Trade Policy in East Asia: Regionalism Triumphant?

Razeen Sally

Until recently, successive generations of East Asian tigers pursued non-discriminatory trade policies through unilateral liberalisation, APEC and the WTO. Now discriminatory bilateral and regional initiatives are spreading like wildfire. Will an East Asian economic block form around China and/or Japan? Will it sideline the region’s involvement in the WTO?

East Asian countries have relatively liberal trade policies and are reasonably well integrated into the global economy. That, however, masks huge differences. Hong Kong and Singapore are free ports. South Korea and Taiwan have liberalised substantially in recent years. Malaysia is fairly open but with significant protection, especially in services. Thai protectionism remains quite high. Indonesia and the Philippines are stuck in political and economic instability post-Asian crisis. Myanmar and Indochina, all much poorer, have higher levels of protection.

Now consider the two regional engines, Japan and China. Japan is mired in sclerosis at home and incapable of leadership abroad. On trade policy it is defensive, especially in its addiction to agricultural protectionism. China presents a different picture. Its WTO commitments are the strongest of any developing country, crowning the most substantial package of market-oriented reforms during the past decade. China has sharply narrowed the trade policy gap with other developing countries, with average tariffs down to Southeast Asian and Latin American levels (about 10 per cent) and comparable openness to FDI. The upshot is that the emerging market policy environment is a lot more competitive, especially in terms of attracting foreign investors.

The other eye-catching trade policy feature in East Asia is the sudden turn to the ‘new regionalism’, the proliferation of initiatives to form Free Trade Agreements (FTAs). Singapore pioneered this approach, and is now close to concluding a strong, ‘WTO plus’ FTA with the US. The Association of Southeast Asian Nations (ASEAN) is talking to several third countries. To date only a proposed ASEAN-China FTA has got off the starting blocks. Similar initiatives are afoot in Northeast Asia.

A bundle of political and economic factors lies behind the New Regionalism. China, for instance, views FTAs as a means of exercising strategic leadership in the region. The economic motivations are mostly defensive. Given a post-Seattle WTO in drift and deadlock, there is a race to secure preferential access to the markets of the major powers, and to defuse future trade tensions by locking into strong bilateral and regional partnerships.

Given present trends, a loose East Asian trade block revolving around China (more likely than Japan) could emerge alongside US-led and EU-led blocks, all interlinked by a cross-regional patchwork of bilateral and plurilateral FTAs. This scenario is worrying if the WTO does not get out of its rut, for then a regionally spliced up world economy will be dominated by discrimination, knots of red tape and power plays. Poor and weak countries would be the losers. However, if the WTO does advance, especially through multilateral, non-discriminatory liberalisation in the present Doha Round, the New Regionalism will be more benign.

Ultimately, as a region highly dependent on trade with and inward investment from the rest of the world, FTAs are not enough for East Asia. The region will continue to have a long-term stake in a WTO that delivers freer trade worldwide, i.e. multilaterally rather than bilaterally or regionally.

The WTO is important to East Asia, but the reverse is also true. Of the score or so of active developing and newly developed countries in the WTO, nearly half come from the region. In all likelihood, China will soon be the most powerful developing country in the WTO. The Doha Round will not make sustained progress without the active participation of East Asia, on individual issues and across-the-board.

China is bound to play a more prominent role as the new round unfolds. There are early, positive signs that it is adopting a ‘Brazilian’ as opposed to an ‘Indian’ strategy in the WTO, i.e. shaping differentiated positions, some offensive, others defensive, but not being negative and blocking on several fronts. This is indeed the right strategy for those in the Beijing leadership who wish to extract maximum benefit from the WTO and use it to bolster domestic reform.

As for the others: Korea is active and constructive in the WTO, except on agriculture. Taiwan is also set to play a constructive role – if only the mainland will let it. The global city-states, Hong Kong and Singapore, have a clear WTO focus on market access and strong rules. Malaysia and Thailand are also fairly active in the WTO, with a mix of open-market and protectionist positions. Indonesia and the Philippines are weaker, overwhelmed by policy incoherence and fire-fighting at home, and with insufficient capacity to deal with the WTO’s burgeoning and increasingly complicated agenda. The three Indochinese countries are in the queue for WTO accession.

The WTO is at a crossroads. It sorely needs to rediscover the raison d’être of the GATT: to progressively liberalise trade. Strong US leadership is required to push the WTO in this direction while avoiding an EU-style future (regulatory overload) or a UN-style future (an irrelevant talking shop). This is more likely under a Bush administration with better open-market credentials and a more assertive foreign policy than any Democrat alternative. However, Robert Zoellick, President Bush’s Trade Representative, needs allies. Many of them – including China -- are to be found in East Asia.

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