Sat, 25 Jan 2003

Regional partnerships in Asia and overcoming deadlock in WTO

Razeen Sally, Professor of economics, London School of Economics, Project Syndicate

This week, America and Singapore ironed out the final stumbling blocks to a bilateral free trade agreement (FTA). Such pacts are spreading like wildfire across Asia.

Until recently, most East Asian countries pursued non- discriminatory trade policies through unilateral liberalization, the Asian/Pacific Economic Community, and the World Trade Organization (WTO). As the U.S./Singapore deal shows, discriminatory bilateral and regional initiatives are growing more popular. An East Asian economic bloc forming around either China and/or Japan now seems plausible. Will all this deal-making sideline the region in the WTO?

East Asian countries have relatively liberal trade policies and are reasonably well integrated into the global economy. This, however, masks huge differences. Hong Kong and Singapore are free ports. South Korea and Taiwan liberalized substantially in recent years. Malaysia is fairly open but with significant protection, especially in services. Thai protectionism remains high. Indonesia and the Philippines are mired in political and economic instability. Myanmar, Vietnam, Cambodia, and Laos, all very poor, have higher levels of protection.

Now consider the two regional engines, Japan and China. Japan's sclerotic domestic economy makes it incapable of exerting regional leadership. On trade policy it is defensive, especially in its addiction to agricultural protectionism.

China presents a different picture. Its WTO commitments are the strongest of any developing country. China narrowed the trade policy gap with other developing countries, bringing average tariffs down to Southeast Asian and Latin American levels (about 10 percent) and establishing comparable openness to foreign direct investment (FDI). The upshot is that the emerging market policy environment is a lot more competitive, especially in terms of attracting FDI.

Traces of the "new regionalism" can be found everywhere. Singapore pioneered this approach. The Association of Southeast Asian Nations (ASEAN) is talking to several third countries. To date only a proposed ASEAN-China FTA has got off the starting blocks. Similar initiatives are afoot in Northeast Asia.

Both political and economic factors lie behind this. China views FTAs as a means to exercise strategic leadership in the region. The economic motivations are mostly defensive. But with the WTO stuck in drift and deadlock over the past few years, there is a race to secure preferential access to the markets of the major powers, and to defuse trade tension by locking into strong bilateral and regional partnerships.

Given today's trends, a loose East Asian trade bloc revolving around China (more likely than Japan) could emerge alongside U.S.-led and EU-led blocs, all interlinked by a cross-regional patchwork of bilateral and "plurilateral" FTAs. This scenario is worrying if the WTO does not get out of its rut, because a world economy that has been sliced up regionally will be dominated by discrimination, knots of red tape, and power plays.

In such a world, poor and weak countries would be losers. However, if the global trade framework institutionalized in the WTO advances, especially through multilateral, non-discriminatory liberalization in the present Doha Round, the new regionalism will probably turn out to be benign.

Ultimately, as a region highly dependent on trade with and inward investment from the rest of the world, FTAs are not enough for East Asia. The region will continue to have a long-term stake in a WTO that delivers freer trade worldwide, that is, multilaterally rather than bilaterally or regionally.

The WTO is important to East Asia, but the reverse is also true. Of the 20 or so active developing and newly developed countries in the WTO, almost half come from the region. The Doha Round will not make sustained progress without the active participation of East Asia, on individual issues and across the board.

Because of its economic and trade muscle, China is bound to play a more prominent role as the Doha round unfolds. There are early, positive signs that it is adopting a "Brazilian," as opposed to an "Indian," strategy within the WTO. It is not being negative or obstructionist in blocking the liberalization process on several fronts, which is India's historic manner of conducting global trade negotiations. This is the right approach for those in China's leadership who wish to extract maximum benefits from the WTO to bolster domestic reform.

Korea is active and constructive in the WTO, except on agriculture. Taiwan is also set to play a constructive role -- if mainland China lets it. The city states, Hong Kong and Singapore, have clear-sighted WTO policies, focusing on market access and strong rules.

Malaysia and Thailand are also fairly active in the WTO, with a mix of free-market and protectionist positions. Indonesia and the Philippines are weaker, overwhelmed by policy incoherence and fire-fighting at home, and with insufficient capacity to deal with the WTO's burgeoning and increasingly complicated agenda. Vietnam, Laos, and Cambodia are in the queue for WTO accession.

The WTO is at a crossroads. It sorely needs to liberalize trade progressively. Strong U.S. leadership is required to push the WTO in this direction while avoiding an EU-style future (regulatory overload) or a UN-style future (an irrelevant talking shop). This is more likely under a Bush administration with better open-market credentials and a more assertive foreign policy than any Democratic alternative. However, Robert Zoellick, President Bush's Trade Representative, needs allies. Many of them -- including China -- are to be found in East Asia.