Trade Deals We Need To Close
By Charlene Barshefsky
9 March 2006
This week U.S. Trade Representative Rob Portman announced that the Bush administration will pursue free-trade talks with Malaysia. Last month talks on a free-trade agreement (FTA) were inaugurated with South Korea. In a global economy awash in trade deals designed to open markets and build alliances, FTAs with these countries are particularly desirable.
South Korea is the world’s 10th-largest economy, with per capita income in excess of $20,000. It is the seventh-largest exporter and importer of goods, seventh-largest exporter of services, and a longtime major U.S. trading partner. Malaysia, with per capita gross domestic product in excess of $10,000, is our fifth-largest trading partner in Asia. Its economic growth, along with that of South Korea, was seriously affected by the Asian financial crisis, but in each country the 10-year average annual growth rate has well outpaced that of the United States. At the same time, South Korea and Malaysia have remained difficult markets to crack. To the extent that the United States is able to achieve quality agreements that further open them, our potential trade benefits will be of genuinely meaningful size.
But economic gain understates the value of these agreements. Each should be seen in the larger context of an Asia that is integrating at breakneck speed, with China at its productive center and the wealthier Asian nations a source of capital and technology. In the rise of Asia and China we are witnessing the most profound shift in the pattern of global trade and investment in our lifetimes. The implications for our competitive and strategic positioning in Asia merit serious and focused attention. The FTAs with South Korea and Malaysia are one of the steps necessary to respond to a transformed landscape.
The global economy is growing and integrating more rapidly than ever. Exports account for almost 30 percent of global GDP; cross-border investment flows range from $500 billion to $1.5 trillion annually. Much larger volumes of currency exchange — perhaps $2 trillion a day — facilitate trade and investment. The ubiquity of voice and data communications, the sharp reduction in global costs of transportation, the rise of the multinational corporation, and countless other factors converge to help form this global economy.
But nowhere is the push toward economic integration as intense, rapid or successful as that brought about by China’s opening and the alignment of East Asian economies around it. The reasons for this are many, but two stand out. First, Asian countries have gotten many of the big things right: high savings and investment rates, intense focus on education, improved infrastructure, and an emphasis on technologies, to name just a few. Second is a unique phenomenon: the increasing integration of previously separate Asian economies, which is bringing explosive growth and structural change.
The Cold War tensions and sharp ideological and military conflict that by 1950 dominated inter-Asian relations have been replaced over time by Asian pragmatism, normalization and, most recently, China’s opening. The economic integration that has ensued is exemplified by the high level of Asian investment in China — between $45 billion and $50 billion of the $60 billion in total direct investment in China last year came from South Korea, Japan, Taiwan, Hong Kong and Singapore. Movement from a series of self-contained economies toward a much larger complex of capital, technology and low-cost labor has shifted Asian trade rapidly toward China, increasing both Chinese and Asian competitiveness vis-à-vis Europe and the United States. For example, Asian exports of high-tech products to the world, concentrated in China, now exceed America’s.
Enter South Korea and Malaysia. Intensified Asian competition is not to be feared, but any worthy competitor will respond in a thoughtful and coherent manner. An unsentimental look at America’s position in Asia would reflect Asia’s economic transformation, the emerging competitive challenge to our country, and the spillover effects on Asian and Pacific diplomacy and American influence in the region. A U.S.-South Korea FTA was a first response with an economically vital and closely allied nation. The inauguration of free-trade talks with Malaysia is an important second. A Muslim nation, Malaysia chairs the Non-Aligned Movement, the Organization of the Islamic Conference and the Association of Southeast Asian Nations. Strengthened ties and deeper economic integration with it will yield benefits well beyond the commercial. The next steps should include an ASEAN-wide FTA, to which Malaysia is central and to which the FTAs with Singapore and Thailand (in process) would be docked. An FTA with Japan should also be pursued — or at the least a deeper relationship — as should Vietnam’s accession to the World Trade Organization, the revitalization of the Asia-Pacific Economic Cooperation as a regional economic forum, and strengthened ties with India.
Robust engagement with Asia is critical if we are to retain unencumbered economic access to the region and if we are to reinvigorate our central role in the Pacific, our network of relationships and American influence there. The U.S.-China relationship will itself be placed on more solid footing in a mutual theater of balanced alliances grounded among equally integrated economies.
U.S. competitive strength and its bearing on our diplomatic heft and standing among nations is a large subject. No one agreement or set of agreements will ensure a position of leadership or influence for the United States in the years to come — certainly not if our fiscal house remains in disarray, tragic deficiencies in education are allowed to persist and American innovative capabilities are hampered rather than encouraged. As we look at a world transformed, it is clear that we have no time to waste. The South Korea and Malaysia announcements are important steps in response.
The writer was U.S. trade representative from 1997 to 2001. She is senior international partner at the Washington law firm WilmerHale.