Asians growing anxious over rising American protectionist policies

Michael Richardson, Yale Center for the Study of Globalization, Singapore

As Asian countries prepare to receive American president George W. Bush at the annual summit of Asia-Pacific nations, there is growing anxiety about U.S. economic policy towards the region. The failure of the Cancun talks on liberalizing farm trade, threats of punishment to countries who opposed the U.S. war against Iraq, and the rising protectionist chorus from a pre- election United States are some of the concerns that will be uppermost in the minds of leaders of the Asia-Pacific Economic Cooperation (APEC) forum when they meet Bush in Bangkok on Oct. 20 and 21.

There is increasing concern that smaller and poorer nations, or those that oppose American foreign policy, will be marginalized as the U.S. and other powerful economies seek to forge regional or bilateral pacts to boost trade as a substitute for a global deal.

East Asian nations are also worried by the rising chorus of American criticism of China's trade and currency policies as politicians, unions, and industry lobby groups in the U.S. gear up for the presidential elections in 2004. With an increasingly integrated regional economy, any cutback in Sino-American trade would have a negative ripple effect on all.

This was underlined in a new forecast issued by the Asian Development Bank on Sept. 30. It said that growth in Asia, minus Japan, would accelerate even further over the coming year, thus securing its place as the world's fastest-growing region. But the ADB also cautioned that part of Asia's dynamism was the result of swapping dependence on the U.S. for dependence on China.

It noted that the latter has emerged over the past two years as "a major growth engine for intraregional trade," and that many of the 40 Asian developing economies have doubled the share of their total exports going to China since the start of 2000.

China has a rapidly rising trade surplus with the U.S. that already stands at more than US$100 billion for 2003. Beijing is under pressure from Washington to revalue its currency to make Chinese imports more expensive and U.S. exports cheaper.

China's neighbors in East Asia fear that such pressure will be the prelude to U.S. protectionism that will crimp their economic growth as well.

China recently overtook the U.S. as the main export market for South Korea, contributing significantly to the growth momentum of the Korean economy in the first half of 2003. South Korean exports to China soared 47 percent year-on-year in the first seven months of 2003. Southeast Asian countries too boosted their exports to China in the past two years.

"China specializes in assembling imported parts and components," said a World Bank report released in July. "Often these components are produced in relatively high wage countries like Singapore or South Korea, which then capitalize on China's relatively low wage costs for product assembly."

Moreover, investors from East Asian economies are among the top manufacturing investors in China, and many of their export products go to the U.S.

The Bush administrations' pressure on China over the growing trade imbalance and Washington's simultaneous push for bilateral and regional trade deals are thus seen by many in East Asia as a risky and unwelcome course.

When the Cancun ministerial conference of the World Trade Organization opened in September, some East Asian leaders were already warning that its failure would lead to a world trading system organized around economic blocs.

"That kind of world will be less favorable for many countries, particularly the smaller and weaker ones," said Singapore's Minister of Trade and Industry George Yeo. "It will also be a more dangerous world where might is right, where rules are written by the powerful, and where even the pretense that all countries are equal will be discarded."

Bangladesh, Cambodia, Laos and Nepal, may have benefited from a WTO deal, but they are unlikely to be included in bilateral or regional free trade areas (FTAs), analysts said.

After the Cancun breakdown, U.S. Trade Representative Robert Zoellick served notice that as the 148 members of the World Trade Organization ponder the future, the U.S. will not wait.

China, India, Malaysia, Thailand and the Philippines lined up with other developing countries to oppose the kind of compromises that would have produced a WTO accord acceptable to the U.S. They are thus likely to be given low priority by the Bush administration in its bilateral and regional FTA plans, despite comprising some of Asia's largest and most dynamic economies.

Malaysia, Thailand and the Philippines had expressed interest before Cancun in negotiating FTAs with the U.S., the world's largest economy and a major investor in all three countries. Now, however, Malaysia may be left at the back of the queue because of its Cancun stand and outspoken criticism of the Iraq war, U.S. Middle East policy and America's attitude to the Islamic world.

The next step on the U.S. agenda to promote what Zoellick calls "competitive liberalization" by leaving some countries behind until they are ready to cooperate and catch up may be to form a trans-Pacific FTA linking the U.S., Canada and Mexico, the three members of the North American Free Trade Agreement, NAFTA, with "can-do" nations around the Pacific Rim.

Still, the U.S. approach of rewarding political friends and penalizing opponents of its foreign policy will complicate the process of extending the network of FTAs linked to the U.S.

Singapore, which supported the U.S.-led invasion of Iraq, had its FTA with the U.S. signed in May, while Chile, which was opposed to the Iraq war, was made to wait. Another prominent member of the U.S. coalition in Iraq, Australia, hopes to finalize an FTA with the U.S. by the end of the year that would include significant mutual concessions on agriculture.

Japan, the world's second largest economy after the U.S., appears an unlikely candidate for an FTA with the U.S. because of the opposition from powerful and highly protectionist farm lobby. South Korea will probably fall short for the same reason.

Not to be left out of the FTA game, China said it wants to speed up negotiations with the Association of Southeast Asian Nations, on a regional FTA that would be the world's largest. It is due to be formed by 2010. Moves by Japan, South Korea and India to negotiate preferential trade pacts with ASEAN are also likely to be hastened by the collapse of the Cancun talks, analysts said.

"FTAs, bilateral and regional, will become more important," said Singapore's George Yeo after the Cancun breakdown. "And the result will be growing regionalism."

The writer is a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore. This article appeared in YaleGlobal Online, (www.yaleglobal.yale.edu) a publication of the Yale Center for the Study of Globalization, and is reprinted by permission.