Onus on ASEAN to perk up on trade, investment

By Alan Wheatley

TOKYO (Reuters): With the Americas eying a huge free trade zone and China exerting a magnetic attraction for foreign firms, worries are growing that Southeast Asia will end up as the wallflower at the global trade and investment dance.

Persistent political instability -- highlighted again on Monday in the Philippines -- coupled with signs of backsliding on plans for an Asian Free Trade Area (AFTA) risk driving foreign investors into more welcoming arms, thereby undercutting the region's capacity to recover its former dynamism, analysts say.

Robert Lees, executive director of the Pacific Basin Economic Council (PBEC), a Honolulu-based business group, said the only way for the 10-strong Association of Southeast Asian Nations (ASEAN) to staunch the flood of foreign direct investment (FDI) into China at ASEAN's expense was to hasten the creation of AFTA.

"Then they have a big market. Otherwise they're a bunch of interesting little economies that in no way, shape or form compare with the Americas and/or China," Lees said.

"And yet you can't get ASEAN to take a big gulp and make AFTA happen," he lamented.

Indeed, with growth slipping and business elites under pressure, some of the original six ASEAN members that are due to reduce tariffs to a maximum five percent by the end of 2002 as part of the AFTA plan are increasingly dragging their feet.

-- Indonesia, citing its weak economic condition, has said it would not meet its commitment until others had done so. It also wants to exclude sugar to protect its cane farmers.

-- The Philippines plans to ask for a delay in cutting tariffs on petrochemical products at the request of a foreign-backed consortium that plans to build the country's first naphtha cracker plant.

Mignon Chan, director-general of the Pacific Economic Cooperation Council, which advises the Asia Pacific Economic Cooperation (APEC) forum, said governments were trying to strike the right balance between opening up to trade and investment while minimizing their vulnerability to the sort of damaging capital outflows that exacerbated Asia's 1997 financial crisis.

"But overall it doesn't mean they're shutting out the liberalization process," she said.

Trade experts had feared backsliding after Malaysia was granted more time last year to lower auto tariffs in order to shield its Proton national car project.

"All these things are a product of economic strife and of the protectionism and nationalism and fear of foreigners that come with economic strife," Daniel Gay of Strategic Intelligence, a Singapore consultancy, said.

A vicious circle can then set in. Weak growth saps tax revenues, increasing pressure on governments to sell assets to fund gaping budget deficits. Yet owing to their fading attraction to investors they can do so only at fire sale prices, fanning popular and political resentment at home that further deters FDI.

"The tendency is for economic problems to foster nationalism, which in turn fosters more economic problems," said Gene Frieda of Forecast, another economic consultancy in Singapore.

Frieda cited the Thailand-first platform on which Prime Minister Thaksin Shinawatra swept to power as well as opposition within Indonesia to the planned sale of 25 palm oil plantations to a Malaysian company, Kumpulan Guthrie Bhd.

Economic nationalism is of course a fact of life around the globe even in countries that champion free trade and investment.

Invoking national interests, the Australian government shocked markets last month by blocking a bid by Royal Dutch/Shell for oil and gas producer Woodside Petroleum Ltd.

And the U.S. Defense Department wants to block the purchase by Dutch computer chip equipment maker ASM Lithography of a Silicon Valley firm for fear its optical technology, used in satellite photography, could end up in hostile hands.

The difference, perhaps, is that the likes of cash-strapped Indonesia can ill afford to antagonize already gun-shy foreign investors.

Some foreign companies, as the Philippine naptha cracker plan shows, continue to invest. And just last week, Indonesia's bank restructuring agency sold its stake in the country's second largest cement producer, to Germany's Heidelberger Zement AG for $94 million.

But Gay of Strategic Intelligence said the clear trend was for FDI to head toward Northeast Asia, especially in sophisticated sectors such as high-end electronics.

"Southeast Asia looks like it's increasingly going to mop up the low-end, labor-intensive manufacturing FDI and not the more value-added, new economy-oriented FDI," Gay said.

The exception, he and others agreed, was Singapore, which is reacting to the snail's pace of trade liberalization within ASEAN and the World Trade Organization by forging bilateral free trade pacts with nations like New Zealand, Japan and the United States.

Lees at PBEC said he hoped the rush to do bilateral deals, though a second-best solution, would be a wake-up call for ASEAN.

As well as the lure of China -- Ford Motor Co. last week became the latest big multinational to set up shop there -- Lees said ASEAN needed to rise to the challenge posed by the plan for a Free Trade Area of the Americas, which 34 leaders from North and South America agreed last week to try to conclude by 2005.

"ASEAN has China on the one side, coming into the WTO and armed for bear in terms of marketing prowess, and then the Americas, which could pretty well do many and most if not all of what Southeast Asia does for the U.S. market right now," he said.