[A-List] China: flexing trade muscles

["Michael Keaney" <michael.keaney@xxxxxx>]

The red dragon roars

China and the Association of South-East Asian Nations are creating the
world's largest free trade area, threatening Japan's economic dominance,
writes John Aglionby

The Guardian
Thursday November 7, 2002

Until this week, little of regional, let alone global, significance has
happened in the Cambodian capital Phnom Penh since the repressive Khmer
Rouge regime under Pol Pot was ousted in 1979.

But against a backdrop of freshly-paved roads, recently-painted buildings
and newly-acquired traffic lights in this oversized sleepy village, a
seismic shift in east Asia's economic, and consequentially diplomatic,
balance of power took firm root.

Put simply, the red dragon has eclipsed the dominance of the rising sun. For
the past five decades Japan, the world's second largest economy, has been
the main economic player in east Asia. Its government aid has helped prop up
many nations' economies and its private sector has spread its tentacles to
the remotest corners of the region.

But not for much longer, or so it seems. For China has leapfrogged over
Japan and signed a framework free trade agreement with the 10-member
Association of South-East Asian Nations (Asean) at the group's annual
Leaders' summit, held this week in the former French colony at the mouth of
the Mekong river.

The five key areas of cooperation will be agriculture, the IT industry,
human resources, future investment, and development in the Mekong river
basin. Initial predictions of its potential value are mind-boggling.
Encompassing about 30% of the world's population, it will be the world's
biggest free trade area. Its combined GDP will be about £1.4 trillion and
two-way trade will grow by about 50% in each direction to £850 billion.

Implementation will not happen overnight, indeed it is not even guaranteed
at all as the technical negotiations have yet to begin in earnest. The
current timetable is for the first six members of Asean ­ Brunei, Indonesia,
Malaysia, the Philippines, Singapore and Thailand ­ to join in 2010 and the
four remaining, less-developed, members ­ Burma, Cambodia, Laos and
Vietnam ­ to follow five years later.

In an apparent sign of good faith, or evidence of its desire for eventual
total regional domination, depending on one's point of view, China also
signed with Asean a nonbinding declaration to reduce political and military
tension in the South China Sea. Six nations ­ China, Taiwan, Vietnam,
Malaysia, the Philippines and Brunei ­ have overlapping sovereignty claims
to all or part of the strategic and resource-rich sea lanes and islands,
such as the Spratlys.

In Phnom Penh it was decided to introduce confidence-building self-restraint
measures. An example of these is giving prior warning of military exercises,
which should reduce the chances of conflict erupting.

Japan, by contrast, is struggling to catch up. A day after the China-Asean
deal was inked, Japanese prime minister Junichiro Koizumi signed an
agreement with Asean to form a free trade agreement. But the details of this
deal are extremely vague and it is much more of a pact to forge a framework
rather than a framework itself. Mr Koizumi accepts that the realisation of
any free trade deal with Asean is at least a decade away. Mr Koizumi¹s hands
are also tied by vested interests that don't exist in China. These include a
powerful agriculture lobby that does not want its market flooded by cheaper
south-east Asian products. Asean agricultural imports into Japan are already
14 times greater than in the other direction.

The fact that the leaders are predicting these free trade areas will take so
many years to establish suggests the road ahead will be bumpy at best and
possibly impassable. Arguably the biggest stumbling block will be Asean
itself and the fact that it is anything other than a unified and homogenous
organisation. At one end of the scale is Singapore, a developed, industrial,
open-market economy with an extremely clean government, while at the other
is Laos, a poor communist state, reliant on agriculture and whose government
is anything but clean.

By 2004 Asean is due to eliminate tariffs on the vast majority of products
traded within the organisation, although each nation has a list of
individual opt outs, such as Malaysia¹s vehicle manufacturing industry. Most
governments are refusing to buckle to domestic pressure, and are demanding
tariff-reduction delays.

But that is still on a country-by-country bases. When it comes to collective
action, Asean is much better at talking than doing. Its attitude to stopping
terrorism is a classic example. Much of the leaders' two-day summit was
spent discussing this crucial subject but few concrete measures were agreed
upon and no pressure was put on Indonesia ­ widely considered the weakest
link in the war on terror ­ to take firmer action against potential
troublemakers.

Where this leaves Asean is hard to gauge. But with the shadow of China
looming ever larger over the region, most leaders believe they have little
choice but to embrace the red dragon as quickly and beneficially as possible
before it tramples them completely.