influencing the course of world economic development.

The history of China's opening to international commerce is brief but dramatic. The tipping point was the fateful step taken by former leader Deng Xiaoping in 1978 to open up China to foreign investment and trade with the initial commissioning of Special Economic Zones (SEZs) for the purpose. Besides foreign capital, the Chinese leader was hoping for his country to absorb foreign business acumen. In the beginning, the foreign business response to Deng's call came mainly via overseas compatriots in Hong Kong, Taiwan and Southeast Asia. Their efforts initially were in property development and small-scale merchandising. Nevertheless it was a symbolic first step in involving the vital overseas Chinese commitment to helping realize Deng's vision. During those fledgling times, only a few global MNCs invested in the contract service and outsourcing business with typical foreign direct investment (FDI) sizes in the million RMB range — with a few exceptions being joint ventures with Chinese state-owned enterprises (SOEs) in a few areas such as the automotive industry. Nevertheless the appearance of such early foreign investors on the scene bolstered the Chinese leadership's new market-driven experiment. With the mainstream world economy set on the course of globalization in the 1990s as symbolized by the advent of the World Trade Organization (WTO), the Chinese government allowed for further access by foreign investment into China by decentralizing decision making for its approval at the provincial level and opening more areas to foreign investment.

EVOLUTION OF CHINA-ASEAN RELATIONS

China for the first time officially recognized the ASEAN grouping in 1975 after China was admitted into the United Nations in 1971, and ASEAN member states started to switch their diplomatic recognition from the Republic of China (ROC) to the People's Republic of China (PRC). The official relationship between China and ASEAN as a grouping was not possible before all ASEAN member states established diplomatic relations with China. During his visit to Thailand, Malaysia and Singapore in November 1978, Chinese leader Deng Xiaoping expressed China's wishes to develop relations with all ASEAN countries. From the 1980s, China intensified its effort to establish diplomatic relations with all the remaining ASEAN states that had not established or restored diplomatic relations with China. In July 1985, China and Indonesia signed an MOU to restore direct trade with each other as a precursor of restoration of their full relations. In his visit to Thailand in November 1988, Chinese Premier Li Peng announced four principles in establishing, restoring and developing relations with the ASEAN states. After restoring and establishing diplomatic relations with Indonesia on 8 August 1990 and with Singapore on 3 October 1990, China pushed for official ties with the ASEAN grouping. On 19 July 1991, Chinese Foreign Minister Qian Qichen attended the opening session of the Twenty-fourth ASEAN Ministerial Meeting (AMM) in Kuala Lumpur as a guest of the Malaysian Government, where he held the first informal meeting with the ASEAN foreign ministers and expressed China's interest in cooperation with the ASEAN as a grouping. The latter responded positively. At the invitation of the Chinese Vice-Foreign Minister Tang Jiaxuan, the ASEAN Secretary-General Dato' Ajit Singh led an ASEAN delegation for a visit to Beijing in September 1993, and agreed to establish two joint committees, one on cooperation in science and technology, and the other on economic and trade cooperation.

INTRODUCTION

The advance of industrialization in China and its continuously high economic growth have attracted worldwide attention. The entry into the WTO in 2001 has brought China into a new era of development. As a large country in East Asia, China has played an increasingly important role in the region's economic development and cooperation. Since the signing of the “Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China” in November 2002, the economic relationship between China and ASEAN has become closer and closer, where trade relations is the focus. Therefore, this chapter intends to present a survey on the trade relationship between China and ASEAN. The origin of the trade relations between China and ASEAN will be addressed first, followed by the development process of China-ASEAN trade relations, and finally its prospects.

ORIGIN

Because of history, geo-politics, and past migration in the region, Southeast Asian polities play important roles in China's surrounding environment, economic development, external economic relations and foreign policy commitment.

Trade Relations in Ancient Times

Trade relations between China and Southeast Asian countries can be traced back to early ancient times, about the third century B.C., when the so-called “maritime Silk Road” went by way of present Southeast Asia from the Chinese southeastern coast. Many coastal cities and ports of the Philippines, Indonesia, Malaysia, Vietnam and Thailand were on the Silk Road. According to historical records, China had established tributary relations with some Southeast Asia polities by the Sung dynasty (960–1280), and the mission under the tribute system was actually a “cloak for trade”. So, it is commonly described as “tribute trade”, which is an official trade relationship. Especially in the fifteenth century, the Ming dynasty sent many eunuch-led voyages to what we now know as Southeast Asia, among which the Zheng He voyages were very famous.

A NEW SPURT OF HIGH GROWTH

China's economy in 2005 registered another year of surging growth, with its total GDP (based on recent revision) expanding at 9.9 per cent to reach 18.23 trillion yuan (or US$2.26 trillion). Growth in 2005 was just marginally lower than the 10.1 per cent of 2004. In fact, China's economy since 2001, when China gained accession into the WTO, has experienced a new spurt of high growth with its GDP expanding at the average rate of 9.8 per cent for the period 2002–05, higher than the annual average of 9.6 per cent for the whole period of 1979–2004. (Figure 2.1). The last spurt of high growth occurred in the early 1990s when Deng Xiaoping embarked on a “grand tour of South China” (nanxun), which touched off an upsurge of investment (both domestic and foreign) and industrial production for the period of 1992–96, giving rise to double-digit rates of economic growth and also double-digit rates of inflation. Subsequently, Premier Zhu Rongji had to introduce tough macro-economic control measures to bring the economy to a soft landing in 1996. The present spurt of high growth had initially also sparked fears of overheating, which, however, never materialized.

What are the underlying causes for the present spurt of dynamic growth? First, whereas the previous spurt of high growth was primarily investment driven, this time round it was fuelled by both high domestic investment (that is, domestic demand) and high exports (that is, external demand). For the period of 2001–05, as will be further discussed later, exports grew at the hefty average rate of 30 per cent while domestic investment grew at 24 per cent.

Such dynamic expansion of exports in recent years bears the best testimony to the positive “WTO effects” on China. Indeed, China's economy post- WTO has become much more closely integrated with the global economy, leading to a large influx of foreign direct investment (FDI) and the rapid expansion of the export-oriented manufacturing activities. This explains why in recent years over 50 per cent of China's exports are carried out by foreign invested enterprises.

INTRODUCTION

There are certainly some risks and costs associated with the current initiatives to bring about greater trade liberalization between China and the ASEAN countries within the framework of the WTO and regionalism. But the high level of commitment demonstrated by both parties for the establishment of a free trade area indicates their sense of optimism that the enormous benefits that can be derived from free trade will outweigh the short-term costs.

It is argued that China and the ASEAN countries can maximize the benefits of trade liberalization by strengthening and enhancing their investment cooperation. Both countries have huge markets (existing and potential) which offer each other enormous investment opportunities.

Investment cooperation can take a variety of forms but may be classified into two types: market sharing and resource pooling. Market sharing takes the form of providing access to each other's investment opportunities by relaxing the restrictions and rules on and creating an environment conducive for foreign investments. Resource pooling could take the form of joint ventures and other types of partnerships (such as joint marketing and promotion) using each other's comparative advantages and complementarities.

In this light, this chapter will attempt to identify the specific areas where there is great potential for investment cooperation between these countries and the obstacles that need to be addressed in order to bring this potential into reality.

The first part of the chapter will first outline the trends and nature of the investment relationship between these countries. The second section will identify the specific areas where there is potential for mutually beneficial investment cooperation between these countries and the third section discusses the major obstacles and constraints that have come in the way of achieving a significant ASEAN-China investment cooperation.

ASEAN-CHINA BILATERAL INVESTMENT

Before exploring and identifying areas for possible investment cooperation, it is useful to first briefly outline the trends and nature of the investment relationship between China and the ASEAN countries.