China-ASEAN Free Trade Zone opens the zero-tax era RMB internationalization springboard

The China-ASEAN Free Trade Area (CAFTA), the world's largest free trade zone, officially launched on January 1, 2010. This landmark agreement saw over 90% of goods traded between China and ten ASEAN countries move toward zero tariffs, covering more than 7,000 products. With a combined GDP of nearly $6 trillion and a trade volume of $4.5 trillion, the region entered a new era of economic integration and openness. The rapid development of economic and trade relations between China and ASEAN was driven by the Framework Agreement on Comprehensive Economic Cooperation, signed in November 2002. By 2010, after seven years of negotiation and collaboration, the two sides finalized three key agreements: the Goods Trade Agreement, the Service Trade Agreement, and the Investment Agreement. These agreements laid the foundation for a fully integrated free trade area. Starting from January 1, 2010, six original ASEAN members—Brunei, the Philippines, Indonesia, Malaysia, Thailand, and Singapore—implemented zero tariffs on over 90% of goods. China’s average tariff to ASEAN dropped from 9.8% to 0.1%, while the average tariff of the six ASEAN members to China fell from 12.8% to 0.6%. The four newer ASEAN members—Vietnam, Laos, Cambodia, and Myanmar—were expected to achieve the same goal by 2015. Since the signing of the Comprehensive Economic Cooperation Framework Agreement, trade between China and ASEAN has surged. In 2002, bilateral trade stood at around $60 billion, rising to $231.12 billion by 2008, with an average annual growth rate of 24.2%. Thai Ambassador Wang Yisheng predicted that after the full implementation of CAFTA, bilateral trade would continue to grow rapidly, with an estimated increase of 40% to 50% annually. Experts believe that the reduction of tariffs not only boosted trade volumes but also helped optimize the trade structure between the two regions. Despite both being export-oriented economies, China and ASEAN have complementary industries. For instance, China exports machinery, steel, textiles, and ceramics, while importing raw materials such as copper, rubber, and cocoa. The share of mechanical and electrical products in China’s exports to ASEAN increased from 39.5% in 2003 to 50% in 2008. According to a report by Guojin Securities, several industries have seen growing export shares to ASEAN, including chemical fibers, transportation equipment, steel, chemicals, and glass ceramics. While the steel industry is currently at a low point, other sectors like chemical products show steady growth. In the medium term, the China-ASEAN Free Trade Area could see significant opportunities in chemical fiber and textile machinery, as well as in agricultural and industrial equipment. As ASEAN countries remain largely agrarian, there is strong demand for Chinese agricultural machinery and production materials. Additionally, cooperation in sectors like machinery processing, textiles, engineering contracts, and electrical appliances presents substantial growth potential. The launch of CAFTA also marked a step forward in the internationalization of the RMB. As a developing country-led free trade zone, it serves as a platform for expanding the RMB’s role in regional trade and finance. Experts suggest that currency internationalization typically occurs in three stages: first, local usage; second, regional acceptance; and third, becoming a reserve currency. Currently, the RMB is gaining traction in ASEAN due to its stability and growing trade volume. In 2008, China’s trade with ASEAN reached $231.12 billion, and even during the 2009 financial crisis, trade remained strong, reaching $187.05 billion in the first 11 months. With a large population and high growth potential, the region is set to become one of the fastest-growing in the world. This increasing trade volume has fueled greater demand for RMB pricing and settlement. Since the global financial crisis, China introduced cross-border RMB settlement, which gained early traction in ASEAN. The RMB’s relative stability compared to the depreciating US dollar has made it more attractive for regional transactions. Additionally, the Chiang Mai Initiative Multilateralization Agreement, signed by 10+3 finance ministers, supports trade financing and promotes the use of RMB in the region. To further enhance economic and financial cooperation, authorities plan to introduce measures that facilitate investment and deepen trade and capital market integration. These initiatives aim to expand the RMB’s usage beyond borders, offering more opportunities for overseas businesses to adopt the currency.

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