| Summary: | In November 2002 at the ministerial meeting, ASEAN and China signed an agreement to form a free trade area (FTA) by the year 2010. There was an estimation that both regions would gain from FTA deals. However, the rapid growth of China since the early 1990s is seen as a threat to ASEAN's future economic growth. Prior to November 2002, ASEAN had experienced trade and investment diversions, i.e trade and investment in the region had diverted to China. China's
relatively lowest cost of production as compared to ASEAN members has decreased the export competitiveness of ASEAN. The strong competition between the regions in the international commodity market and productive foreign capital has produced a great deal of stress ASEAN economies. The main reason for the economic stress is largely attributed to the structure of production and exports of ASEAN and China. Both regions engage in similar sectors of commodities production and exports. There is the factor of homogenity in production and exports in the regions. In the group of countries or regions which have a similar structure of production of commodity and exports, theoretically only countries which have the lowest cost of production will
gain in trading. On the other hand, investment diversion happens in two forms: (1) new investments or foreign firms prefer China rather than ASEAN. We should remember that the determinants of inflow of FDI in a country relies on political stability (i.e good political governance, significant institutional reforms such as land reforms, a liberal labours acts, lower cost of production in terms of labour, transportation or any costs related to businesses). Fiscal incentives are the secondary factor. Eventhough ASEAN may offer political stability but it may not offer relatively low costs of production compared to China. In this regard, and theoretically since the main objective of a firms is to make profit, so the firm will only invest in a
country which ensures and allows that the firm would make a profits. One of the items looked at by a firm is the lowering of operating costs. Related to the first argument members of ASEAN have experienced re-location of foreign firms which were' previoulsy located in the region to China. There were a number of multinational firms, for example Harris, Seagate, National Semi-conductor, Seagate and Siemens which were located in Singapore and Malaysia had moved either their entire or part of production to China. The diversion of trade and investment of ASEAN to China is real. These diversions have explicitly affected terms-of-trade of ASEAN's economies, and have eventually contracted exports income. This paper believes that the ASEAN-China FTA does not promise a total gain to members of ASEAN. This paper does not deny that there are members of ASEAN which may receive a positive economic impact of the FTA but the question is how much will they gain. This paper will explores what the impact of ASEAN-China FTA on ASEAN's
trade and will provide some ideas as to how competitive members of ASEAN are against China.
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