Uncle Sam's Eastern Plans

SINGAPORE: As Asian countries prepare to receive American president George W. Bush at the annual summit ofAsia-Pacific nations, there is growing anxiety about US economic policy towards the region. The failure of theCancun talks on liberalizing farm trade, threats of punishment to countries who opposed the US war againstIraq, and the rising protectionist chorus from a pre-election United States are some of the concerns that willbe uppermost in the minds of APEC (Asia-Pacific Economic Cooperation) leaders when they meet President Bush inBangkok on October 20 and 21.

There is increasing concern that smaller and poorer nations, or those that oppose American foreign policy,will be marginalized as the United States and other powerful economies seek to forge regional or bilateralpacts to boost trade as a substitute for a global deal. The US is expected to push its interests in Asia atthe highest level at the APEC meeting.

East Asian nations are also worried by the rising chorus of American criticism of China's trade andcurrency policies as politicians, unions, and industry lobby groups in the US gear up for the presidentialelections in 2004. With an increasingly integrated regional economy, any cutback in Sino-American trade wouldhave a negative ripple effect on all.

This was underlined in a new forecast issued by the Asian Development Bank on 30 September. It said thatgrowth in Asia, minus Japan, would accelerate even further over the coming year, thus securing its place asthe world's fastest-growing region. But the ADB also cautioned that part of Asia's dynamism was the result ofswapping dependence on the US for dependence on China. It noted that the latter has emerged over the past twoyears as "a major growth engine for intraregional trade," and that many of the 40 Asian developingeconomies have doubled the share of their total exports going to China since the start of 2000.

China has a rapidly rising trade surplus with the US that already stands at more than $100 billion for2003. Beijing is under pressure from Washington to revalue its currency to make Chinese imports more expensiveand US exports cheaper.

China's neighbors in East Asia fear that such pressure will be the prelude to US protectionism that willnot only hurt China but crimp their economic growth as well.

China recently overtook the US as the main export market for South Korea, contributing significantly to thegrowth momentum of the Korean economy in the first half of 2003. South Korean exports to China soared 47percent year-on-year in the first seven months of 2003, while Taiwan's exports to the mainland leapt by over108 percent. Southeast Asian countries too boosted their exports to China in the past two years. Many of thoseexports are components or raw materials that end up in goods made in China and shipped to the US.

"China specializes in assembling imported parts and components," said a World Bank reportreleased in July. "Often these components are produced in relatively high wage countries like Singaporeor South Korea, which then capitalize on China's relatively low wage costs for product assembly."

Moreover, investors from East Asian economies such as Japan, South Korea, Singapore, Taiwan, Thailand, andHong Kong are among the top manufacturing investors in China, and many of the export products of theirfactories go to the US, the world's largest economy and importer.

Against such a background, the Bush administration's pressure on China over the growing trade imbalance andWashington's simultaneous push for bilateral and regional trade deals are seen by many in East Asia as a riskyand unwelcome course.

When the Cancun WTO ministerial conference opened in September, some East Asian leaders were alreadywarning that its failure would lead to a world trading system organized around economic blocs.

"That kind of world will be less favorable for many countries, particularly the smaller and weakerones," said Singapore's Minister of Trade and Industry George Yeo. "It will also be a more dangerousworld where might is right, where rules are written by the powerful, and where even the pretence that allcountries are equal will be discarded."

Asia's least developed countries, such as Bangladesh, Cambodia, Laos and Nepal, may have benefited from aWTO deal, but they are unlikely to be included in bilateral or regional Free Trade Areas (FTAs), analystssaid.

After the Cancun breakdown, US Trade Representative Robert Zoellick served notice that as the 148 membersof the World Trade Organization ponder the future, the US will not wait. "We will move towards free tradewith can-do countries," he said.

China, India, Malaysia, Thailand and the Philippines lined up with other developing countries to oppose thekind of compromises that would have produced a WTO accord acceptable to the US. As a result, they are likelyto be given low priority by the Bush administration in its bilateral and regional FTA plans, despitecomprising some of Asia's largest and most dynamic economies.

Malaysia, Thailand and the Philippines had expressed interest before Cancun in negotiating FTAs with theUS, the world's largest economy and a major investor in all three countries. Now, however, Malaysia may beleft at the back of the queue because of its Cancun stand and outspoken criticism of the Iraq war, US MiddleEast policy and America's attitude to the Islamic world. Thailand and the Philippines may get less harshtreatment from Washington. Both are US allies in war on terrorism, and Thailand is hosting this month's APECsummit.

The next step on the US agenda to promote what Zoellick calls "competitive liberalization" byleaving some countries behind until they are ready to cooperate and catch up may be to form a trans-PacificFTA linking the US, Canada and Mexico, the three members of the North American Free Trade Agreement, NAFTA,with "can-do" nations around the Pacific Rim.

Still, the US approach of rewarding political friends and penalizing opponents of its foreign policy willcomplicate and slow the process of extending the network of FTAs linked to the US.

Singapore, which supported the US-led invasion of Iraq, had its FTA with the US signed in May, while Chile,which was opposed to the Iraq war, was made to wait. Another prominent member of the US coalition in Iraq,Australia, hopes to finalize an FTA with the US by the end of the year that would include significant mutualconcessions on agriculture.

Japan, the world's second largest economy after the US, appears an unlikely candidate for an FTA with theUS because of the opposition from powerful and highly protectionist Japanese farm lobby. South Korea willprobably fall short for the same reason.

Not to be left out of the FTA game, China said it wants to speed up negotiations with ASEAN, theAssociation of South East Asian Nations, on a regional FTA that would be the world's largest. It is due to beformed by 2010. Moves by Japan, South Korea and India to negotiate preferential trade pacts with ASEAN arealso likely to be hastened by the collapse of the Cancun talks, analysts said.

"FTAs, bilateral and regional, will become more important," said Singapore's George Yeo after theCancun breakdown. "And the result will be growing regionalism."