The future after FTA with China

The future after FTA with China

The Nation
Asia News Network
Bangkok

Next week's ASEAN summit is likely to be another watershed in
the development of the grouping as it is likely to endorse the
proposal for a free trade arrangement (FTA) with China. This is
the biggest economic initiative by the Association of Southeast
Asian Nations since the formation of the ASEAN Free Trade Area
(AFTA) 10 years ago.

The FTA proposal with China comes amid a backdrop of popular
belief that China has been drawing foreign investment away from
ASEAN due to its stronger and larger domestic economy and the
expected greater role it will play in the world economy after the
giant country joins the World Trade Organization later this year.

But the ASEAN leaders need to exercise some caution before
jumping into bed with China on free trade. A lot more homework
has to be done to ensure that this is a win-win situation for
everybody, not least because much of the foreign direct
investment going into China is from Taiwan and Hong Kong. Several
analysts have noted that foreign direct investment in ASEAN has
not been significantly diverted to China when those outflows from
Taiwan and Hong Kong are excluded.

This mirage picture has to be made clear, otherwise ASEAN
might be pursuing the wrong track strategy, especially in terms
of its own priorities. Should the grouping build on its strengths
such as its more developed infrastructure and key industries like
automobiles and electronics rather than focussing its attention
on making the FTA work?

At the same time, there is greater validity in forming a FTA
not just between China and ASEAN but for all East Asia as
proposed by the East Asian Vision Group. This will mean bringing
Japan and Korea into the FTA agreement. Both of these countries
are said not to be ready for an FTA with ASEAN at this time, but
this does not mean that they are not suitable partners. After
all, East Asia must form pacts together as a grouping in wake of
the much stronger economic blocs in Europe and the Americas.

Furthermore, ASEAN's larger interests lie with an open trading
system on a global scale. The grouping must continue to work for
a new global trade round after the WTO meeting. The East Asian
free trade model ought to be seen as the next most desirable
option.

Many people will, of course, commend the ASEAN leaders for
taking a firm initiative to form a free trade deal with China.
ASEAN obviously needs a clear China strategy as the latter's rise
is unstoppable. But the final decision and the details to be
hammered out with China should not be based upon eager political
overtones but economic logic based on actual hard data and
forecasts of costs and benefits.

No one can deny that ASEAN, or Thailand, can exert leverage on
the growth of China, but the question is how. The answers are not
easy to come by. A rigorous study has to be made on the impact of
an FTA agreement with China before the final agreement is signed.

Otherwise, ASEAN will find itself caught in a Catch 22
situation in much the same way that AFTA has failed to make the
region sufficiently attractive because ASEAN member countries
tend to retreat into their own self interests, rather than act
upon the broad interest of the group as a whole.