Dr. Victor K. Fung:Prosperity through Cooperation
Origin:Boao Forum for Asia      Time:2013-12-13 14:48:52     Views:356225

  I.  China and Free Trade Areas in Asia

    I would like to preface my remarks by commending the far-sighted vision of a leadership that in 1978 initiated imaginative economic reforms. These reforms along with a policy of opening the door to foreign investment have spurred the Chinese economy to develop at a phenomenal pace. The determination by the Chinese leadership to continue with and extend the economic reforms nationwide will ensure China's emergence as one of the world's major economic powers in the 21st Century.

    In order to benefit from this development, the region as a whole will need to agree on the strategy to adopt and the actions to take.

    In the short term, I think the ASEAN Free Trade Agreement(AFTA) may need to be hastened to attain the critical mass as a single market to attract Foreign Direct Investments(FDI).

    In the longer term, I think serious consideration should be given to the formation of Free Trade Areas under the WTO framework. Currently under discussion is the"ASEAN+3", meaning the ASEAN countries plus China, Japan and Korea. The idea was mooted by the Chinese leadership and is definitely worth pursuing by Asia as a whole. The Free Trade Areas concept is to allow the free flow of goods across the region at low or zero tariffs. It will help to ease the pressures on Southeast Asian economies from China's WTO entry and create a win-win situation for all parties concerned.

    Developing Domestic Consumption Markets in Asia's economies

    The export economies in Asia, especially the newly industrialized economies, are vulnerable to the US economic slowdown as they rely heavily on the US market. A way forward, therefore, has to be formulated whereby Asian economies can better rely on each other.

    Developing stable and mature domestic markets is an effective way to fend off the negative impacts caused by downturns in our export markets worldwide. The idea is to create Asia's own internal demand.

    China offers a good example. China's accession to the WTO and her commitment to cut tariffs will stimulate the growth of the domestic market as consumers  enjoy more choices. Other Asian countries such as India(with a population of one billion) and Indonesia(with a population of 200 million) also have  the potential to develop huge domestic demand.

    The growth of domestic demand across the region would  be conducive to the growth of intra-regional trade. The virtuous circle thus created would boost both demand and trade within the region. Manufacturing products, notably consumer goods, will find outlets not only in Western markets but also within the Asian region. With over 60 percent of the world's consumers, this population base which Asia is in possession of, is one  of the world's most valuable assets rather than a liability if you look at it from a marketing standpoint.

    II.  Impact of China's WTO entry on the Asia Economies

    Challenges to Asian countries

    So far, the key focus of most people has been on the market opportunities that will arise in China in her new position as a member of the WTO. However, I don't think this will become a reality as quickly as some people may wish.

    In my assessment, the far more significant impact of China's WTO membership is that her exports to the rest of the world will become vastly more competitive. Discriminatory trade practices and barriers currently adopted by some WTO member countries against China will largely be wiped out within a short period of time. Under WTO regulations, China will also be entitled to redress should she become a victim of discrimination or unfair trade practices.

    Product-wise, China's competitors in the region will find that garments are relatively immune from the impact because of the still existing quota system. However, the Agreement on Textile and Clothing(ATC) provides for the termination of quotas among the WTO member countries, the Multi-Fibre Arrangement(MFA) will be phased out and all quotas will be removed by 1 January 2005. It is almost certain that China's export of textiles and apparel to other countries will explode in 2005. As for other non-garments, the impact could be quite drastic and immediate. Manufacturers in Southeast Asia will probably be the most severely affected.

    In addition, locations of global industries keep shifting.  Increasingly mobile companies are drawn to places with lower costs, better skills, and a higher quality of life.  China is becoming a huge magnet, sustaining in foreign investment. Under the difficult competitive circumstances other countries must demonstrate their attractiveness to investors as never before. They must be ready to abandon shrinking or noncompetitive businesses and replace them with new one which have higher value-added.

    Opportunities for the Asian countries

    In response to globalization and China's WTO entry, Asian countries will need to diversify their economic base, build economic clusters and develop mechanisms to make their economies more flexible and adaptable to changing conditions.

    Principles of Supply Chain Management("SCM")

    First, a market-oriented strategy will need to be formulated to further enhance economic competitiveness and to achieve regional cooperation. With globalization and cross-border integration developing steadily, the world economy is becoming an inseparable whole. Countries must adopt a genuine market perspective towards their products and customers. Governments and communities must think and plan more like businesses.

    Second, Southeast Asian countries may need to re-position themselves in the market by seeking and specializing in some niche clusters as quickly as possible. Such re-positioning requires re-examinations of their respective strengths and weaknesses. Failing that, they might have a hard time staying in the race. I would, therefore, envisage a niche hunting game to start in the near future.

    Furthermore, clusters of inter-related industries concentrated within a region are also critical to economic development for their ability to respond to change.  Since industry clusters continually generate new industries and spin-offs, the region can accommodate change and be self-regenerative.  For example, Silicon Valley began as a semiconductor-manufacturing region, but as semiconductor manufacturing moved away, it switched to software development. "Soft inputs" such as skilled workers, technology, specialized financing, and a responsive business climate are the basic requirements for the development of industrial clusters.

    By focusing on one's core competency, developing a clear positioning in the supply chain and maintaining effective collaboration, I believe the competitiveness of the Asian economies will be enhanced significantly. 

    Third, economies shall constantly pursue enhancement and optimization of the supply chains. For economies based on an assembling industry or resource extraction, it is critical to move up the value chain by developing capabilities to manufacture component parts or to integrate components.  Manufacturing economies will need to add value by improving design, R&D and innovation.

    Governments also play an important role and there are a number of areas where they can assist. Firstly, they need to introduce a user-friendly legal framework which is conducive to the development of knowledge-based economies, which can nurture new niche industries. Secondly, they need to incorporate values such as lifelong learning and entrepreneurial spirit in the education system.  Thirdly, they need to facilitate R&D through the provision of seed moneys and matching grants, the protection of intellectual property rights, as well as effective licensing programs for research institutions.  Fourthly, they need to develop a sound capital and financial market involving venture capital as the base, investment banks as the mezzanine stage and a well regulated stock market to allow companies to make initial public offerings as they mature. Last but not least, Government's need to establish efficient channels to link up new technologies, knowledge-based organizations and funding resources.

    The quality of life is becoming more and more important in placing Asia strategically in the global economy. In making relocation decisions, businesses are placing increasingly greater weight on quality-of-life considerations rather than on cost factors alone. Foreign investors and talent- are also concerned more and more with the quality of living such as how easily the traffic moves, how clean streets are, how serious the air pollution is and how good the education system is. This requires investments in infrastructure, education as well as in amenities like museums, theaters, libraries, sports and recreational facilities.

    In the meantime, Asian economies must work closely together to establish a favourable environment for the flow of work, physical goods, information and capital within the region. With such cooperation, regional prosperity in Asia can be assured.

    III.  Strategies for Asian businesses to capitalize on a growing China?

    China- the largest potential consumer market in the world

    Based on my own observation, I am convinced that China is totally committed to opening up her domestic market with or without WTO entry. The WTO focal point is, in essence, to speed up the whole process of opening.

    One of the most important aspects of China's WTO entry would be the granting of national treatment to overseas companies. By obtaining a status similar to Chinese enterprises, foreign companies will be able to directly import, export and distribute within China with wholly-owned or majority-controlled joint ventures. Restrictions on trading and distribution of goods within China will be lifted gradually. This, in fact, will provide a new platform, and new impetus, for foreign business wishing to tap the vast potentials of the China market.

    Since the economic reform and the opening up of China, there has been remarkable growth in China's consumer market. With the improvement in people's living standards and rising disposable income, remarkable changes occurred in the consumption structure. On the whole, demand has shifted from daily necessities to high-quality and foreign branded goods and services. Thus,'Oversupply' only exists in the market for lower-end products. Those high-quality and foreign branded products are in short supply.

    Make good use of the Closer Economic Partnership Arrangement(CEPA) between the Chinese Mainland and Hong Kong

    CEPA, which is essentially a bilateral free trade agreement under the WTO framework, was signed between the Chinese Mainland and Hong Kong in June 2003. It is the first free trade agreement ever concluded by the Mainland of China and Hong Kong. CEPA will open up huge markets for Hong Kong goods and services, ahead of and beyond the commitment of China in the WTO.  The WTO-plus market liberalization measures for trade in services will give companies in Hong Kong a first-mover advantage.

    Although CEPA provides Hong Kong with a number of first-mover advantages in the huge Chinese market, these benefits are not exclusive to Hong Kong. Foreign enterprises may also enjoy the benefits of CEPA by fulfilling the CEPA Rules of Origin..

    First, foreign manufacturers could relocate part of the manufacturing processes, those of high valued-added in particular, to Hong Kong in order to meet the'value-added requirement'

    Second, to enjoy the status of'Hong Kong Service Suppliers', foreign enterprises in Hong Kong could adjust their employment structures so that at least 50% of their employees are Hong Kong residents or Mainlanders with one-way permits

    Third, they could partner with or even buy out Hong Kong enterprises that satisfy the requirements of CEPA- this may well lead to a wave of acquisitions of Hong Kong enterprises by foreign enterprises.

    Fourth, multinationals having subsidiaries qualified for CEPA benefits could strengthen these subsidiaries to make the most of CEPA and improve their market access to the Mainland.

    CEPA not only gives Hong Kong companies a head start on their competitors, it opens a new avenue of co-operation between Hong Kong and overseas firms and partners wanting a foothold in China's  growing market.

    IV.  Conclusion

    A more open and prosperous China is unambiguously good for the world economy in the long run. Nevertheless, in the near term, Asian economies will face serious challenges adapting to the growing presence of China in the world marketplace. The fierce competition stemming from China will inevitably force some companies and industries in these countries to shut down, while others will choose to relocate to China. Indeed, this shakeout is already happening.

    The challenge for the rest of Asia and beyond is to be flexible and dynamic in adapting to the peaceful emergence of China. Asian governments should not resist this adjustment. Rather, they shall concentrate on minimizing the costs of economic dislocation, by focusing on developing niche markets and promoting industries with a comparative advantage vis-à-vis China.

    In the meantime, it is imperative for China to take the initiative in establishing an environment in which'prosperity through cooperation' can be achieved throughout the region.

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