China's might

Not a long ago communist China was often depicted as the region's bogeyman, especially over certain contentious areas in the South China Sea. Although some still consider China as a dormant security threat in the region, many more now think of China differently: As a new economic powerhouse, whose development awes (or irks) not only its neighbors but also the developed world.

With its cheap labor and relative stability, China beats most competitors in Southeast Asia. Chinese goods have already flooded the region, including Indonesia. Just name it, you can easily find made-in-China goods here, from needles to motorcycles.

While Indonesia appears to be quite uncompetitive by comparison, this has not stopped it and other countries in the region from entering into a free trade agreement (FTA) with this particular country. Last week, during the ASEAN summit in the Laotian capital of Vientiane, President Susilo Bambang Yudhoyono and other government leaders in the region signed a trade pact with Chinese Prime Minister Wen Jiabao. With this accord, they agreed to eliminate tariffs on a range of agricultural and manufactured products by 2010. So what are the implications of this FTA?

Considering China's dominance in the manufacturing sector, many parties in Indonesia believe that a FTA with China will eventually overwhelm the country with Chinese juggernauts. A number of Indonesian labor unions, for example, responded to the agreement with strong reservations, noting that the FTA would force many firms in the country to close and thus increase unemployment. Businessmen from the Indonesian Chamber and Commerce voiced similar concerns, saying that the accord would "deal a blow to Indonesia's manufacturing sector."

These concerns are all well-founded. In fact, labor and industries in less competitive sectors will likely be the big losers. Nevertheless, taking a deeper look, it can be concluded that the potential upsides will outnumber the downsides, and the potential gains will outweigh any losses.

The arguments may be cliched, but it is worth repeating them here. Free trade in general will make people better off, with cheaper prices. True, workers in "protected" industries may have higher wages than they would otherwise under free trade, but consumers in general would be worse off because of higher prices of goods as a result of import tariffs. True, free trade may displace workers in less competitive industries, but it creates efficiencies in the economy by allocating production factors -- land, labor and capital -- to more productive sectors.

There are also the practical arguments presented by Trade Minister Mari E. Pangestu that a FTA with China will lead to the formation of a regional production center with China as the core and countries in the region as alternative supply sources or complements to China. Thus, not participating in the FTA with China could well mean that Indonesia would be left out in this regional production network, which according to Chinese government data is worth US$84 billion in the first nine months of this year, or up 35 percent from the previous year. At this pace, trade between ASEAN and China will soon match the $120 billion in annual trade between ASEAN and the United States.

Therefore, what should be done now is help reduce any possible suffering of the potential losers by first of all identifying uncompetitive industries and either preparing them for free trade, or facilitating their move into more competitive sectors, where Indonesia has special expertise and resources. This way, Indonesia can gain more from the FTA with China, and help create the world's biggest free trade zone, covering nearly two billion people.

Not only that, the FTA with China will bring another, bigger gain to the region, i.e. stability. The FTA with China will complement China's signing of a non-aggression pact with ASEAN -- the Treaty of Amity and Cooperation. Free trade improves prosperity, and prosperity brings stability. As libertarian economist Friedrich Hayek once said, more trade almost always leads to less war.