As ASEAN nations chase bilateral free trade agreements (FTAs) to cope with the China challenge, analysts warn the group stands to lose more than it gains if it fails to speed up internal liberalization.
FTAs will be more of a stumbling block than a building block for the Association of Southeast Asian Nations' own area free trade agreement (AFTA) if tariff walls among its 10 members are not sufficiently low, they say.
A flurry of FTAs will also result in a web of complex preferential tariff schemes which could burden the private sector and lead to trade diversion and investment distortion, analysts warned at a recent ASEAN business forum.
Singapore, the most affluent but trade-reliant ASEAN member, started the ball rolling by inking FTAs with the US, New Zealand, Japan and Australia. It says such deals can help restore investor confidence in the rest of Southeast Asia, and boost ASEAN's competitiveness against China.
The island-state said Friday it hoped to conclude FTA talks with Canada this year.
Other ASEAN members, including Thailand and the Philippines, have since joined the fray and are negotiating deals with economic heavyweights including the US and Japan.
Deunden Nikomborirak, research director with Thailand Development Research Institute, said cumbersome and slow multilateral negotiations were turning countries to FTAs but these were "second best alternatives."
The danger is they could divert trade from AFTA to big trading partners such as the US, Japan and the EU which end up becoming hubs, she said.
"If each ASEAN member country has a bilateral FTA with the US while maintaining high tariffs among themselves, then the US will mostly benefit as the preferred location for investment," she said. "To avoid this, ASEAN must ensure that tariff walls among themselves are sufficiently low."
Deunden said it would be tough for smaller economies to see net gains from FTAs since major industrialized countries often have a standard agreement, she said.
For instance, Japan and the US are using the FTA with Singapore as the blueprint for talks with Thailand but this is unfair as the economies differ and the Singapore FTA for example, does not include agriculture which is a key sector for Thailand, she said.
Hank Lim, research director at Singapore's Institute of International Affairs, said FTAs were "discriminatory in nature" and could complicate tariff rates and rules applied to the same products.
He noted that ASEAN, as a grouping, was also developing FTAs with a number of countries including the US, Japan, India, South Korea and was working with China to create the world's largest free trade zone within 10 years.
But in the absence of a common framework, there is a danger ASEAN will end up with a series of different frameworks that are inconsistent with each other and lead to negative implications, he said.
"One such undesirable effect is higher costs of doing business and discriminatory trade occurring because of the spaghetti bowl effect of regulations," he said in a paper presented at the forum.
"Another is that ASEAN does not become the hub and the framework is driven more by the non-ASEAN partner," he said.