Little noticed at the beginning of the year was the introduction of several more strands into the “noodle bowl” of Asia-Pacific trade agreements. On Jan. 1, several new free trade agreements went into effect. These trade deals are by no means perfect. In fact, they represent distinctly second- or even third-best options given their limits and their trade diversion effects. Nevertheless, they also could have profound political consequences.
The biggest deal was the inauguration Jan. 1 of the China-ASEAN Free Trade Area (CAFTA). When ranked by size, this is, with 1.9 billion people, the world’s largest free trade area. Its $6 trillion in combined GDP makes it the world’s third largest, trailing NAFTA and the European Union. Negotiated and agreed in 2003, the members have had seven years to prepare. During that time, China has become ASEAN’s third-largest trade partner, surpassing the United States and trailing Japan and the EU. Trade between China and ASEAN reached $193 billion last year, a fourfold increase since the deal was agreed. During that time China’s share of ASEAN’s total commerce has increased as well, expanding from 4 percent to 11.3 percent. Trade among its members swelled to $4.5 trillion, 13.3 percent of global trade and half the total trade of Asia in 2008.
The FTA sharply reduces tariffs on 90 percent of traded goods in two phases: The six original ASEAN members (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) have cut their average tariff on Chinese goods from 12.8 percent to 0.6 percent. By 2015, four newer ASEAN members (Cambodia, Laos, Myanmar and Vietnam) will do the same. As always, there are provisions that protect some industries from competition. The tariffs on items identified as “highly sensitive” (such as rice, cars and petrochemical products) will be cut more gradually: The original ASEAN six have until 2015 to cut those tariffs below 50 percent and the new members have until 2018.
On Jan. 1, the ASEAN-Australia-New Zealand Free Trade Agreement also went into effect. It includes 600 million people and has a combined GDP of $2.8 trillion. It supplements the Australia-New Zealand FTA that has been in effect for over 25 years. ASEAN accounts for 15 percent of Australia’s trade, roughly equal to the country’s trade with China. For New Zealand, ASEAN collectively is the country’s fifth-largest export market and fifth-largest source of imports. The agreement covers some 70 percent of Australian trade with ASEAN and will eliminate tariffs on 96 percent of Australian exports to ASEAN by 2020. The deal has entered into force for Brunei, Burma, Malaysia, the Philippines, Singapore, and Vietnam; Indonesia, Cambodia, Laos, and Thailand are expected to ratify the agreement in the first half of 2010.
While both agreements are expected to increase total trade and welfare among members, neither agreement has been wholeheartedly embraced. In Australia, there are complaints that implementation of tariff cuts for its goods is too slow. In ASEAN, Indonesia has been most vocal in demanding protection for its industries. Jakarta has said it will review the CAFTA agreement but failed to get negotiators to renegotiate the deal. Other countries that hope to exploit their labor advantage are also likely to feel the pinch as they try to compete with China’s seemingly endless supply of labor.
Economists insist that regional trade agreements are second-best solutions. Global trade deals should be preferred: Smaller arrangements risk diverting trade from the most optimal relationships to those “artificially” favored by the preferential terms of a particular deal. The proliferation of trade deals in Asia — Japan has signed several with regional partners, South Korea is negotiating its own, and India concluded an FTA with ASEAN last year — is a sign of the growing impatience with global trade talks.
Equally important, however, are the political implications of these agreements. While there is no single Asian free trade agreement, those nations have been forging closer economic ties for nearly two decades. This reflects business reality — companies have gone multinational to exploit comparative advantages regardless of borders — as well as recognition that Asian economies are intertwined and economies of scale are crucial to the region’s prospects. The Asian Financial Crisis of 12 years ago was proof for many that closer ties were needed to better insulate the region from the worst effects of global currency speculation.
Reaction to the crisis of 1997-98 also has a political dimension. Asian nations recognized that they needed to amplify their voice if they were to have international leverage. The forging of an economic community is part of a more broad-based effort to create a distinctive “Asia” in the world. That identity is slowly taking shape. The web of ties is thickening.
China, by virtue of geography and economy, dominates any “Asian community.” This worries many governments and has encouraged them to reach out to Australia, New Zealand and India to balance this giant. They are also eager for better ties with the U.S. Washington’s engagement with ASEAN shows that it understands that concern. These tensions are likely to define Asian and Japanese foreign policy for years to come.
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