An Analysis on the Trade Flows of ASEAN with China

China in the, the in China International Conference "Implications of a Transforming China: Domestic, Regional and Global Impacts", -6 August 7 Institute of China Studies, University of alaya An Analysis on the Trade Flows of ASEAN with China Lau Wee Yeap Department of Applied Statistics Faculty of Economics and Administration University of alaya Kuala Lumpur, alaysia Hooy Chee Wooi School of anagement University of Science alaysia

AN ANALYSIS ON THE TRADE FLOWS OF ASEAN WITH CHINA R Lau Wee Yeap and Hooy Chee Wooi, Faculty of Economics & Administration, University of alaya School of anagement, University of Science alaysia Abstract This paper examines the monthly bilateral export and import flows between ASEAN- with China from 98 to. Our preliminary analysis on the trade statistics shows that trade between China and ASEAN members have grown to be more important over the years. The trade volumes, both export and import, of nearly all the ASEAN- members have increased significantly over the last two and a half decades, and China has been the top- trade partners of all the ASEAN- countries ever since the inception of the ASEAN plus China agreement in 997 and ASEAN Plus Three in 999. However, we found that only a number of more developed ASEAN members to have higher trade intensity with China post AFTA plus China and ASEAN Plus Three formation. INTRODUCTION China and a number of countries in ASEAN i have been trading partners since centuries ago. Due to historical background and domestic political development, member countries of ASEAN became independent nations in the mid of th century. While China adopted a different model of development in 9s, it started to open its door to foreign partners in late 97s, culminating in the accession of China into Trade Organization (WTO) in. The cooperation between China and ASEAN was brought up a step further in December 997 when Cina attended the first ASEAN + summit in Kuala Lumpur, capital of alaysia. At the meeting, the then Chinese President Jiang Zemin delivered an important speech entitled "Establish Good-neighborly Partnership of utual Trust Oriented to the st Century." After the summit, the two sides issued the Joint Declaration of the People's Republic of China and ASEAN Summit, establishing guidelines for their relationship and common policies of good-neighborly partnership of mutual trust oriented to the st century. Further to that, in December 998, -- The then Chinese Vice President R Corresponding author: Faculty of Economics & Administration, University of alaya 6 Kuala Lumpur. Email: wylau@um.edu.my, 6-7967-67

Hu Jintao attended the second ASEAN+ summit in Hanoi, capital of Vietnam. Leaders of the two sides agreed to maintain friendly exchanges between China and ASEAN countries in various fields, at different levels and through various channels within an allaround dialogue cooperation framework. They also reached consensus on appropriately dealing with differences to boost their partnership. Another step of fostering the cooperation between ASEAN and China was brought forward when three countries from East Asia, namely Japan and the Republic of Korea (ROK) attended informal Summit among the Leaders of ASEAN in December 997 in conunction with the Second ASEAN Informal Summit in alaysia. This initiative has brought the fruition of formal institutionalisation of ASEAN Plus Three when the Leaders issued a Joint Statement on East Asia Cooperation at their rd ASEAN Plus Three Summit in anila in 999. ASEAN Plus Three leaders expressed greater resolve and confidence in further strengthening and deepening East Asia cooperation at various levels and in various areas, particularly in economic and social, political, and other fields. Since then, a number of key documents have been adopted to set the direction for ASEAN Plus Three cooperation. These include the Report of the East Asia Vision Group (EAVG) of and the Report of the East Asia Study Group (EASG) of. While acknowledging the limitations and obstacles East Asia regional cooperation may face, Ali Alatas () advocates for the establishment of APT as ideal forum for three reasons. Firstly, the long established economic interdependence and complementarity in the areas of trade, investment and transfer of technology among APT countries. Secondly, there is strong political will from ASEAN leaders who want to enhance mutually beneficial cooperation in East Asia. Thirdly, the new challenges posed by globalization, including the risk of contagion in financial and economic crisis calls for closer cooperation as an imperative. It is envisaged that APT will establish an Asian onetary Fund (AF) and an East Asia Free Trade Area (EAFTA) in the long run. As discussed in the above, APT has been advocated as a means of increasing intraregional trade, and acting as a special regional form of capitalism. In addition, the accession of China into WTO in has served as the catalyst for increasing regional trade between China and ASEAN members. Hence, the obective of this paper is to examine and compare international trade between ASEAN and especially with maor events like the formation of ASEAN plus Three in 999 and the accession of China into WTO in, contributing to further understanding of trade relationship between ASEAN and China. Fernald et al. (999) examines the link between China and Asian Economies and refutes the claims that China 99 devaluation and strong export performance during 99-9 is the pre-cursor to the Asian crisis of 997-98. They find the strong export performance by China 99-9 was matched by other economies. They further discusses ways for the propagation of the Asian crisis to namely the export channels, the capital inflows channel and increased focus onto the vulnerabilities of China s financial sector by investors.

Fung and Lau () investigate the estimates of the United States China Bilateral Trade Balances. The official estimates of bilateral trade imbalance published by both countries are different which could be attributed to various factors such f.o.b.-c.i.f. adustments of re-exports and re-export markups. The author find the bilateral merchandise trade balance for 999 is US$7.8 billion, in China s favour. Fung and Lau () further investigate the adusted estimates of the U.S.-China bilateral trade balances from 99 to. After a few readustments, they conclude that the best estimate for of the U.S.-China bilateral trade imbalance in good and services in is US$7. billion. This figure is more than percent smaller than the official estimate of the U.S. government. Wu and Zhou (6) have studied the bilateral trade between China and India. They find that both countries have enoyed tremenduous economic growth in the past decade. Using trade intensity index i.e. the export intensity index (II) and import intensity index (II), they found all export and important intensity indices with one exception are smaller than unity, implying that China and India are trading less than they should be. There have been substantial increase in the bilateral trade between the two countries from 997 to. It was reported in, the trade volume reached US$ billion, a 8% increase over the level. They conclude that both countries can increase bilateral trade if each country explores its own comparative advantage and sign bilateral free trade agreements (FTAs) between the two countries. Our paper intends to provide a more detail on the bilateral trade relationship between ASEAN- with China. Unlike most of the previous works that rely on low frequency trade data, we used monthly export and import trade series to provide a more comprehensive picture of ASEAN-China trade relationship. We also include all the ASEAN members, instead of ust focusing on the more developed ASEAN countries, i.e. Indonesia, alaysia, Philippines, Singapore and Thailand (ASEAN- henceforth). The remaining ASEAN countries which are often off the list in most of the empirical studies are Brunei, Cambodia, Laos, yanmar and Vietnam. Thus, our sample covered a complete ten members of ASEAN (ASEAN- henceforth). Besides examine the trade statistics of the ASEAN-, our paper mainly is to employ the method of Wu and Zhou (6) to examine the trade intensity of ASEAN- and China. In view of the above, this paper aims to bridge the gap on the research of trade issues between China and ASEAN-, and contributes to the understanding of trade relationship between China and ASEAN empirically, and adds to the growing literature on the comparison of trade of China with other economies. The paper is arranged as follows. The second section reviews the literature on China trade with other economies. The third and four sections are on methodology and results. In the final section, with respect to findings obtained from this study, policy implication to the trade between ASEAN and China are discussed.

ETHODOLOGY Based on Brown (99) and Koima (96) (see Wu and Zhao, 6), trade intensity between exports and imports of China with ASEAN countries can be measured with the following equations, respectively: II II = =, ( ), ( ) where II = China s export intensity index, II = China s import intensity index, = China s export to country-, = China s total exports to the world, Country, = country- s total imports from the world, = the world total imports, = China s total imports from the world China China, = China s imports from country-, Country, = the country- s total exports to the world, and = the world total exports. Export and import intensity indices reflect the ratio of the share of China s trade with country- (i.e. ASEAN member countries) relative to the share of world trade destined for country-. An index of greater (less) than unity has been interpreted as an indication of larger (smaller) than expected trade flow between two parties concerned. Data is obtained from IF Direction of Trade Statistics. The bilateral import and export series are in monthly frequencies. RESULTS Before we proceed to examine the trade intensity between China and ASEAN countries, perhaps a glance on the trade statistics would provide us some preliminary insight on the progress of their trade relationship. Table reports the annual export value of ASEAN-

to mainland China in a number of years from 98 to. The figure in the parentheses represents the ranking of export value to China in the bilateral trade of ASEAN-. Table, on the other hand, reports the annual import value of ASEAN- from mainland China for the same sample. Both the export and import values are measured in millions of USD. Generally there are a significant growth in both export and import values of ASEAN- to and from with the exception of Laos. However, with the launch of ASEAN Plus Three Summit in anila in 999, both imports and exports of Laos umped more than % from year to, so as alaysia, Brunei, Philippines and Thailand to a lesser extent. This phenomenal growth between China and ASEAN- trade can be attributed to the accession of China to WTO in. For Cambodia, yanmar and Vietnam, the significant growth was only seen in import for more than %, while export recorded a slight improvement in. The export of Singapore also umped % from to, but its import only grew about %. For Indonesia, both export and import increased less than %. In terms of ranking, there is also a fast improvement shown by these countries. In general, trade with China has become increasing important to ASEAN- ever since the 99s. In 99, China has become the top- importer for goods from ASEAN-, except for Brunei and Cambodia. In, China not only became top- import destination for goods from ASEAN-, but also recorded as the top- for six of the ASEAN- members, i.e. Indonesia, alaysia, yanmar, Singapore, Thailand and Vietnam. On import, the importance of China in ASEAN- s trade is even clearer. Ever since 99, China has been the top- seller of goods to ASEAN-, except for Brunei and Philippines in. In, China has become the top- exporter to ASEAN- and remained the top- for Indonesia, Laos, yanmar, Thailand and Vietnam. In short, these preliminary analyses on the trade statistics of ASEAN- with China shows that China has become more and more important trade partners of ASEAN-. Table : Annual Export Value of ASEAN to China (millions USD) 98 99 99 Indonesia.(6) 8.9 () 7.7 () 767.7 () 8. () alaysia 7. () 69.9 () 889.9 (9) 8.6 (9) 68. () Brunei. (). (9). (8).7 (8) 9.78 (6) Cambodia. ().6 (). ().78 ().79 (9) Laos 7.7 ().8 () 8.8 ().8 ().9 (9) yanmar.89 (9).9 ().96 ().7 (). () Philippines. (8) 6.76 (6) 8.9 () 66.9 ().6 (7) Singapore 7.6 () 798.77 () 79.7 () 76.9 (6). () Thailand.66 () 68.7 (8) 6.9 (6) 86. () 77. () Vietnam. () 7.78 () 6.87 () 6.9 () 88. () Figures in the parenthesis represent the ranking of the export value to China in the respective countries. * Export values of Cambodia, Laos and Vietnam for 98 is replaced by 98 due to data unavailability.

Table : Annual Import Value of ASEAN from China (millions USD) 98 99 99 Indonesia 97. () 6.86 (8) 9. (8).97 () 97.7 () alaysia.7 (9) 6.78 (9) 79. () 7. () 799.6 () Brunei. () 7. (8) 88.68 (8) 6.89 () 6.8 (6) Cambodia. (). () 6.78 (8).88 (). () Laos.88 (8).9 (). () 7.86 () 8.6 () yanmar 9. (7) 7.68 () 679.6 () 6. () 998.7 () Philippines. (6) 8.6 (6) 66.8 (9) 78.9 () 797. () Singapore 68.69 (8) 9.6 (6).6 (8) 76.6 () 7.6 () Thailand 6.6 (6) 6.99 (6) 9. (7) 76.9 () 666.9 () Vietnam. ().6 (9) 9.69 (6). () 8. () Figures in the parenthesis represent the ranking of the import value from China in the respective countries Import values of Cambodia, Laos and Vietnam for 98 is replaced by 98 due to data unavailability. The raw trade statistics however, does not really tell us much on the intensity of China s trade with the ASEAN-. These are for two reasons. First, the value of trade increases with inflation. Thus a price effect might mislead our understanding of trade intensity between these countries. Second, the trade growth might be the result of increasing trend of globalization worldwide, which sees countries with open economy often showing higher trade with many of their trading partners. Although the rankings as listed in Table could probably provide some idea of the trade intensity of ASEAN- with the rankings however act an ordinal measure of relativity, and they do not provide us with an quantitative measure of the trade intensity between ASEAN- with China. Based on equation () and (), the trade intensity of export and import of China with ASEAN- are calculated separately. Figure depicts the monthly export and import intensities of China with ASEAN- for 98-. These trade intensity series provide us with the pattern and consistency of China s trade, both export and import, with the ASEAN- countries for the last two and a half decades ever since China started to liberalize its policies on foreign trade in late 97s. The graphs provide a different story as compare to the preliminary trade statistics analysis. In terms of monthly export, only three of the ASEAN- show increasing export intensities with China after the inception of the AFTA+ China framework in the late 99s, i.e. Indonesia, Brunei, and alaysia. These three countries basically have achieved high export intensity to China in the mid-98s and the mid-99s. Philippines, Singapore and Thailand on the other hand, have gained quite high export intensities with China ever since the mid-98s. The AFTA + China framework does not seem to contribute much to their export to China. Vietnam enoyed high export intensity to China ever since their open door policy before the mid-99s and with the fast growth and diversification of their economy, the export intensity from Vietnam to China has dropped recently. As for Cambodia, Laos and yanmar, their export intensity to China remain quite uncertain and drastic before the 99s. They turn quite stable after that but there is no clear improvement in their export intensity under the AFTA+China framework. 6

Figure : onthly Export Trade Intensity of China with ASEAN (millions USD) China to Indonesia China to Brunei Darussalam......8..6...... China to alaysia.8 China to Cambodia.6. 6...8 8.6.. China to Philippines 7 China to Laos 6 China to Singapore 8 China to yanmar 7 6 China to Thailand China to Vietnam 7

Figure : onthly Import Trade Intensity of China with ASEAN (millions USD) China from Indonesia China from Brunei Darussalam................. China from alaysia. China from Cambodia.. 8. 6... China from Philippines China from Laos 9 8 8 6 7 6 China from Singapore. China from yanmar..6..8.. China from Thailand 7 China from Vietnam 6 8

The scenario for import intensity is a bit different. Except for Indonesia, the other four ASEAN- countries show a clear increase in import intensity under the AFTA+China framework, with Singapore and Thailand to a lesser extend. Brunei has very high import intensity from China under the AFTA+China framework while Vietnam enoyed high import intensity with China ever since the early 99s. The import intensity of Cambodia, Laos and yanmar with China show quite the same with their export intensities with i.e. they are stable after the 99s but there is no clear improvement under the AFTA+China framework. CONCLUSION The importance of China in world trade has received high attention over the last two decades. With the inception of ASEAN Plus Three and ASEAN Plus the role of China has gained renewed attention as the block comprises a huge market size. Our paper has provided a more detail on the bilateral trade relationship between ASEAN- with China. Our paper has used monthly export and import trade series to provide a more comprehensive picture of China with all the ASEAN countries. We examine the trade statistics of the ASEAN-, as well as trade intensity based on the method of Wu and Zhou (6). Basically the trade statistics shows that China has become very important to ASEAN-, where both export to and import from China of nearly all the ASEAN- members have increased significantly over the last two and a half decades. ore importantly, China has become the top- trade partners of all the ASEAN- countries with the inception of the ASEAN+China and ASEAN Plus Three agreement in the late 99s. However, we found that only some of the more developed ASEAN members have managed to enoy higher trade intensity with China under the ASEAN+China inception. REFERENCES Alatas, A. (). ASEAN Plus Three Equals Peace Plus Prosperity, ISEAS Discussion Paper No., January Regional Outlook Forum, ISEAS, Singapore. Brown, A.J. (99). Applied economics: Aspects of world economy in war and peace. London: George Allen and Unwin. Fernald, J., Edision, H., and Loungani, P. (999), Was China the first domino? Assessing links between China and other Asian Economies, Journal of International oney and Finance, Vol. 8, -. Fung, K.C., and Lau, Lawrence, J. (), New Esimates of the United States China Bilateral Trade Balances, Journal of the Japanese and International Economies, Vol., -. 9

Fung, K.C., and Lau, Lawrence, J. (), Adusted estimates of United States-China Bilateral Trade Balances: 99-. Journal of Asian Economics, Vol., 89-96. Koima, K. (96). The pattern of international trade among advanced countries. Hitotsubashi. Journal of Economics, (), 6-6. Wu, Y. and Zhou, Z. (6). Changing bilateral trade between China and India. Journal of Asian Economics, Vol.7, 9-8. Soesastro, H. (). Whither ASEAN Plus? Presented in PECC Trade Policy Forum, June -, Bangkok, Thailand. p.-6.. Suzuki, S. (). Chairmanship in ASEAN + : A Shared Rule of Behaviour, IDE Discussion Paper No. 9, Institute of Developing Economies (IDE), JETRO, Chiba, Japan, p.-. Stubbs, R. (). ASEAN Plus Three: Emerging East Asian Regionalism? Asian Survey, (), -. Footnotes i The members of ASEAN are Brunei, yanmar/burma, Cambodia, Indonesia, Laos, alaysia, the Philippines, Singapore, Thailand and Vietnam.