Trade disputes are likely to increase in the future as smaller Asian economies struggle to compete with cheaper goods made in China, according to a report by ING Barings' top regional economist.
Tim Condon said inflexibilities in the economic structure of several Asian countries are preventing them from taking steps to benefit from regional trade, such as specializing in goods which they can produce at a lower cost. The opening up of the Chinese economy after it joins the WTO is expected to heighten the competition. Condon said in a report issued over the weekend that "rigid economies are more likely to experience trade disputes with China."
"By definition, these economies will find it more difficult to adjust to the competitive pressure from [China].
"As political power is usually the source of economic rigidness, we would expect the incidence of trade disputes to increase as China's opening exposes the region to even greater competition from Chinese producers," said Condon, the Anglo-Dutch bank's chief economist for Asia.
He cited the bitter trade dispute between China and Japan and predicted that Taiwan, Malaysia and Thailand would be the economies most likely to experience trade friction with Beijing.
The trade dispute between China and Japan flared earlier this year when Tokyo decided to slap extra charges on certain farm goods, which come mainly from China.
And in July, Japan said it may impose high tariffs on salt and towel imports from China to protect domestic manufacturers. The salt tariffs may be imposed when the domestic market is opened up next April, the Japanese finance ministry said.
Condon said that "we believe it would be a mistake for policymakers in other economies to intervene or subsidize local producers in order to offset their disadvantages vis-a-vis Chinese producers."
But he added that "such mistakes are likely, as increased competition from Chinese products puts pressure on producers in the region's less flexible economies."
Made-in-China goods have elbowed out the exports of its neighbors in the global market because they are less expensive. Cheaper production costs have lured many multinational companies to relocate in China.
Condon said that despite China's advantage, "the whole region can benefit from trade gains if its local producers specialize in goods in which their cost-advantages are greatest."
"The problem in Asia [outside China] is that inflexibilities in economic structures impede producers from positioning themselves to exploit the gains from trade," Condon said.
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