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.