TCS Daily

Free Trade Asian Style

By Alan Oxley - December 8, 2004 12:00 AM

Vientiane is a charming, dusty town on the Mekong River, midway between Yunan and the South China Sea. Monks in saffron robes still roam the streets. Asia's leaders recently crowded into town for the annual Summit of the Association of South East Asian Nations (ASEAN)*. They made big commitments to trade liberalization. That is good news. Asia's high growth has carried some serious free trade black spots. Is its getting serious at last?

East Asia is the success zone of the developing world. It has been for forty years. Following Japan's example, Taiwan, Korea, Singapore and Hong Kong, the Asian "tiger economies" used export strategies and open economies to lift growth in the sixties to acquire developed country living standards by the eighties. Japanese analysts were fond of calling this the "flying geese" growth pattern, with Japan leading the formation.

Other nations in Southeast Asia - Thailand, Malaysia, Indonesia and the Philippines - set out to mimic the "tiger" strategy. Thailand and Malaysia did best. The whole region grew on low cost manufacturing. Today it is global manufacturer of the computer age.

The World Bank described East Asia as the "miracle" model for growth. The pattern is large private sectors, modest public sector expenditure, export-based growth and lower trade barriers: unlike Latin America where generally the reverse held and growth stumbles.

But the miracle model had its weaknesses. Financial governance was neglected. In the Asian currency crisis in 1997 it cracked under the strain of runaway growth. Excessive intervention by government and financial mismanagement showed Japan's slumping growth was not cyclical, but structural. No longer the leader of the geese, it became an economic turkey.

Trade liberalization dominated international economic policy in the late eighties. The General Agreement on Tariffs and Trade was reshaped into the World Trade Organization, strengthening the multilateral trading system and equipping it to deal with a changing world economy. The European Community created the "Single Market" and the North American Free Trade Agreement was completed.

The East Asian economies were active participants in this global action to open world markets. None however embraced free trade as a primary economic tool for managing the economy as New Zealand and Chile did. There was a distinct mercantilist flavor in East Asian policy - tariffs were reduced on inputs for export industries rather than on all imports. In most cases, farm industries were protected, services sectors remained cosseted, and in many cases, national champions were subsidized. In Korea these subsidies nearly bankrupted the economy in 1997.

ASEAN created a Free Trade Area in 1992. Initially, trade in agriculture was not fully covered, services were not included and members nominated what products would be liberalized. The system did not have a binding system of enforcement, like NAFTA and the WTO. The cultural preference in Asia is to base business on trusted relationships rather than legal contracts. The Chinese call them "Guanxi": the Western approximation is "connections".

The free trade rhetoric in East Asia has been good. President Soeharto brokered the Bogor Declaration at the Summit of APEC economies in Indonesia in 1994. All East Asian economies are members of APEC and pledged to remove all barriers to trade and investment by 2010 for industrialized economies and 2020 for developing economies.

At the ASEAN Summit last year, ASEAN leaders set out a long term goal of an East Asian Economic Community, the rhetoric going as far to suggest East Asia might replicate the European Community. The leaders of China, Japan and Korea are now regular visitors to the ASEAN Summits and the idea of an economic grouping of "ASEAN plus the 3" is now also on the agenda.

At the Summit in Vientiane this week, further commitments were made. China and ASEAN announced they would cut trade barriers in a Free Trade Agreement. The ASEAN Leaders announced they would speed up removal of barriers to trade among ASEAN members and that they would negotiate a Free Trade Agreement with Australia and New Zealand.

Indonesia's new trade Minister, Mari Pangestu, a renowned free trader, was more sanguine after the Summit. She reminded colleagues that ASEAN was reluctant to open services sectors and was still shying away from backing up commitments with robust legal obligation.

She might have also noted that China's approach to liberalization also features elements of mercantilism like ASEAN's, although no one can question the commitment of China's leadership to lock economic activity into an open market model.

There is change. China joined the WTO and Singapore and Thailand have negotiated FTAs with the US, Australia and New Zealand which include legally binding commitments to protect foreign investors and foreign businesses. In its agreement with the US, Singapore has committed to bind its government-owned businesses which dominate Singapore's economy to new domestic rules guaranteeing competition.

The strategic gap is services and investment. East Asia at large cannot continue to depend principally on low cost manufacturing. As economies prosper, labor costs rise. In China, low cost manufacturing is migrating inland to regions were labor costs are lower. The higher income ASEAN economies, like Thailand and Malaysia, are running out of low cost labor.

The Secretary General of ASEAN reminded Governments in Vientiane that the services sector now generates most activity in most economies. Economies in East Asia cannot remain competitive unless services sectors are liberalized. The same holds for investment. Restrictions on foreign investors are still common in East Asia.

The talk is right in East Asia. It is time to walk the talk.

Alan Oxley is as former Ambassador of Australia to the GATT

* Members of ASEAN are Brunei, Cambodia, Indonesia, Laos Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.


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