Asians Fear Rising US Protectionism

SINGAPORE: As Asian countries prepare to receive American president George W. Bush at the annual summit of Asia-Pacific nations, there is growing anxiety about US economic policy towards the region. The failure of the Cancun talks on liberalizing farm trade, threats of punishment to countries who opposed the US war against Iraq, and the rising protectionist chorus from a pre-election United States are some of the concerns that will be uppermost in the minds of APEC (Asia-Pacific Economic Cooperation) leaders when they meet President Bush in Bangkok 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 bilateral pacts to boost trade as a substitute for a global deal. The US is expected to push its interests in Asia at the highest level at the APEC meeting.

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

This was underlined in a new forecast issued by the Asian Development Bank on 30 September. It said that growth in Asia, minus Japan, would accelerate even further over the coming year, thus securing its place as the world's fastest-growing region. But the ADB also cautioned that part of Asia's dynamism was the result of swapping dependence on the US for dependence on China. It noted that the latter has emerged over the past two years as "a major growth engine for intraregional trade," and that many of the 40 Asian developing economies 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 for 2003. Beijing is under pressure from Washington to revalue its currency to make Chinese imports more expensive and US exports cheaper.

China's neighbors in East Asia fear that such pressure will be the prelude to US protectionism that will not 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 the growth momentum of the Korean economy in the first half of 2003. South Korean exports to China soared 47 percent year-on-year in the first seven months of 2003, while Taiwan's exports to the mainland leapt by over 108 percent. Southeast Asian countries too boosted their exports to China in the past two years. Many of those exports 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 report released in July. "Often these components are produced in relatively high wage countries like Singapore or 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, and Hong Kong are among the top manufacturing investors in China, and many of the export products of their factories 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 and Washington's simultaneous push for bilateral and regional trade deals are seen by many in East Asia as a risky and unwelcome course.

When the Cancun WTO ministerial conference opened in September, some East Asian leaders were already warning 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 weaker ones," said Singapore's Minister of Trade and Industry George Yeo. "It will also be a more dangerous world where might is right, where rules are written by the powerful, and where even the pretence that all countries are equal will be discarded."

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

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

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

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

The next step on the US agenda to promote what Zoellick calls "competitive liberalization" by leaving some countries behind until they are ready to cooperate and catch up may be to form a trans-Pacific FTA 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 will complicate 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 mutual concessions on agriculture.

Japan, the world's second largest economy after the US, appears an unlikely candidate for an FTA with the US because of the opposition from powerful and highly protectionist Japanese farm lobby. South Korea will probably 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, the Association of South East Asian Nations, on a regional FTA that would be the world's largest. It is due to be formed by 2010. Moves by Japan, South Korea and India to negotiate preferential trade pacts with ASEAN are also 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 the Cancun breakdown. "And the result will be growing regionalism."