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Trade deals mushroom, with or without WTO

Monday October 31, 2005

ASIA OUTLOOK: Trade Deals Mushroom, With Or Without WTO

By Owen Brown

SYDNEY (Dow Jones)—A World Trade Organization ministerial meeting in Hong Kong in December is looming as key to the shape of free trade in Asia in the 21st century as countries within the region intensify their interest in integrating their markets.

If a breakthrough agreement under the so-called Doha Development Agenda can’t be secured at the talks then regional integration will be forced by default to a second-best option of so-called Free Trade Agreements, or FTAs.

Trade in Asia, which for centuries meant simply shipping raw and exotic materials to industrialized nations, has assumed greater regional importance in the past two decades.

Economies are building up their manufacturing sectors and lining up for a slot in a regional supply chain that eventually delivers low-priced manufactures to consumers in the U.S., Japan, and Europe. And to do that they need easier access to each other’s market.

Intraregional trade within Asian nearly doubled to about 41% of the region’s total trade volume during the past two decades, International Monetary Fund research shows.

That puts intraregional trade within Asia on about the same footing as traffic between the three members of the North American Free Trade Agreement, or NAFTA.

It’s also a growing volume of traffic that is taking up a bigger chunk of world trade.

The IMF estimates emerging Asia’s aggregate share of world trade has climbed to 20% in 2004 from 13% in 1990.

This growth has been achieved through the market-opening entry into the WTO of key economies such as China as well as the adoption in the past two decades of export-driven growth models to spur industrialization in countries previously dominated by rural production.

If WTO moves forward in Hong Kong, it promises greater worldwide access to markets. But first agreement must be reached by its 148 members on the extremely sensitive issues of trade in agriculture and services.

And the prospects aren’t looking good.

WTO director-general Pascal Lamy recently likened this trade round to a plane and described agriculture as the engine that will lift the bulk of this aircraft from Hong Kong.

"If that engine is logjammed, as it has been, the plane gets stuck in the tarmac," he said.

Continued wrangling over agricultural subsidies in the lead up to the ministerial meeting have again put hopes of a deal in this trade round under threat.

With the fate of multilateral trade negotiations still uncertain until the outcome in Hong Kong, Asia has been borrowing from the NAFTA model to try and further improve market access to key trading partners, just in case.

And there certainly has been a proliferation of free-trade discussions in recent years.

China began FTA negotiations with the 10-member Association of Southeast Asian Nations in January 2003, signing a framework agreement on trade in goods in November 2004.

Within its own sphere, China has also concluded closer economic partnership agreements, or CEPAs, with its special administrative regions in Hong Kong and Macau.

In turn, ASEAN this year has begun FTA negotiations with South Korea and Japan.

Japan is currently in negotiations with South Korea, Malaysia, the Philippines, Thailand.

The list goes on.

Free-Trade Area Talks Proliferate

Aside from concern about multilateral talks stalling yet again, another trigger for the preference for FTAs has been China’s entry into the WTO in late 2001.

China’s accession into the global trading group after almost 15 years of painstaking negotiations intensified concern this emerging economy giant would dominate world trade to the detriment of similarly industrializing countries in the region.

That anxiety appears to have eased with Asian neighbors now looking for ways to better integrate their exporting sectors with that of the low-cost manufacturing Mecca.

A testament to that integration is the dramatic growth of exports to China from the rest of the region to 35% of total intraregional trade in 2004.

Despite this increased traffic within Asia, the final destination for finished products continues to be the world’s industrialized economies.

So as China has grown in importance as an exporting nation, it has complemented trade within the region. Its factories take components and raw materials from other parts of the region rather than taking over the entire production chain.

There’s an expectation this will continue as markets within the region become more open.

"China will continue to grow its manufacturing exports, but not necessarily at the expense of others," Kym Anderson, lead economist with the World Bank’s development economics research group, told Dow Jones Newswires.

"On the contrary, the ongoing fragmentation of production into ever-smaller niche suppliers of components ensures others are also able to grow their exports."

Austrade chief economist Tim Harcourt said while China and other Asian countries might dominate manufacturing, countries such as Australia, will benefit by providing high value-added services along the production chain.

"When people look at exports from China to America they forget about all the components that are made elsewhere and they forget about the services and the high-value added stuff that can be done in Australia and other countries," Harcourt told Dow Jones Newswires.

With negotiations yet to be concluded, the World Bank’s Anderson said it isn’t yet clear which industries will most benefit from a free-trade area adopted through an ASEAN-China FTA.

"ASEAN primary exports to China are likely to grow," he said. "If the FTA is net trade creating, third countries also are likely to gain on average although low-skilled labor-intensive manufactures and services elsewhere may face more competition from east Asia."

FTAs Don’t Open All Markets

But there are concerns these FTAs won’t be as effective as a hard-brokered multilateral deal because some of the major Asian economies leading these negotiations aren’t likely to easily open what are currently less-open markets.

"There is more to creating a free-trade area than simply signing an agreement and saying it is so," Australian-APEC Study Center Chairman Alan Oxley said.

Oxley worries about the form an East Asian free trade area will take if negotiations are dominated by China and Japan.

The goal of free trade areas should be to create economic growth, not just expand trade and this can only be successful if all goods are traded freely and investors are free to put their money where they will get the best return, he said.

"These are the conditions essential for creating efficiency and growth and which don’t yet exist in many East Asian countries," Oxley said.

 source: DowJones News