Why Asian countries are racing to sign bilateral trade deals with each other

Everybody’s doing it

Feb 26th 2004 | SEOUL AND TOKYO | From The Economist print edition |
http://www.economist.com/world/asia...

Why Asian countries are racing to sign bilateral trade deals with each other

WITH everyone but Mongolia and North Korea doing it, even South Korea’s protectionists could not resist any longer. After three failed attempts, the National Assembly finally ratified the country’s first-ever free-trade agreement (FTA) last week. Since such agreements are becoming commonplace, and since South Korea chose a modest and distant trading partner, Chile, for its first foray into tariff-free trade, it would be easy to dismiss the treaty’s importance to the rest of Asia. Yet it may signal the start of a more aggressive phase in the region’s trade policy.

Most of Asia’s recent trade deals have been tame agreements, knocking down barriers between countries with little to lose, but also little to gain, from freeing two-way trade in most sectors. Rich and tiny Singapore has been a popular partner for such deals, because it does not threaten the powerful farm lobbies of other countries. Long a member of the ten-nation Association of South-East Asian Nations (ASEAN), Singapore has signed bilateral agreements in the past two years with Japan, Australia and America, and is talking to South Korea, India, Canada and Mexico about other FTAs.

However, what might be called the Singapore phase of Asian trade talks may now be giving way to something more substantial. The proliferation of simple FTAs is pushing many Asian countries to make bigger “concessions” in a race to secure better access to nearby economies. That even a perennial hold-out such as South Korea now shares some of this urgency is telling. Violent protests had delayed passage of its FTA with Chile for over a year. South Korea’s government hopes the deal will pave the way for more valuable agreements with its two giant neighbours, China and Japan. A similar sense of desperation has been gripping Japan’s trade bureaucrats, who have launched their own bid to speed up FTA talks.

Last week, with Junichiro Koizumi, Japan’s prime minister, urging it on, the Ministry of Economy, Trade and Industry (METI) more than doubled the size of its core FTA team. The extra manpower will aid negotiations with Korea, Mexico and several ASEAN economies. It will also make it easier for METI to resist opposition from the rival farm and labour ministries, and to make the case for freer trade directly to Japanese journalists.

Like South Korea, Japan is making a trial run with a non-Asian country, in its case Mexico. Here, it ought to be able to win domestic support for an FTA. Japanese businessmen, especially in the car and steel industries, want tariff-free access to a country in which they can assemble products cheaply for export to America. Still, a previous round of talks with Mexico, over farm products, collapsed late last year, even though imports of the two most contentious products, orange juice and pork, matter little to Japan’s total farm sector. The country’s farm lobbies fear that if they give a little, pressure will mount to allow freer imports of rice and other cherished products from countries such as Thailand and the Philippines.

Why are Japan, South Korea and many other Asian countries pressing for more and meatier FTAs? The most obvious reasons are China’s growing economic weight and its willingness to throw it around. In 2002, China’s total trade volume with Japan, South Korea, India and the ten ASEAN members topped $200 billion, more than a 20% increase over 2001. Its trade growth appears to have accelerated in 2003: early last year, China’s trade with Japan was rising at an annual rate of 36%, and with South-East Asia by 49%.

China’s own appetite for trade deals has grown along with its economy. This has been fuelled partly by its frenetic quest for markets, materials and machinery. Chinese companies are especially keen on Australia, since their economy is chronically short of commodities-crude oil, copper, aluminium, iron ore and natural gas-to fuel its breakneck expansion. The two countries will begin talks on an FTA in March. Since joining the WTO in 2001, China has also grown more sanguine about the potential risks of trade deals. Cheap imports have caused less disruption than many had expected, and even the country’s farming sector has not been hit as badly as feared.

Geopolitics is also driving China into trade talks. Its desire to appear a responsible regional power, and to integrate itself economically with the formerly wary countries of ASEAN in a way that gives them obvious advantages, is a powerful driver of its regional trade strategy. It also hopes for the emergence of an Asian economic block that might negotiate more effectively with America and the EU. If China can overtake Japan along the way, and become Asia’s paramount economic voice, so much the better.

ASEAN countries have taken even greater notice of China’s ability to suck in foreign direct investment. If they are to have any hope of luring foreign businessmen these days, these countries need to trumpet their growing economic ties with Asia’s next giant. Some are also seeking greater ties with the established one, Japan. The Philippines, for instance, wants to send nurses to Japan, which needs cheaper care for its elderly.

In North-East Asia, the trading motives are different. Although South Korea hopes to cut FTAs with both China and Japan, its two big neighbours still watch one another warily. Japanese companies have been pouring investment into China over the past couple of years, and Japan owes much of its recent economic recovery to trade with its fast-growing neighbour. Notably, however, the trade pairing with the most obvious potential impact-a Sino-Japanese FTA-is not even on the table. China has launched a trade offensive to boost its growth and increase its regional influence; Japan is responding by pressing for its own deals with anyone in the region who seems game. Yet Asia’s two economic giants are still too distrustful of one another to sit and discuss an FTA. So far.

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