East Asians Look at North America's Trade Pact
International Herald Tribune
September 10, 1992
Philip Bowring 

Should East Asia welcome or fear the recent agreement between the United States, Canada and Mexico to create a North American Free Trade Area? The two sides of the Pacific Ocean are each other's major trading partners. Is their future to be one of increased accord or discord?

The question will be brought into focus by the annual ministerial meeting in Bangkok on Thursday and Friday of a group that encompasses both sides of the Pacific - the 15-member Asia Pacific Economic Cooperation forum, or APEC.

On one side of the ocean, it includes Japan, South Korea, China, Taiwan, Hong Kong, Australia, New Zealand and members of the Association of Southeast Asian Nations. On the other side are the United States and Canada. Mexico and some other Latin American countries are aspirant members.

When the Asia Pacific economic group was formed in 1989, it was intended as a forum for trans-Pacific trade promotion, liberalization and coordination against a perceived threat to the global system operating under the General Agreement on Tariffs and Trade.

This multilateral system, from which all the APEC countries had profited, was seen to be under challenge as free-trade principles were eroded and a protectionist single market prepared to emerge in Europe.

But in the last three years, trans-Pacific trade tensions have increased, first between Japan and the United States, and more recently between China and the United States. The North American trade agreement and economic reform in Latin America have moved remarkably quickly. The collapse of the Soviet empire has altered the political dynamics of trans-Pacific relationships and made the situation in Europe both more complex and less threatening to Asia.

Meanwhile, ASEAN, hitherto largely a political group, has been spurred to create its own trade pact. An Asian bloc to rival the North American trade area and the European Community would have to include Japan and Korea. But Japan remains too dependent on the U.S. market and too nervous of regionalism generally to be seen favoring such an idea.

There is little doubt, however, that the North American pact helped inspire Mahathir bin Mohamad, the Malaysian prime minister, to propose yet another grouping, the East Asia Economic Caucus, which would exclude the United States, Canada, Australia and New Zealand.

Japanese business has been quietly fostering the idea. The abrasive way it was launched and promoted by Mr. Mahathir upset some Asian countries. But the open hostility of the United States to the proposal has done it no harm in a region which, while still essentially pro-American, is looking for faster-growing markets and closer intraregional ties.

The dependence of newly industrialized economies in East Asia - Taiwan, South Korea, Hong Kong and Singapore - on exports to the United States has been falling fast as regional trade growth has burgeoned. Japanese, Taiwanese and Hong Kong capital surpluses have been building new business links and prosperity across the region.

East Asia has been one of the greatest beneficiaries of an open global trading system. It will be one of the last to take refuge in regionalism. But if forced to do so, it will.

Just as the Asia Pacific forum is the germ of a trans-Pacific GATT to take over the regulation of trade should the world body disintegrate, the caucus could do the same in an East Asian context, with the Japanese yen performing the same role for the region as the Deutsche mark does in Europe.

The direction the North American grouping takes will determine whether Asia's future lies with APEC or the East Asia economic caucus.

Interpretation of "local content" rules is a key issue. Textiles, for example, will require North American-made yarn. Asian companies may find that they have to invest more in the Americas to keep a market foothold than they would like, and to produce more there than at home.

A bigger fear is that the North American pact will lead more to trade diversion than to trade creation. Tariff advantages would cause shifts of factories to Mexico - to the direct loss of Asia - particularly countries such as Malaysia and Thailand that are attractive manufacturing centers but far from North America and dependent on footloose foreign multinationals for much of their manufactured exports.

There may also be diversion of capital away from Southeast Asia, which has relied heavily on foreign investment for growth. In recent years, the region has found it easy to attract money. Southeast Asia is close to the countries with surplus capital. But its position as a priority target for investment could change.

For now, say many manufacturers, labor in Mexico is mostly less efficient and more costly than in most export-oriented East Asian countries. But the stimulus of deregulation and investment is likely to make Mexican industry more competitive. Infrastructure is also improving. Equally important - with protectionist sentiments rising in the United States, particularly against Asian manufacturers - Mexico may be seen as a less vulnerable location for export manufacturing, even if it not as cheap. Mexico now has much more clout in Washington than it used to have.

For the United States, trans-Pacific trade remains far more important in absolute terms than trade with Canada and Mexico. The economic relationship with Japan is indispensable to American prosperity. Any group, such as APEC, which can help ensure that the North American trade area adds to U.S. trade in one direction without undermining it in another, will do a useful service to its members and to world trade in general.

But it is hard to escape the trend that NAFTA represents - increased regionalization of trade and a greater U.S. concern with issues close to home. Asia is often seen as a threat to U.S. industry, while Latin America is an area of promising opportunity for U.S. capital and exports.

Cultural and political links give U.S. companies an apparent advantage in Latin America that they lack in Asia.

For a Japanese multinational, doing business in Mexico may be no more alien than in Indonesia. But East Asia's energetic ethnic Chinese businessmen, who use clan contacts across the region to expand commerce and investment, are far less likely to have such links in the Latin world. They may prefer to stay in more familiar territory and promote regional arrangements that mirror the North American pact.

The writer, a former editor of the Far Eastern Economic Review, contributed this comment to the International Herald Tribune.

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