Sat, Dec 18, 2004 page8

• ASEAN and China sign 'dirty' FTA

  • By Honigmann Hong洪財隆
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  ASEAN, fond of holding grand meetings and declaring "new action programs," on Dec. 2 signed a free trade agreement (FTA) with China, a move that has grabbed the world's attention. The agreement won't take force until 2010. But since it involves a realignment in the region's integration, it has caused a domino effect, with Japan, South Korea, New Zealand and even India moving faster to sign similar agreements with ASEAN. It can also be predicted that the US will reconsider its trade diplomacy in East Asia.

  It seems the evolving situation might give Taiwan and the US another shared interest -- or rather, a shared worry over whether they will be marginalized by the economic integration process in Asia.

  Politely speaking, the FTA between ASEAN and China is a matter of putting the cart before the horse. It completely violates the normal procedure whereby the agreement would first be negotiated and signed and only then take effect and be implemented.

  In November 2002, the two sides first signed a preparatory Framework Agreement on Comprehensive Economic Cooperation expressing their willingness to set up an FTA, implementing measures while negotiations were still ongoing.

  The first set of measures including agricultural, fishery and livestock (and some industrial products), and a unilateral reduction of customs duties by China on imports from ASEAN nations was implemented in January this year and is generally referred to as the "Early Harvest Program." In other words, since both sides are members of the WTO, China can clearly be suspected of trying to make an early start before the official implementation of the FTA.

  China can of course defend itself by saying that it is a generalized system of preferences which was promoted by the UN a long time ago: unilateral benefits on certain specified products offered by developed countries to still developing countries.

  The problem is that China, whose full market status is not yet universally recognized, and whose national income per capita is lower than that of ASEAN countries, should not be the one to dispense such benefits, regardless of whether we look at the issue from the perspective of law or logic.

  Further, following the gradual expansion of the scope of the FTA negotiations, from last year's agricultural, fishery and livestock issues to the present manufacturing industry (completed only recently) and next year's service industry and investment issues, the number of countries and industries affected also increases steadily. Maybe someone will report or complain about China's "beneficial actions" to Geneva.

  Next, judging from the two parties' geographic size and and the number of countries involved, and the fact that such a complex FTA could be completed in less than two years clearly shows that there has been some shady dealings going on. Mainly, almost all "sensitive products" have been excluded during the negotiation process, allowing each country to rely on high customs duties to protect special products decided by each country itself. This means that the FTA does not apply to these products.

  For example, total imports of the items on the list put together by Indonesia make up 15 percent of its total imports, while Malaysia's car industry and Thailand's petrochemical industry have been the main obstacles to trade liberalization within ASEAN.

  Academically, this kind of agreement, which emphasizes exchange of short term interests instead of truly attempting to implement free trade, is nothing but a "dirty FTA." It is of relative little use either to participating countries or excluded ones.

  Furthermore, this agreement lacks an effective conflict resolution mechanism. This makes it difficult to supervise the future implementation of the agreement.

  It seems that ASEAN's original wish to use an "extension strategy" consisting of the use of external forces to promote internal trade reform remains unchanged. This is nothing more than a reflection of that old joke deriding FTAs: An FTA is like paradise: everyone says it's good but everyone wants to go there at some later time.

  Even if there are, in practice, limited economic benefits to the China-ASEAN FTA, there will nevertheless be considerable geopolitical implications. Of these, many eyes will be on which nations come to be incorporated in the future, whether or not the grouping of "ASEAN plus one," including China, will be extended to "ASEAN plus three," including China, Japan and Korea, or whether it will indeed come to incorporate Australia and New Zealand, as China has suggested, to become a mammoth "East Asian Free Trade Area."

  This particular trend is likely to be limited somewhat by the economic structure and political leadership of East Asian countries. East Asian products as a whole still rely heavily on the US and Europe for their markets, and the US still plays a major role in regional security in East Asia.

  Despite the fact that the US's economic influence is gradually waning in this region (just as China's is increasing), it nevertheless maintains a unique position here, and is sufficient to act as a restraining force for the spread of regionalism in Asia. The nature of the strategic response and measures the US will adopt to "check" the ever-increasing Asian regionalism will be a crucial factor.

  In Taiwan's case, aside from keeping a very close eye on regional developments in Asia, it should also abandon any overly optimistic thinking. China is already the world's third largest trading nation, and there can be no doubt that it will become the largest trading partner with countries such as Japan, South Korea, the various nations that make up ASEAN, and even Australia and New Zealand.

  Given that any East Asian economic organization has to include China, if Taiwan wants to be a part of this, harmony across the Taiwan Strait is of paramount importance. And before all of this actually happens, Taiwan would be best advised to use the threat of being marginalized to make this crisis an opportunity for internal reform.

  What Taiwan needs is a slight advantage won in increments, and not to gamble for all or nothing.

  Honigmann Hong is an associate research fellow at the Taiwan Institute of Economic Research.

  Translated by Perry Svensson and Paul Cooper
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