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ASEAN finds free trade a tougher sell in today's environment

People become aware of the divine power of a mantra only when they no longer hear it.

People have been hearing world leaders inveigh against protectionism after official meetings for so long that they barely took notice. But the communique released on March 18 after the Group of 20 finance ministers and central bank governors meeting in Baden-Baden, Germany, made no mention of it. Many in Asia worry that the G-20's sudden reticence on trade signals the end of an era.

The shock may be deepest for the Association of Southeast Asian Nations, which marks its 50th anniversary in August. ASEAN has ridden an accelerating wave of globalization since the turn of the century, boasting that it is turning the entire Asia-Pacific region into a free trade zone. The Group of Seven industrialized nations had finally started taking notice of it.

ASEAN's 10 members have fashioned a single market and liberalized trade with Japan, the U.S., Europe, India and Australia. But the U.S., long the standard-bearer for free trade, has turned inward with the advent of the Trump administration. The latest G-20 statement has underlined ASEAN's fears.

Back-seat drivers

Southeast Asia had hoped to become the central link in two proposed multilateral free trade deals: the 16-member Regional Comprehensive Economic Partnership and the Free Trade Area of the Asia-Pacific, which includes Russia and countries in Central and South America. ASEAN also wants bilateral pacts with major markets such as the U.S., the European Union, Japan, China and India.

The Obama administration was eager to launch the Trans-Pacific Partnership, a now moribund group that included only four ASEAN members. It hoped to invite others to join the TPP later, giving Washington a key role in creating trade rules in the Asia-Pacific.

But Donald Trump's election as president appears to have exposed the idea of ASEAN's centrality as an illusion. The regional bloc thought it was in the driver's seat, but in reality the U.S., Japan and China are doing the steering.

The G-20 statement was particularly jarring because it came on the heels of the U.S. Federal Reserve's March 15 decision to raise the federal funds rate by 0.25 percentage point to between 0.75% and 1%. Asian monetary authorities said nothing, but worried that a U.S. rate hike would suck capital from their countries.

An Indonesian official admitted to being nervous. Indonesia was one of the resource-rich nations whose currencies weakened last year due to falling crude oil prices. But with resource prices stabilizing, Indonesia's currency, the rupiah, did not decline on news of the rate hike. Fed Chair Janet Yellen did work to ensure that financial markets would factor in a rate hike. This spared Asian currency markets from major turmoil and likely came as a relief to ASEAN monetary authorities.

But the region is not out of danger. "The Fed statement conceals a big pitfall for ASEAN," warned Satoshi Okagawa, a Singapore-based senior global markets analyst at Sumitomo Mitsui Banking Corp. Yellen may be sending messages about interest rates, but the statements make no mention at all of how the U.S. central bank would end quantitative easing. "Market players will focus on where excess liquidity is heading, and discussions that mix up both interest rates and liquidity will become meaningless," Okagawa said.

Europe introduced quantitative easing later than the U.S., and the European Central Bank is already looking for an exit. The Fed, on the other hand, wants to raise interest rates as quickly as possible and appears to be avoiding the topic of excess liquidity and its side effects. The Bank of Japan's situation is a little different, as its monetary easing has no end in sight. Gov. Haruhiko Kuroda may, in fact, envy his U.S. counterpart, who is able to raise rates without having to try to hoodwink the public with arcane academic theory.

But if financial markets start to question the steps monetary authorities are taking to soak up the money that flowed out of Japan, the U.S. and Europe and into emerging economies, the U.S. stock market rally could end abruptly. That, in turn, might lead investors to pull their money out of ASEAN and other emerging markets, causing their currencies to plunge. Thus, the Fed's interest rate hike is not the only cause for concern.

Looking for alternatives

That is why ASEAN is trying to remain attractive to investors outside the region. The biggest draw is RCEP. With the TPP stalled after Washington announced its withdrawal, RCEP is suddenly in the spotlight because it does not involve the U.S.

The 16 negotiating countries met in Kobe, in western Japan, through March 3. Officials from Southeast Asian countries were especially keen on the talks. A Japanese official said they seemed to want to reach any agreement they can, "no matter what the content of the deal ends up being." They apparently want to announce an agreement at the conclusion of the RCEP talks at the ASEAN and East Asia summits later this year.

China is also eager for RCEP to get off the ground. President Xi Jinping declared at the World Economic Forum in Davos, Switzerland, in January that his country "will lead the way on global free trade." China has in the past used its allies in Cambodia and Laos to drive a wedge between the ASEAN members regarding maritime disputes in the South China Sea. But on trade, Beijing is eager to lend ASEAN a hand in reaching a favorable agreement -- that is, one less demanding than the TPP.

At present, only Japan and New Zealand are trying to salvage the TPP, which is billed as a model of transparent, high-level trade rules. That would seem to rule out a quick compromise on RCEP. But Japanese Prime Minister Shinzo Abe is unlikely to reject RCEP outright, given Asians' traditional preference for consensus over confrontation. The negotiating countries are thus very likely to reach an agreement by year-end on a free trade deal, but one with many loopholes.

The Philippines holds ASEAN's rotating chairmanship this year. President Rodrigo Duterte is a populist who is more focused on domestic issues such as public safety and corruption. He appears to have little interest in policy coordination with his neighbors or regional integration efforts.

Thus, ASEAN unity may be exposed as a facade. It is easy to imagine a future in which members hold regular meetings long on rhetoric and short on substance.

The prospects are not all gloomy, however. There is no denying that the Asia-Pacific region is the driving force of the global economy. Auto giants such as Toyota Motor and Volkswagen, and consumer goods makers, including Procter & Gamble and Unilever, have supply chains stretching around the South China Sea.

ASEAN also has dense information and transport networks, with Singapore acting as its hub. China is raising its international profile as the U.S. pulls back. It is only natural for Beijing to fill Washington's shoes as the latter reduces its commitment to the region. But that will not undermine ASEAN's economic and geopolitical significance.

Regional solidarity and powerful leaders are needed for small or emerging economies to make their voices heard without being subordinated to major powers. Returning to the era of developmental dictatorship is not desirable, but it is clear that Southeast Asia today lacks exceptional leaders like Singapore's founding father, Lee Kuan Yew, longtime Malaysian leader Mahathir Mohamad and former Indonesian President Suharto.

The disappearance of the anti-protectionist mantra at the G-20 meeting could be a watershed moment. Perhaps the ideal of free trade itself will come into question. If so, ASEAN, which has promoted internal integration akin to that of the EU, will lose its unifying goal and perhaps its raison d'etre. The group is facing the biggest challenge in its 50-year history.

 

Mar 23, 2017

Source: Nikkei

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