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EIU: Free-trade free-for-all

Asia: Economy: News analysis
01 Dec 2004

Asia economy: Free-trade free-for-all



If proof were needed that an Asian free-trade "arms race" has begun in earnest, then the 10th ASEAN (Association of South-East Asian Nations) summit in Vientiane on November 29th-30th provided it in abundance. The highlight of the summit was the signing of an FTA between China and ASEAN, but equally striking was the number of other trade pacts that were, variously, agreed, worked on or proposed during the meeting in the Lao capital.

Although the regional trend towards trade liberalisation will certainly have some positive consequences, particularly in helping to lower tariffs on traded goods, the events at the Vientiane summit will confirm the fears of some trade experts. They believe that a proliferation of intra-regional or bilateral FTAs risks distorting trade flows, complicating trading rules and undermining multilateral free-trade initiatives, particularly the World Trade Organisation (WTO)’s Doha Development Agenda (DDA).

Rumblings of concern over the impact of so many FTAs—and their potential to create a regulatory "spaghetti bowl" of conflicting obligations—have been around for some time. Yet it now seems that the region’s push for FTAs is gathering even greater momentum than was previously thought. The official website for the ASEAN summit listed a total of 34 agreements and studies that were to be signed, adopted or presented. In addition, participating countries discussed a number of agreements on the sidelines of the summit, one of the highest-profile of which was a bilateral FTA between Japan and the Philippines.

But it is the stampede to form large, regional trading blocs with the ten-member ASEAN that will be remembered as a defining feature of the summit. If conventional wisdom holds that the completion of an FTA creates a domino effect in which excluded countries, as a defensive measure, rush to secure preferential market access of their own with the FTA’s participants, this appeared to be borne out by the Vientiane summit: in addition to the China-ASEAN deal, plans emerged for similar pacts linking ASEAN to South Korea, Australia and New Zealand respectively. Japan and India already plan to forge their own FTAs with ASEAN, and Japan has now agreed to start talks in April 2005.

First step towards a pan-Asian common market?

The rush to form partnerships with ASEAN creates a potentially extraordinary situation. If all of the proposed FTAs go ahead as planned, virtually all of Asia could in theory become a tariff-free zone. It is claimed that the China-ASEAN pact alone will create the world’s largest common market by 2010 (one that will expand even further when the four newer ASEAN members, which face a slower liberalisation schedule, cut tariffs five years later, in 2015). Even today, China and ASEAN boast a combined population of 1.9bn and combined GDP of US$2.4trn. Add in Japan, South Korea, India, Australia and New Zealand, and potentially one is left with a free-trade area encompassing a combined population of 3.1bn and GDP of US$9.1trn (again, using Economist Intelligence Unit estimates for 2004).

Why is ASEAN suddenly the focus of everyone’s attention? As mentioned, straightforward competition among policymakers—a defensive response to ensure one’s own country is not excluded from tariff reductions—is one reason. A desire to lessen Asia’s dependence on US and EU export markets is also a likely factor. And for many countries other than China, a pact with ASEAN offers a means of collectively scaling up in response to China’s ever-growing economic might. Of course, the ASEAN-China FTA implicitly recognises the growing importance of China as an export market and key driver of regional trade in its own right. Among other things, China has recently overtaken the US as South Korea’s top trade partner.

Politics is also a factor, particularly for the region’s two economic powerhouses of Japan and China. For them lowering trade barriers can be a convenient way of securing political concessions. It is notable that in September 2004 ASEAN granted China market economy status (MES). Whether or not this was in return for more generous FTA terms from China, gaining the support of ASEAN is useful for China in its attempts to be recognised as a market economy by the US and EU. This has a significant bearing on China’s treatment in anti-dumping cases. Deepening its links with ASEAN via an FTA would also help China to counterbalance its important but fraught trading relationship with the US and could add weight to its dealings on a range of political issues, from South-east Asian boundary disputes to relations with Taiwan. Within the region, China could gain politically if an FTA allowed South-east Asia to share in its export success, countering fears of the region being overwhelmed economically by China. All of the above goals would be helped by reciprocal economic commitments locking in ASEAN’s dependency on China. Japan, for its part, has reportedly won the support of ASEAN for its bid to gain a permanent seat on the UN Security Council, again illustrating the likely political dimension of free-trade negotiations.

Liberalisation prospects

At the very least, the proliferation of FTAs will result in a lowering of tariffs within Asia, and in the eventual elimination of tariffs on many goods. This will help to stimulate crossborder trade and investment within Asia, and may also constitute a useful preliminary step towards multilateral liberalisation under the WTO. Part of the appeal of an FTA with ASEAN, apart from the size of the market, is that the bloc’s own internal common market, the ASEAN Free Trade Area (AFTA), has laid much of the policy groundwork already. Tariffs have already been reduced on many goods, and industries in ASEAN countries have had time to get used to the idea of more open competition with those of their immediate neighbours, making broader liberalisation less intimidating. ASEAN officials reckon the new FTA with China will boost bilateral trade by 40% by the end of the decade, from an expected US$100bn in 2004.

But it will not all be plain sailing. The main drawbacks to the China-ASEAN pact are that it currently focuses only on trade in goods—services are to be addressed at a later date—and allows each country to exclude numerous "sensitive" categories from tariff reductions. Both factors will dilute the benefits of the FTA. A further concern is the potential for conflicts between the scope and terms of different agreements. In addition to the large potential or actual "ASEAN +" combinations—involving Australia, China, India, Japan, New Zealand and South Korea—the Vientiane summit saw progress on smaller bilateral FTAs between South Korea and Singapore, New Zealand and Thailand, and (as mentioned) Japan and the Philippines. Encouragingly, the Japan-Philippines FTA covers an important aspect of services trade, allowing Philippine nurses and health workers to work in Japan. There have also been encouraging signs that Japan is becoming more flexible in considering opening up its agricultural markets—a traditional sticking point in trade negotiations—although rice imports will continue to face heavy duties.

However, Japan’s departure from its traditional stance in trade negotiations, though welcome from most viewpoints, in theory opens the way for future trade friction should preferential concessions extended to one country not be extended to others. Will Japan admit nurses from elsewhere in South-east Asia if an FTA with ASEAN is concluded, for example? And will the terms of Japan’s bilateral FTA with the Philippines also apply to any future pact with ASEAN, of which, significantly, the Philippines is a member? The same principles apply to other Asian countries trying to set up FTAs with all and sundry. For companies and regulatory bodies across the region, there is likely to be an increase in the administrative burden as a result of the proliferation of FTAs, as respectively complying with or monitoring adherence to trading rules becomes more complex.

Countries trying to set up FTAs have promised, and will continue to promise, that the terms of any agreements comply with WTO rules, and with those of regional trading agreements such as AFTA. But given the number of agreements now being considered, whether conflicts can be avoided in practice is more doubtful.

In this context, it is hardly surprising that some voices are calling for restraint. This was conspicuously the case at another recent regional summit, APEC (Asia-Pacific Economic Co-operation), that took place in Santiago, Chile, shortly before the ASEAN meeting. At APEC the emphasis was firmly on the primacy of the WTO’s Doha round. The very fact that APEC considered it necessary to remind its members—some of which are ASEAN members—of the importance of embracing multilateral liberalisation arguably betrays its concerns that precisely the opposite is occurring on the ground.

 source: EIU ViewsWire