Environmental Impacts of the ASEAN-China Free Trade Agreement on the Greater Mekong Sub-Region

Using the free trade agreement concluded between China and the Association of Southeast Asian Nations in 2004 as an example, this study seeks to illustrate the interaction between FTAs, trade and the environment. Based on an analysis of the agreement's impacts on trade flows between China and its five trading partners in the Greater Mekong Sub-region (Cambodia, Lao PDR, Vietnam, Myanmar and Thailand), the paper examines the likely effects of these changes on pollution levels. A case study of Cambodia elaborates on other environmental issues arising from increases in agricultural production and natural resource exploitation.

Key findings:

• Overall, trade between China and the GMS has increased significantly since the signing of the ASEAN-China FTA, in particular for goods whose tariff rates were reduced under the ACFTA. A similar trend can be observed in Cambodia, although some exports eligible for lower tariffs have seen a relatively slow increase due to difficulties faced by exporters in meeting China's import standards for agricultural products such as cassava, live animals and fish.

• Two thirds of the trade volume between China and the GMS countries is in products that fall into the least polluting sectors (i.e. those sectors that emit total toxic pollution of less than 500 pounds per million USD of production), while a third is in products that fall into the most polluting sectors (i.e. more than 1,500 pounds per million USD of production). The level of pollution intensity generated by the latter sector is significant and likely to grow.

• Within the GMS trade structure, China is the major producer of goods in the most polluting sectors, which means that much of the GMS-wide pollution intensity originates in China. In the case of Cambodia, rising imports in the most polluting sectors from China have led to a substantial "gain" from trade for the Cambodian environment, but this has come at the cost of environmental degradation in China.

• There is considerable trade in natural resources within the GMS, such as minerals, agricultural commodities and wood, and in products derived from these resources. Increased trade in natural resource-based products raises serious environmental concerns over resource depletion. These impacts are of particular concern in Cambodia given its heavy reliance on natural resource-based exports to China, existing environmental challenges (including loss of forest cover, depletion of inland fisheries, degradation of coastal resources and loss of biodiversity) and weak environmental regulation.

Key recommendations:

• The absence of provisions concerning environmental cooperation in the ACFTA suggests significant shortcomings in regional economic policy making. While it is important for GMS countries to pursue further trade liberalization and deepen economic integration to sustain economic growth, environmental issues must be considered and included in trade negotiations and agreements in order to mitigate negative environmental consequences of trade.

• In Cambodia, improving natural resource governance, including by addressing shortages of skilled staff, insufficient budget allocations, overlaps in functional areas among responsible agencies and poor physical facilities, needs to be a key priority for the government as well as the donor and civil society communities.

• Due to data limitations and the short time since the finalisation of the ACFTA, this study only provides a very preliminary assessment of the agreement's trade and environment impacts. Additional research would be needed to get a better understanding of the causal links between ACFTA and changes in trade flows, the consequences of increased trade in natural resource-based products on resource sustainability, and the social impacts of trade expansion under the ACFTA and its environmental impacts.