ASEAN-China Free Trade Area (ACFTA) Agreement as an International Regime, The Impact Analysis on ASEAN

1

ASEAN-China Free Trade Area (ACFTA)

Agreement as an International Regime:

The Impact Analysis on ASEAN

By:

Muti Dewitari (0706165570)

Rindo Sai’o (0706165583)

Dyah Ayunico Ramadhani (0706291230)

Erika (0706291243)

Tri Andriyanto (0706291451)

DEPARTMENT OF INTERNATIONAL RELATIONS

FACULTY OF POLITICAL AND SOCIAL SCIENCE

UNIVERSITY OF INDONESIA

2009

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CHAPTER I

INTRODUCTION

1.1. Background

Regional dynamic of East Asia is influenced by the trade factor among countries in

the region. China, Japan, and South Korea have played significant roles in trade activity.

China itself has become the most influential player in shaping world’s economy. The massive

economy growth in China does not only rely on its domestic economy growth, but also on its

trade activity with other nations. One of the regions which have been an extremely important

in shaping China’s economy growth is Southeast Asia region.

Looking from ASEAN’s point of view, China has also emerged as an important

trading partner for the Association of Southeast Asian Nations (ASEAN) since the

mid-1990s.1 Since then, China remains important in influencing the economic growth in

Southeast Asian countries. Most export products of ASEAN countries are being sold in China;

due to its massive size and population, China is seen as a promising market to sell goods for

every country in the world, including ASEAN countries. For China itself, Southeast Asia is

also seen as a big market to distribute its products. Therefore, the cooperation between China

and ASEAN should be the mutual benefit one, since China and ASEAN countries need each

other as well. This look-a-like mutual benefit cooperation between China and ASEAN

happened on 2005, when both parties agree to ratify the ASEAN-China Free Trade Area

(ACFTA) agreement.

While the main idea of creating the ACFTA comes from China, but later on ASEAN

could also gets much benefits from this economic cooperation agreement. China, in one side,

experiences an increasing amount of total import; whilst ASEAN countries, in the other side,

gain benefit in the increasing number of total export.

1.2. Research Question

1 Evelyn Devadason, China’s Future: Pitfalls, Prospects and the Implications for ASEAN and the World.

http://ics.um.edu.my/umweb/ics/may2009/evelyn.pdf, accessed on November 22, 2009, 03.25 PM.

3

This paper will try to answer this specific question: How ASEAN-China Free Trade

Area (ACFTA) as an international regime could benefit ASEAN’s countries?

1.3. Theoretical Framework

Regionalism is seen as an international regime that is used to attain a certain goal or

interest. According to Stephen Krasner, the definition of regime is a set principals, norms,

rules, and procedures in an implicit policy making process where the expectation of the actors

meet in a certain given area in international relations. The presence of the regime is

considered essentials to provide the framework of negotiations by reducing transaction cost

and to help coordinate the expectation of the actors by improving quality and quantity of

information existed for the state.2 According to Keohane, the demand for the international

regime may change depending on the nature of the international system-in terms of

transaction costs- and the effects of the characteristic of the international regime itself in

terms of the information. The more a group of states is interdependent then the bigger will the

demand and need for an international regime be. Thus we can conclude that coordination in

international regime and its development are not only dependent to the existing interest and

power but also to the existing expectations and information.

Through the cognitive knowledge-based approach, we could deduce that even

different interpretations about interest and power might exist and happen. The cognitive

knowledge-based approach sees that learning and ideology influence rules and international

cooperation by showing the importance or unimportance of a certain value.3 This is in line

with the previous explaination of how knowledge or information achieved from the

international regime or system can change the interest of the actors. This cognitive approach

emphasizes on how today’s desicions might not be the same with previous decisions not

only because the actor take the future into considerations but also because they take into

account the past as well. The interest of a certain actors only emerge from a certain normative

2 Robert O. Keohane, “The Demand for International Regime”, in Theory and Structure in International

Political Economy, Charles Lipson and Benjamin J. Cohen (eds.). (Massachusetts: the MIT Press, 1999), p.

161. 3 Stephen Haggard and Beth A. Simmons, “Theories of International Regimes”, in Theory and Structure in

International Political Economy, Charles Lipson and Benjamin J. Cohen (eds.), Massachusetts: the MIT Press,

1999), p. 198.

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and epistemic context and cannot be explicate outside that context. Thus the essence of

cooperation cannot be elucidate without refering to the ideology and value of the actors, their

views upon interdepence issue, and the provided information of how they could carry out a

certain specific goal. The cooperation is influenced by the perception and misperception,

capacity to process information, and learning ability.4 The cognitive approach believes that

in analyzing international phenomena in this term is the international regime, social

institutions and the inseparable actors with the social-political context of the environment.

Interest and power are not the only important and influencial points; Environment and

perception are also as important as the previous points. In this particular case, the regime

theory is essential in identifying the ideology, value, norms, rules, and procedures that

influence the establishment of regime especially regional regime.

4 Ibid, p. 198.

INTERNATIONAL REGIME

To prevent a “war of all against all” in a

structural anarchy; facilitated through

an agreement or treaty

intra-government

SUPPLY SIDE ARGUMENT

Hegemonic Stability Theory

International regime is able to

produce more public goods than in a

fragmented system.

DEMAND SIDE ARGUMENT

1. Agreement

A regime facilitated an agreement by

giving rules, norms, principles, and

procedures in an international politics.

2. Transaction cost

When there is an international regime,

the transaction among members would

be decreased.

3. To reduce uncertainty

The norms of a commitment could be

used to overcome conflict that

emerges from the uncertainty by using

assumption about future behavior. The

international regime creates a

coordinated game based on

antagonistic calculation.

5

CHAPTER II

CONTENT

2.1. Description of ASEAN-China Free Trade Area (ACFTA)

In 2001, at an ASEAN-China Summit in Bandar Seri Begawan, Brunei Darussalam,

China came up with a proposal offering ASEAN-China Free Trade Area in a period of ten

years. Chinese proposal on the meeting itself is limited only to learn more about the

feasibility. In the process, negotiations continued between the two sides. Within one year, at a

meeting in Phnom Penh in November 2002, ASEAN and Chinese leaders ready to sign a

Framework Agreement on Comprehensive Economic Cooperation (CEC), wherein there is

also discussion of the Free Trade Agreement (FTA).5

There is no doubt that the Chinese proposal is very interesting. However, China and

ASEAN also saw the economic significance of China's proposed initiatives. The initiatives to

develop economic cooperation with ASEAN initiated by China. With the success of China

became a member of the WTO, indicating that China has been transformed into a party that

was already seen in negotiating various trade agreements. Of course, ASEAN must be able to

position so as not harmed in these trade agreements.

Trade agreement between ASEAN and China begins with an introduction to the

Early Harvest program.6 From the beginning of this course, can be seen that there is an effort

to drive China to ASEAN economic cooperation would be profitable Chinese economy. Of

course, this makes other countries in East Asia are interested in starting a similar trade

agreement with ASEAN, with the aim of earning profits, as do Japan and also agreed that

trade agreements with ASEAN. In ASEAN itself, couldn’t find documents detailing a clear

strategy with the involvement of ASEAN trading partners in the FTA. However, the ASEAN

efforts to open itself to trade agreements with developed countries in Asia clearly is a step

forward. At the very least, globalization has become a powerful tool in the effort to promote

the ASEAN economies.

China became an important trading partner for Association of Southeast Asian 5 Hadi Soesastro, “Realizing the East Asia Vision”, in Economics Working Paper Series, Februari 2005, p. 3.

Also available on http://www.csis.or.id/working_paper_file/51/wpe090.pdf. 6 Ibid.

6

Nations (ASEAN) since the mid-1990s. ASEAN-China trade has grown more than fivefold

between 1997 until 2005. In 2007, the volume of trade between ASEAN and China has

passed the target of U.S. $ 200 billion. Based on the data obtained in 2006, China ranked fifth

in terms of export destinations of ASEAN and ranked third in terms of imports from the

ASEAN market. In fact, the intensity of exports from ASEAN to China have increased, very

different from the intensity increase among other member countries. 7

Greater integration of China in international trade began to emerge from the receipt

of China's World Trade Organization (WTO) membership in 2001. For the regional level, the

basic increase in the intensity of China's trade does not apart from the efforts to establish the

ASEAN-China Free Trade Area (ACFTA) later in the year 2010 for all ASEAN member

countries. ACFTA would later lead to major restructuring patterns of trade through the

specialization area of manufactured products. It is not separated from the pattern formation in

the past a similar model. China, as the state controlled most of resources, clearly became the

nucleus of commercial activity in this area. This is not a part of the effort China has made a

big leap from the first periphery of the core production network in the period 1995 to 2004. In

the end, in the year that China has managed to become the end point of the economic rise of

Asia.8 With the ACFTA, dynamic changes in trade patterns among the five founding nations

of ASEAN, Indonesia, Malaysia, Singapore, Thailand and the Philippines (ASEAN-5). The

existence of ACFTA has successfully reorganized the flow of trade and intra-ASEAN

interaction with other member states as well as with China.

The Framework Agreement on CEC contains three elements: liberalization,

facilitation, and economic cooperation. In addition it has a provision on the mechanism to

implement the Agreement, including a dispute settlement mechanism. The liberalization

element covers trade in goods, trade in services, and investment. In the context of

liberalization, the Agreement provides for special and differential (S&D) treatment and

flexibility to the newer ASEAN members as well as flexibility to address sensitive areas.9

The Framework Agreement contains an Early Harvest program that covers all

products in chapters 01 to 08 at the 8/9 digit level (HS Code): live animals; meat; fish; diary 7 Evelyn Devadason, op.cit.

8 Ibid.

9 Hadi Soesastro, op cit.

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produce; other animals products; live trees; edible vegetables; and edible fruits and nuts.

Products under this program are divided into three categories for tariff reduction and

elimination, but tariffs will have to be brought to zero for all three categories within three

years. However, the program allows for an Exclusion List and different timeframes between

the ASEAN-6 (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) and the

CLMV (new members Cambodia, Laos, Myanmar and Vietnam), for whom zero tariffs

will be reached in 2010. Initially it was thought that China would offer the Early Harvest

program on a non-reciprocal basis, but this turned out not to be the case. Moreover, some

agricultural commodities of great interest to ASEAN, such as rice and palm oil, were

excluded from the program. Some ASEAN countries (e.g. the Philippines) did not

immediately join the program.10

Beyond the Early Harvest, tariff reduction and elimination will be pursued along two

tracks, the normal track and the sensitive track. Applied MFN tariffs of products listed in the

normal track should be gradually reduced or eliminated in accordance with specified

schedules and rates over a period from 1 January 2005 to 2010 for ASEAN-6 and China, and

over a period from 1 January 2005 to 2015 for CLMV. Reduction of tariffs of products in the

Sensitive List will be in accordance with mutually agreed end rates and end dates. The

number of products in the Sensitive List is subject to a maximum ceiling, also to be mutually

agreed upon.11

The Framework Agreement was amended on 6 October 2003. The Protocol of

amendment incorporated the Rules of Origin (ROO) applicable to the products covered under

the Early Harvest program. It also included subsequent Early Harvest agreements between

some ASEAN members and China, and it clarified the implementation of the provision of the

program as well as the terms and conditions for the acceleration of the tariff reduction and

elimination through bilateral or multilateral agreements.

The negotiation on the FTA for goods (beyond the Early Harvest) was to be

concluded by 30 June 2004. This was a rather ambitious timeframe, and indeed, the deadline

was missed. The parties could not agree on the maximum number of tariff lines in the

10

Ibid. 11

Ibid.

8

sensitive list. However, as political leaders were determined to begin the process of tariff

reduction and elimination on 1 January 2005, a compromise was struck, and Ministers were

able to sign an agreement at the ASEAN Summit in Vientiane in November 2004. This does

suggest the importance of setting target dates. The Agreement on Trade in Goods of the

Framework Agreement on CEC, or for short, the ASEAN-China FTA (ACFTA), is only the

first portion of a series of agreements to implement the Framework Agreement. At the

Vientiane Summit, Ministers also signed an Agreement on Dispute Settlement Mechanism of

the Framework Agreement on CEC. They will be followed by an agreement on services, an

agreement of investment, and other agreements. It is indeed rather surprising that ASEAN

and China were able to produce those two agreements within a short time. Framework

Agreement ACFTA goals are (a) strengthen and enhance trade cooperation on both sides; (b)

liberalize trade in goods and services through reduction or elimination of tariffs; (c) seek and

develop new areas of economic cooperation are mutually beneficial to both parties; (d)

facilitating economic integration more effectively with the new member countries of ASEAN

and bridge the existing gap on both sides.12

There are other factors that support the

immediate implementation of ACFTA.13

Trade volume between China and ASEAN increased

from US$105.9 billion in 2004 to US$202.5 billion in 2007, attaining the target of US$200

billion set by leaders of the two sides three years ahead of schedule. In the first 10 months of

2008, trade volume between China and ASEAN reached US$199.1 billion, up 21.6 percent.14

It is fact that the main drivers of ACFTA implementation in East Asia and Southeast Asia.

2.2. The Supply Side of ASEAN-China Free Trade Area (ACFTA)

China as the economic power within region in fact has succeeded in offering an

economic stability to the rest of ASEAN countries under the idea of ACFTA emergence.

China’s attempt to provide this form of stability through free trade, in fact, has pulled

ASEAN countries attention in making such agreement. As a big country with big economy 12

Subdit Kerjasama Dit Pemasaran Internasional, “Perkembangan Implementasi ASEAN-China Free Trade

Area (ACFTA)”. http://agribisnis.net/index.php?files=Berita_Detail&id=192, accessed on November 24, 2009

03:04 AM. 13

“Mendag Ajak Inventarisir Masalah FTA ASEAN-China”. http://www.indonesia.go.id/id/index.php?

option=com_content&task=view&id=10709&Itemid=825, accessed on November 24, 2009, 03:40 AM. 14

“China-ASEAN FTA to be Completed in 2010, ASEAN Envoy”, http://www.chinadaily.com.cn/

china/2009-01/16/content_7403667.htm, accessed on November 24, 2009 at 03:55 AM.

9

growth, and also given the fact that China is so far the most economically stable country,

China is seen as a country who could offer stability in Southeast Asian region.

2.3. The Demand Side of ASEAN-China Free Trade Area

2.3.1. ACFTA Agreement

The main idea of the economic cooperation between ASEAN countries and China

once established in 2003 when both parties agreed to implement EHP, a reduction in

unfinished agricultural products and selected goods. In 2004, both countries then agreed in

providing a reduction and elimination commitment through ACFTA framework on all other

products, excluding products that are already regulated on former agreement. ACFTA also

regulated the basic idea of the dispute settlement mechanism between parties which

furthermore will be discussed one year after the agreement come into force in July 2005.15

ASEAN-China Free Trade Area (ACFTA) agreement basically contains regulations on

three aspects of economy. Those three aspects are trade and investment, though trade has

been the most attractive aspect for ASEAN countries. On ACFTA agreement, there will be

tariff barriers reduction and elimination between China and ASEAN countries which are

divided into Normal Track and Sensitive Track. Normal Track furthermore is divided into two

models which are Normal Track I and Normal Track II, which in the other hand Sensitive

Track is also divided into two models; Sensitive List and High Sensitive List. Basically, the

ASEAN 6 (Indonesia, Malaysia, The Philippines, Singapore, Thailand and Brunei

Darussalam) and China shall eliminate all the tariff barriers into zero in 2010 while the newer

members (Cambodia, Lao, Myanmar and Vietnam) shall eliminate in 2015.

Normal Track I consists of regulation of tariff reduction in accordance with the following

threshold. First, each party shall reduce to 0-5% not later than 1 July 2005 the tariff rates for

at least 40% of its tariff lines placed in the Normal Track. Second, each party shall reduce to

0-5% not later than 1 January 2007 the tariff rates for at least 60% of its tariff lines placed in

the Normal Track. And last, each party shall eliminate its entire tariff for tariff lines placed in

15

ASEAN-China: Background, http://www.miti.gov.my/cms/content.jsp?id=com.tms.cms.section.

Section_b609671a-c0a81573-aba0aba0-c94c2e0c, accessed on November 23, 2009, 11.32 PM.

10

the Normal Track not later than 1 January 2010. In the other hand, Normal Track II permits

each member countries to formulate tariff lines under Normal Track, not exceeding tariff

lines, and shall eliminate all its tariffs for tariff lines place in the Normal Track II not later

than 1 January 2012.16

ASEAN 6 and China17

X: Applied MFN

Tariff Rate

ACFTA Preferential Tariff Rate (Not later than 1 January)

2005* 2007 2009 2010

X ≥ 20% 20 12 5 0

15% ≤ X < 20% 15 8 5 0

10% ≤ X < 15% 10 8 5 0

5% < X < 10% 5 5 0 0

X ≤ 5% Standstill 0 0

*The first date of implementation shall be 1 July 2005

In Sensitive Track model, ASEAN 6 and China are allowed to place 400 tariff lines at

the HS 6-digit level and 10% of the total import value based on 2001 trade statistics in the

Sensitive Track. Sensitive Track imposes parties to reduce their tariff rates for products

placed in the Sensitive Track list to 20% not later than 1 January 2012. These tariff rates shall

be subsequently reduced to 0-5% not later than 1 January 2018. While in the other hand,

Tariff lines placed by ASEAN 6 and China in the Highly Sensitive List should be not more

than 40% of the total number of tariff lines in the Sensitive Track or 100 tariff lines at the HS

6-digit level, whichever is lower. The applied MFN tariff rates of tariff lines placed in the

respective Highly Sensitive Lists shall be reduced to not more than 50% not later than 1

January 2015 for ASEAN 6 and China, and 1 January 2018 for the newer ASEAN Member

States.18

Besides the formal regulation towards trade between parties, ACFTA basically also

regulates the investment, yet there has not been official and detail regulation that has been

agreed between.

16

ASEAN-China Free Trade Agreement (ACFTA). http://www.mtib.gov.my/repository/acfta.pdf, accessed on

November 23, 2009, 11.44 PM. 17

Ibid. 18

Ibid.

11

2.3.2. ASEAN-China Trade Flows for 2003 until 2007

To analyze the economic benefit of ASEAN-China Free Trade Area (ACFTA), the

paper will focus on trade flows between two parties for the period of 2003-2007, considering

ACFTA was ratified in 2005, also with consideration to not include trade flows in 2008 since

there is a global financial crisis happened at that time. Based on the 2006 data, China ranked

as the fifth export market destination and third import market origin for ASEAN. Though the

export intensities of ASEAN to China are increasing, they said to differ considerably amongst

member countries.19

The trade flows data will be illustrated into two different sections, for

the trade flows of newer ASEAN members (which consists of Brunei Darussalam, Cambodia,

Lao, Myanmar, and Vietnam) is much fewer than the trade flows of ASEAN-5 (Singapore,

Malaysia, Thailand, Philippine, Indonesia).

2.3.2.1. Trade Flows between China and ASEAN-5 in 2003-2007

Figure 1: ASEAN-China Export, 2003-2007 (in US$ Million)

02000400060008000

100001200014000160001800020000

2003 2004 2005 2006 2007

MY-China

Indo-China

SG-China

Phil-China

Tha-China

19

W.Y. Lau and C.W. Hoow. “An Analysis on Trade Flows of ASEAN with China”, paper presented at the

China in the World, the World in China International Conference –Implications of a Transforming China:

Domestic, Regional and Global Impacts, University of Malaya: Kuala Lumpur, 5-6 August 2007.

12

Figure 2: China-ASEAN Import, 2003-2007 (in

US$ Million)

02000400060008000

100001200014000160001800020000

2003 2004 2005 2006 2007

MY-China

Indo-China

SG-China

Phil-China

Thai-China

Source: UN COMTRADE Database20

There are interesting observations that emerge from the ASEAN-China export interactions in

Figure 1. First, both export and import flows in ASEAN-China trade portray an upward trend

since the implementation of Early Harvest Program (EHP) in 2003, it shows the

implementation of EHP gives a positive impact to the volume of trade in both parties. Second,

trade interactions between the individual ASEAN-5 member economies with China

demonstrate three levels of integration. The first level is shown by Singapore-China

(SG-China) trade relations, for whom they take a distinct lead in terms of exports and

imports,21

whilst the other four countries are left behind. The second layer comprises trade

flows of Malaysia-China (MY-China) which parallel with Thailand-China (Thai-China). The

third layer is Indonesia-China (Indo-China) trade flows that follow closely with

Philippines-China (Phil-China). Third, most countries record consistent trade deficits with

China over the period of review, which means the volume of China’s import is bigger than

the volume of ASEAN’s export.

20

Evelyn Devadason, op.cit. 21

Y. Xiaohong, ASEAN-China Free Trade Area: A Key Step Toward Pan-Asia Europe Integration from the

Perspective of Comparison with NAFTA and EU, unpublished LL.M. Thesis, James E. Roger College of Law,

University of Arizona, 2005.

13

2.3.2.2. Trade Flows between China and Newer Members of ASEAN

Figure 3: Brunei-China and CLMV-China Export, 2003-2007 (in US$ Million)

0

50

100

150

200

250

300

350

2003 2004 2005 2006 2007

Viet-China

Bru-China

Cam-China

Lao-China

Myan-China

Figure 4: China-Brunei and China-CLMV Import, 2003-2007 (in US$ Million)

0

500

1000

1500

2000

2500

3000

3500

2003 2004 2005 2006 2007

Viet-China

Bru-China

Cam-China

Lao-China

Myan-China

Source: UN COMTRADE Database22

From the Figure 3 and 4, we could see the bilateral trade flows between China and

Brunei and China with the four other new ASEAN member countries (Cambodia, Lao,

Myanmar and Vietnam, hereafter referred to as CLMV). Amongst the five ASEAN countries

in Figure 3 and 4, the volume of trade is highest for Vietnam-China (Viet-China), yet remains

much lower than that of the ASEAN-5 with China. Vietnam basically exports marine

products, oil and gas to China and imports machinery, fertilizers and consumer durables from

China.23

From the import figure of Myanmar, we could say that China has also gained

22

Evelyn Devadason, loc.cit. 23

D. Shambaugh, “China Engages Asia: Reshaping the Regional Order”, International Security, 29(3), 2005, p.

14

importance in the Myanmar market. Myanmar is having a high demand of China’s product,

while the export from Myanmar to China remains low.

Unlike the Vietnam-China trade trends, the other four remaining countries do not

depict a clear upward trend in exports to China. Sharp declines are noted in both exports from

Myanmar to China (Myan-China) and Cambodia to China (Cam-China), while exports from

Brunei to China (Bru-China) and Lao to China (Lao-China) are almost not worth mentioning.

As such, huge deficits in trade are frequent between the newer ASEAN members

with China. These deficits in trade are indeed a cause of concern for the CLMV with the

initiation of the ACFTA. Given their weak industrial structures, the CLMV countries are

frightened that the ACFTA will render their domestic markets swamped by cheaper and

better quality Chinese goods.24

2.3.3. Trade Dispute Settlement Mechanism between ASEAN and China

Since the objective of China and ASEAN Free Trade Area is to initiate a more

integrated economic cooperation, all the member countries involved then agreed to

consensually stipulate a dispute settlement mechanism under the Framework Agreement on

Comprehensive Economic Co-operation between ASEAN and China signed in Phnom Penh,

November 4th

,2002. The existence of this dispute settlement mechanism is deemed fairly

essential to reduce the uncertainty and interstate conflict, thus it is expected to result in more

efficient and beneficial trade. This section, by providing detailed description upon pertinent

articles under framework agreement, then will profoundly analyze whether dispute settlement

mechanism agreed is really effective in meeting the objective of reducing uncertainty and

creating more efficient and beneficial trades with less possibility of interstate conflicts

between ASEAN and China.

The Agreement on Comprehensive Economic Co-operation consists of 18 articles that

put concerns upon the mechanism of dispute settlement that may occur between ASEAN and

CHINA. Hence, it is better to start with the first three articles to comprehend the basic

64-99 24

A.D. Ba, “China and ASEAN: Renavigating Relations for a 21st Century Asia”, Asian Survey, 43(4), 2003,

page 622-647.

15

understanding of dispute settlement mechanism. Article 1 parses the definitions to explain the

basic concepts pertinent to dispute settlement. This article definitively names all the parties

involved as “parties to the dispute”, or “parties concerned” and dividing them into party that

request for dispute settlement (“complaining party”) and party to which the request for

dispute settlement is made or (“party complained against”). Article 2 further parses the scope

and coverage of the dispute settlement mechanism under the agreement. According to this

article, the dispute settlement mechanism shall apply to disputes arising under the Framework

Agreement. However, emphasizing the third verse, it is also important to note that Article 2

also fully respects the consent of each complaining party and party complained against

whether they want to settle the disputes under the rules of this agreement or not, as explained

by the third verse of the article. Subsequently, Article 3 then requires the parties concerned to

designate “liaison office” responsible for all liaison affairs and that the parties concerned

must also be fully responsible for all expenses spent to designate the liaison office and settle

the disputes.

Acknowledging this basic understanding upon the concept above, this writing will

move further to analyze the core substance of articles regarding the implementation of

dispute settlement mechanism between ASEAN and China. There are indeed two

mechanisms of dispute settlement recommended by the framework agreement. All parties

concerned can opt to solve the disputes by implementing consultation or through the arbitral

tribunal. Despite some technical and practical differences, these two mechanisms of dispute

settlement indeed indicate the level of difficulty or impediment in solving the dispute. While

consultation is strongly recommended for light dispute that seems possible to be conciliated

through mutual talks or dialogue, arbitral tribunal becomes the least possible option if all

parties concerned can hardly reach conciliation.

The more profound explanation about the process of consultation as trade dispute

mechanism is parsed by Article 4 as cited below:25

1. A party complained against shall accord due consideration and adequate opportunity for

25

Agreement on Dispute Settlement Mechanism of the Framework Agreement on Comprehensive Economic

Co-Operation Between the Association of Southeast Asian Nations and the People’s Republic of China, cited

from the official ASEAN web: http://www.aseansec.org/16635.htm

16

consultations regarding a request for consultations made by a complaining party with respect

to any matter affecting the implementation or application of the Framework Agreement

whereby:

(a) any benefit accruing to the complaining party directly or indirectly under the

Framework Agreement is being nullified or impaired; or

(b) the attainment of any objective of the Framework Agreement is being impeded, as

a result of the failure of the party complained against to carry out its obligations under

the Framework Agreement.

2. Any request for consultations shall be submitted in writing, which shall include the

specific measures at issue, and the factual and legal basis (including the provisions of the

Framework Agreement alleged to have been breached and any other relevant provisions) of

the complaint. The complaining party shall send the request to the party complained against

and the rest of the Parties. Upon receipt, the party complained against shall acknowledge

receipt of such request to the complaining party and the rest of the Parties simultaneously.

3. If a request for consultations is made, the party complained against shall reply to the

request within 7 days after the date of its receipt and shall enter into consultations in good

faith within a period of not more than 30 days after the date of receipt of the request, with a

view to reaching a mutually satisfactory solution. If the party complained against does not

respond within the aforesaid 7 days, or does not enter into consultations within the aforesaid

30 days, then the complaining party may proceed directly to request for the appointment of an

arbitral tribunal under Article 6.

4. The parties to a dispute shall make every effort to reach a mutually satisfactory resolution

of any matter through consultations. To this end, the parties concerned shall:

(a) provide sufficient information to enable a full examination of how the measure

might affect the operation of the Framework Agreement; and

(b) treat as confidential any information exchanged in the consultations which the

other party concerned has designated as confidential.

5. Consultations shall be confidential, and are without prejudice to the rights of any Party in

any further or other proceedings.

6. Whenever a Party (other than the parties to a dispute) considers that it has a substantial

17

interest in consultations being held pursuant to this Article, such Party may notify the parties

to a dispute in writing of its desire to be joined in the consultations within 10 days after the

date of receipt of the request for consultations by the party complained against. Such Party

shall be joined in the consultations provided that the party complained against agrees that the

claim of substantial interest is well founded. The party complained against shall inform the

complaining party and the rest of the Parties of its decision prior to the commencement of the

consultations. If the request to be joined in the consultations is not accepted, the requesting

Party shall be free to request for separate consultations under this Article.

7. In cases of urgency, including those which concern perishable goods, the parties concerned

shall enter into consultations within a period of no more than 10 days after the date of receipt

of the request by the party complained against. If the consultations have failed to settle the

dispute within a period of 20 days after the date of receipt of the request by the party

complained against, the complaining party may proceed directly to request for the

appointment of an arbitral tribunal under Article 6.

8. In cases of urgency, including those which concern perishable goods, the parties to a

dispute and arbitral tribunals shall make every effort to accelerate the proceedings to the

greatest extent possible.

Interpreting Article 2 above, it is interesting to emphasize how China and ASEAN opt

at first to conciliate the possible dispute by implementing consultation, yet they also regard

the efficiency through recommending arbitral tribunal, in case the consultation between the

parties concerned fails to achieve any conciliation. It can be obviously stated in other words,

that China and ASEAN have definitely recognized all uncertainties and unexpected

possibilities exist in interstate relations that may hamper the friendly climate in economic

cooperation and gains generated by trades. The point of this consideration upon efficiency is

clearly reflected in verse 3, 7 and 8 which mention about the recommended alternative to

appoint arbitral tribunal in some conditions highlighted.

At last, it is also essential to understand further how the arbitral tribunal is appointed and

functioned in binding the conflicting parties into conciliation. The mechanism of the

appointment and function of the arbitral tribunal are then described by article 7 and 8. In brief,

the arbitral tribunal consists of three respective members; one appointed by the complaining

18

party, one appointed by party complained against, and the last one acts as chair that shares no

interests to any party and has expertise or experiences in law and international trade.

Regarding how it functions, the arbitral tribunal will take its decision by consensus, or if not

possible, by the majority opinion. The decision taken then reflects the established functions

of the arbitral tribunal as cited from Article 8 verse 3: to consult regularly with the parties to

the dispute and provide adequate opportunities for the development of a mutually

satisfactory resolution; to make its decision in accordance with the Framework Agreement

and the rules of international law applicable between the parties to the dispute; and set out, in

its decision, its findings of law and fact, together with the reasons therefore. Beside these firm

functions, it must also be emphasized that the decision of the arbitral tribunal shall be final

and binding on the parties to the dispute.26

The explanation above of how the arbitral tribunal is appointed and functioned indeed

indicates the certainty created by ASEAN and China in securing their interests in ACFTA and

efficiently avoiding further disputes. The decision of arbitral tribunal is deemed efficient to

adjust any dispute into agreement among both conflicting parties, for it is regarded as legally

binding and final. The conflicting parties, at the end, must comply with the decision of the

arbitral tribunal to halt any dispute.

2.4. Analysis on ASEAN-China Free Trade Area with Keohane’s Theory of

International Regime

Theory of international regime stated that international regime could be seen in two

side argument, the argument of supply and the argument of demand. In ASEAN-China Free

Trade Area (ACFTA), China offers a creation of hegemonic stability to ASEAN

countries—in this case, China acts as the actor in Keohane’s argument of supply, by offering

an economic stability throughout Southeast Asian region. Whilst on the demand side,

ASEAN demands the facilitation of agreement to tackle upcoming trade barriers in the future.

The ACFTA agreement technically would definitely benefit both parties for several reasons.

26

Ibid.

19

First, the establishment will create an economic region with 1.7 billion consumers, regional

GDP of about US$2 trillion and total trade estimated at US$1.23 trillion.27

Regarding to this

number, the ACFTA would be the biggest and largest FTA among developing countries.

Second, the population of 1.2 billion shall release the market access opportunities through

preferential trade for ASEAN countries, while in the other hand, the production of ASEAN

countries will increase. Moreover, the removal of trade barriers between ASEAN and China

will lower costs, increase intra-regional trade and strengthen the attractiveness of ASEAN

countries, especially as a preferred investment destination. The procedure of ACFTA

agreement based on Keohane’s theory of international regime could meet ASEAN demand

which is to facilitate an agreement to tackle upcoming trade barriers in the future. This has

shown how both parties try to reduce and eliminate all of the trade barriers that has already

been there or will be emerged in the future.

ASEAN countries also demand the reduction of transaction cost, which, in this paper,

is defined by the reduction or the elimination of tariff trade barriers amongst the members. As

mentioned previously, the reduction or elimination of tariff trade barriers is already

implemented in 2004. However, the reduction of tariff trade barriers, in fact, does not go

along with the improvement of ASEAN countries’ balance of payment—which, in this paper,

is shown by the huge deficits of trade in all ASEAN countries. This huge deficit of trade

proves that ACFTA does not give much benefit in improving each ASEAN countries’

economic condition. To conclude, the transaction cost among members had been reduced, yet

this reducing transaction cost does not improve ASEAN countries’ economic condition.

The eventual point that also needs to be addressed on this analysis is the

establishment of dispute settlement mechanism under the Agreement of Comprehensive

Economic Cooperation between ASEAN and China. By recalling the previous explanation, it

can be fairly concluded that agreed dispute settlement mechanism has an essentially

determining role in reducing the uncertainty and crating more efficient and beneficial trades

with less possibility of conflicts between ASEAN and China. In achieving the objective of a

more certain and beneficial economic cooperation, ASEAN and China have consensually set

27

“ASEAN-China: Background”, loc.cit.

20

two mechanisms in solving any possible conflicts along ACFTA. Consultation as the first

mechanism is recommended for any dispute deemed possible to be conciliated through

mutual talks or dialogue. As for the second mechanism, ASEAN and China then agreed on

establishing the arbitral tribunal to solve further disputes that fail to meet conciliation through

consultation. Both mechanisms clearly indicate how ASEAN and China consent on solving

the possible dispute efficiently yet also regard the uncertainty or unexpected possibilities

exist in their relations that may hamper the friendly climate economic cooperation and

benefits generated by trades.

2.5 The Analysis of trade deficit between ASEAN and China in ACFTA

Malaysia-China Trade Flows in 2003-2007 Indonesia-China Trade Flows in 2003-2007

Singapore-China Trade Flows in 2003-2007 Philippine-China Trade Flows in 2003-2007

21

Thailand-China Trade Flows in 2003-2007 Vietnam-China Trade Flows in 2003-2007

Brunei Darussalam-China Trade Flows in 2003-2007 Cambodia-China Trade Flows in 2003-2007

Laos-China Trade Flows in 2003-2007 Myanmar-China Trade Flows in 2003-2007

Based on the theory that ACFTA is an international regime; it supposedly could be

beneficial conceptually and technically towards both the ASEAN countries and China itself.

However, if we take a broader look at the balance of payment as the interpretation on how

international regime could minimize the transaction cost between both parties, it definitely

breaks down the assumption right away. From the charts above, we could conclude that all of

the ASEAN countries are experiencing a trade deficit (shown by the blue area) before and

even after the implementation of ACFTA. The trade deficit in all of the ASEAN countries is

22

exacerbated even more after the ACFTA in 2005. In countries such as Laos, Cambodia,

Brunei, Vietnam, and Thailand, the trade deficit even multiplies and increased in a significant

manner than it was before the year 2005. Only in Singapore and Philiphines on the year

2004-2006, the trade gap is relatively small but other than that it all shown a negative trend.

ASEAN countries are receiving more products than they employed each year and

this trend keeps on increasing with the establishment of ACFTA. Therefore we could say that

from economic point of view, the establishment of ACFTA would definitely damage the

ASEAN products, since China’s economy size is way too bigger than ASEAN’s and ASEAN

basically does not have the capability to compete with China. Thus ACFTA as international

regime could be categorized as a loss for ASEAN countries.

23

CHAPTER III

CONCLUSION

The ratification of ACFTA agreement in January 2005 is considered as promising

regime for the economic developments and growth in both ASEAN and China. Principally,

analyzing the tenet contained in the agreement, ACFTA serves as interests of ASEAN and

China in supply and demand side. Arguably, China will supply economic stability for

ASEAN in order to achieve economic hegemony and other way, ASEAN also demands

facilitation of agreement to tackle upcoming trade barriers.

Analyzing the principle ACFTA agreement, there is then positive expectation of

ASEAN of benefits gained by ASEAN. First, regarding economic development, ACFTA

agreement will promote growth as it initiates an economic region with 1.7 billion consumers,

regional GDP of US$2 trillion and total trade estimated at US$1.23 trillion. Second, the

removal of trade barriers between ASEAN and China will lower costs, increase intra-regional

trade and strengthen the attractiveness of ASEAN countries, especially as a preferred

investment destination. At last, the establishment of dispute settlement mechanism will secure

the economic cooperation and trade between ASEAN and China from the uncertainty and

unexpected possibilities resulted from the disputes.

However, analyzing the implementation of this ACFTA agreement and its influence,

the benefits offered by ACFTA agreement from the supply side have not met the expectation

yet. The reason for this fallacy is seen as unpreparedness of ASEAN to advance further

cooperation with China.

24

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