China's Approach to the Free Trade Agreement and Its Influence

ABSTRACT

China is aggressively pushing ahead with the signing of a Free Trade Agreement (FTA) and negotiations have already begun in regards to the future signing of an FTA between ASEAN and Hong Kong.

The China-ASEAN FTA includes promoting trade and investment, realizing free trade within a decade, and developing the Mekong River basin. Certain commodities, including agricultural products, are to be liberalized starting as early as 2004. China anticipates that the FTA will lead to improvements in political relations and will stimulate economic growth; ASEAN in turn focuses on the economic gains that the FTA may generate in terms of benefiting from China's rapid economic growth. Regardless, the establishment of an FTA will confer substantial economic benefits upon both China and ASEAN, and will help expand mutual trade and investment and boost economic growth.

Under the Closer Economic Partnership Agreement (CEPA), China and Hong Kong's free trade relations entail primarily the liberalization of trade in both goods and services and the simplification of investment and trade. Hong Kong expects that CEPA will have a boosting effect on economic growth. Additionally, the removal of customs tariffs and the early expansion of the service sector into China promises significant merits not only for Hong Kong, but also for Hong Kong-based foreign companies. On the other hand, China also stands to gain in that CEPA will not only bolster its "one country two systems" policy by supporting Hong Kong's economy, but it will also allow China to utilize Hong Kong's business functions more fully.

Just as with accession to the World Trade Organization (WTO), China's commitment toward promoting the FTA has a major strategic importance. Using the economic power gained through the FTA, China will be able to push its political agenda, such as improving political relations and establishing a Regional Security and Cooperation System. Economically, China's presence as a major economic power in the region will play an important role via economic cooperation and integration once the FTA comes into effect.

China's approach toward the FTA will have a profound impact on the Asian economy by accelerating regional economic cooperation and integration and by promoting the formation of a Greater China Economic Zone. China's FTA will also have a stimulating effect on Japan, and Japan's support for the FTA will also strengthen. For Japanese companies making inroads into Asia, the FTA will give greater momentum to the establishment of an efficient production system in Asia.