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Bilateral deals will impede trade in east Asia
Guy De Jonquieres, FT Syndication Service

          For more than two decades, east Asia has been the great exemplar of export-led growth. Since 1980, it has increased exports by an average of 9.0 per cent a year, half as fast again as the rest of the world. Exports within the region have risen even faster and now exceed those to other markets.
In contrast to Europe and North America, east Asia's economic integration through trade owes little to concerted government policy, treaties or institutions. It has been powered largely by America's -- and more recently China's -- insatiable hunger for imports and by corporate investment in the trans-regional production chains that feed it.
Now, however, politicians are getting in on the act. Since the late 1990s, some 40 bilateral trade deals have been mooted in the name of strengthening economic ties within and beyond east Asia. Their underlying premise is that they will produce quicker results than long-winded talks in the World Trade Organisation (WTO).
Yet that assumption looks optimistic. According to the World Bank (WB), such deals have a poor record of promoting liberalisation, generating only about a tenth of developing countries' tariff cuts in the past two decades.
The 12-year struggle by the Association of Southeast Asian Nations (Asean) to lower internal barriers illustrates the point. It has made so little headway that exports by Asean's 10 members to each other have grown more slowly than their exports to the rest of the world.
Liberalisation of agriculture and services markets -- which are seriously underdeveloped in east Asia -- was ruled out at the outset as politically too difficult, while governments' persistent protection of pet industries has limited industrial tariff cuts.
Japan, a recent convert to bilateral trade deals, has excluded rice, famously its most protected product, from its negotiations with Thailand. At least Japan is honest enough not to try to pass off such projects as "free trade" agreements, labelling them "economic partnership" arrangements instead.
Unsurprisingly, most bilateral agreements concluded in east Asia to date involve either economies such as Singapore that are already largely open or partners that face few conflicts over "sensitive" sectors, such as agriculture.
But even deals that lower few barriers can affect markets. They typically contain complex restrictions that swell bureaucracy, add costs and disrupt trade. Erecting such obstacles between economies so closely linked by just-in-time supply chains would be economic folly.
If east Asia is serious about deepening its economic integration, it needs to act much more boldly. It requires, first, a coherent and credible plan for genuinely freeing trade across the region and the decisive leadership to implement it. Here, China's role will be crucial.
China is already negotiating a trade agreement with Asean, which may be expanded to Japan and South Korea. Since it joined the WTO in 2001, its resolute attack on its border barriers has made it the world's largest importer, with two-thirds of its economy dependent on trade. Finally, China possesses the political and economic clout to coax and cajole its neighbours to follow its example.
However, Beijing's ultimate intentions are still unclear. Does it really want to create a unified regional market that is open to the world? Or is its main aim to gain diplomatic influence by doling out selective concessions to individual trade partners, creating a dependency relationship in which they would be mere spokes in an economic wheel controlled by China at its hub?
The second requirement is to transform east Asia's model of integration, currently aligned mainly along a vertical axis. The region resembles a giant conveyor belt, carrying components, sub-assemblies and capital equipment to factories in China. However, intra-regional trade in finished products and services remains limited.
If it is to grow, Asian countries need to create more vigorous and competitive domestic markets and stronger consumer demand. Doing so would have the great additional benefit of making their economies more resilient and less vulnerable to external shocks.
Achieving that goal will take a judicious combination of macroeconomic policy measures and structural reforms. Purposeful and well-managed trade liberalisation can make an important contribution. Piecemeal and half-hearted deals, conceived more as diplomatic trophies than as serious attempts to open markets, would be worse than nothing at all.


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Bilateral deals will impede trade in east Asia

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