January 2010 is the beginning of a new decade yet it also inaugurates a new era in international trade with the commencement of the ASEAN-China Free Trade Agreement. The 1.9 billion citizens of its member countries now comprise the largest free trade area in the world. In terms of total trade volume, the ASEAN-China Free Trade Agreement ranks third behind only the European Union and the North American Free Trade Agreement.

After its signing in 2002, China and the six veteran ASEAN members – Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand – have incrementally reduced their tariff levels, typically at 5% per annum. As of January 1 2010, 93% of the commodities exchanged between these countries will have their tariff rates reduced to zero. The newest members of ASEAN – Cambodia, Laos, Myanmar and Vietnam – are scheduled to follow suit with most of their intra-ASEAN tariffs eliminated by 2015.

The trade agreement seems to have been effective. Since the first provisions of the treaty went into effect in 2002, trade has soared between China and ASEAN countries. The exchange of goods among China’s top five trade partners in ASEAN – Indonesia, Malaysia, the Philippines, Singapore and Thailand – expanded at an average rate of 22.9% from 2004 through 2008. In the four newest ASEAN members during this five year time period, imports to China have grown at an astounding rate of 36.1%, albeit with great variation between countries and years.

From this rapid increase, China has edged out the United States to become ASEAN’s third-largest commercial ally, behind Japan and the European Union. China-Asian trade totalled USD 231 billion in 2008. Although the first half of 2009 saw a decrease of 24% over the same period the previous year, indications of a global economic recovery suggest that expansion should once again resume in 2010.

Currently, trade between China and its southeast Asian counterparts is characterised by China swapping finished products, such as electronic equipment and machinery, for inputs such as oil/lubricants, plastics, rubber and intermediate electronic components. The effects of the free trade agreement may gradually change this. It is expected that a number of Chinese manufacturers may expand into areas with cheaper costs.

Take Cambodia, for example. Due to its net exporter status of cotton and to its low production and labor costs, Chinese garment factories may be enticed to relocate given these factors and the extremely competitive environment of China. Provisions of the free trade agreement, such as fair treatment of foreign investment and impediments to nationalisation make foreign direct investment within treaty participants a more viable option for such manufacturers.

Despite the progress already underway through this new agreement, there are still a number of obstacles that must be overcome in order for it to reach its full potential. Road and rail networks are limited between China and ASEAN members; exchange almost exclusively takes place by sea. The Chinese government has allocated USD 25 billion to alleviate this problem, but the construction process will take years to complete. The fact that the free trade agreement has been made without the guidance of the WTO is also a concern. Given the lack of transparency in China and in several Asian countries, restitution in legal disputes may be difficult to obtain.

But the effects of these glitches seem to be minimal. The ASEAN Secretariat estimates that the agreement will contribute an additional 0.3% to China’s GDP and another 0.9% to the GDP of the whole of ASEAN. One may expect that at the beginning of the next decade, the ASEAN-China Free Trade Agreement may yet truly rival those in North America and Europe.