Danger in Asia’s drift toward ‘free trade’

The Doha trade round’s suspension has catalyzed an aggressive new round of regional and bilateral “free trade” agreement negotiations. This phenomenon is particularly pervasive in Asia, where emerging trading powers such as China and ASEAN are busy negotiating FTAs to secure market access and boost regional influence.
Paradoxically, however, these countries’ pursuit of FTAs may complicate future growth prospects by dampening two key factors that have historically driven regional prosperity: integration into the global economy and domestic liberalization measures.
Rather than seeking “second-best” trade solutions, Asia’s interests would be best served through a robust multilateral trading system and regional organizations that deal with rising political rivalries.
Asia’s economic development primarily relied on pursuing export-led growth and economic liberalization.
While adopting a managed trade regime, the four Asian “tigers” and later China relied on economic integration as the main engine for economic growth. Asian countries’ accession into the World Trade Organization also catalyzed important domestic economic reforms and neutralized strident protectionist forces, increasing overall competitiveness and the ability to benefit from globalization.
The Asian financial crisis in 1997, however, stilted Asia’s appetite for continued liberalization efforts.
In response, governments readopted the traditional economic development model of promoting exports, adopting beggar-thy-neighbor currency policies and amassing foreign exchange reserves.
Asia’s pursuit of liberalization through FTAs, however, could hurt long-term growth prospects by dampening reform incentives.
According to Asian Development Bank statistics, at the end of 2005 there were some 20 regional trade agreements notified to the WTO with up to 60 others in various stages of negotiation.
A majority of the signed FTAs, however, do not attempt to deepen trade liberalization in tariffs or services beyond current WTO obligations. These agreements are known as “WTO+ agreements.”
Many FTAs provide limited prospects to increase trade except for highly developed (and unique) economies such as Singapore.
As a result, FTA agreements may reinforce existing regional preferences to develop manufacturing capability at the expense of services.
In Asia, particularly East Asia, the service sector is still vastly underdeveloped.
According to World Bank statistics, services composed 35% of total East Asian Gross Domestic Product in 1990; that ratio only rose one percentage point to 36 percent by 2003.
This level was still far below the world’s service- to-GDP average of 52 percent in 2003.
Developing more robust service industries will be a key to Asia’s future growth in order to attract foreign investment inflows and leverage technological linkages that will increase overall productivity.
At the other extreme, Asian countries are negotiating FTAs with industrialized countries that include potentially damaging service based-agreements. For example, the U.S. has sought an opening of Malaysia’s nascent financial sector that may hurt its development over the long run.
Asia’s focus on trade has also mixed with rising political rivalries resulting in competing visions for regional “free trade zones,” taking away effort from multilateral talks.
China’s meteoric economic and political rise has spurred increasing tensions between the traditional regional leader Japan, and nations throughout Southeast Asia.
In response, China and Japan have developed competing plans to develop a regional “free trade zone” to boost regional influence.
China signed an FTA framework agreement with ASEAN in 2002; China also hopes to eventually incorporate Japan and Korea in a regional free trade zone under the ASEAN+3 grouping.
Japan recently proposed its own framework for the “East Asian Free Trade Zone” that would include a total of 16 countries, including India and New Zealand.
These competing regional free trade frameworks, which reflect political calculus more than tangible economic benefits, ultimately take attention and resources away from building the multilateral system.
The ASEAN bloc has sought to negotiate FTAs with every major trading partner in the region as a way to ensure its regional position and insure against failure at Doha.
This strategy has two problems. One, the pursuit of FTAs has adversely affected ASEAN’s own economic integration process and stalled reforms that would actually allow it to benefit from increased trade flows.
Two, ASEAN has signed a web of FTAs all with different rules of origin and tariff rates that may actually increase the cost of doing business.
Where does Korea lie in this process?
Although a staunch supporter of the Doha round, Korea faces a strategic economic dilemma, particularly as neighbors Japan and China sign FTAs with key trade partners.
Although current FTA negotiations with the United States and a signed pact with ASEAN might provide benefits, they pale in comparison to those offered through true free trade.

*Erik Tollefson is currently an editor at Samsung Economic Research Institute in Seoul.

by Erik Tollefson