d - Asia Today International

MAY 2006
®
EU Trade
Commissioner
Peter
Mandelson:
Patterns of
trade
are changing
GLOBAL
TRADE
ON
THE
EDGE
Negotiators
struggling
on Doha
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Volume 24 | No.3 | May 2006
INTERNATIONAL
23rd Year of Publication
Published in Australia since 1983. Published by Asia Today International Pty Limited
(ABN 34 109 69 874). Office address: Level 29 Chifley Tower, 2 Chifley Square, Sydney
NSW, Australia. Production Office: Suite 2a, 18-20 Waterloo Street, Narrabeen NSW 2101,
Australia. Telephone (612) 9970-6477. Fax (61 2) 9913-2003. Mailing address (all
correspondence): Box N7, Grosvenor Place Post Office, Sydney NSW 1220, Australia.
E-mail . Website .
Contents
COVER REPORT
9-16 WORLD TRADE ON
THE EDGE
Prospects of a breakthrough in the Doha
Round of World Trade Organisation talks
aimed at preserving and enhancing the global
multilateral trading system are diminishing,
with negotiators missing a self-imposed deadline.
Failure would lead to a greater rush for
bilateral Free Trade Agreements, which, with
their conflicting ground rules, especially in
terms of rules of origin, could see the real costs
of international trade escalate. In our special
report, we examine the geographic fault zones
which have already emerged as governments
rush to fill the void left by failure to reach
settlement at the WTO. Increasingly, growth
in cross-border trade is limited largely to
neighbouring countries within geographic
zones – a trend which should concern every
trader and manufacturer.
10-11 TRAPS FOR UNWARY IN KNOT
OF AGREEMENTS
13 WHY MULTILATERAL TRADE IS UNDER THAT
DARK CLOUD
15 SOUTH KOREA REVAMPING ITS
TRADE POLICY
15 WORLD TRADE ‘AT CUSP OF BIG CHANGES’
16 OIL EXPORTERS SAVE MORE
16 US CONGRESS DIVIDED ON TRADE ISSUES
OPINION
5-6 THE FAREWELL THAT WASN’T – Why Thaksin has given globalisation a bad name.
6-7 MANAGING THE GOLDEN GOOSE – Dangers for the economy in Australia’s minerals
and energy export boom.
Cyrill Eltschinger –
China’s IT sales at
US$320 billion.
THE REGION
17 KOREA SHORING UP ITS ENERGY BASE – Korea is pursu
ing oil exploration projects in Africa and Asia.
17 INDIA MOOTS MUMBAI AS OFFSHORE FINANCIAL HUB
– Special economic zones are to be set up in Mumbai, offering
special rights for Indian banks.
19 CHINA BIDS FOR OUTSOURCING – China is poised to
become a serious competitor for both Information Technology and
Business Processing Outsourcing. China has also now become the
world’s largest exporter of IT goods.
BUSINESS TRAVEL
ASXXX Asia Today May 06.qxd 28/4/06 4:36 PM Page 1
Negotiators
struggling
on Doha
22 SHANGRI-LA ON GROWTH TRACK – The Shangri-La Group
plans 80 properties by 2008, 40 of them in China.
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OPINION
THE
FAREWELL
THAT
WASN’T
IRONICALLY, in Thailand,
Thaksin has given globalisation
a bad name. US$47
billion in infrastructure projects,
privatisation of State
enterprises and the Thai-US
FTA are now in limbo . . .
ANALYSIS
Robert Horn*
BANGKOK – It was one of the most
disingenuous farewells of all time.
When Thailand’s Prime Minister, Thaksin
Shinawatra, announced on April 4 that he
would not accept the premiership for a third
term, street protesters who had been
demanding his resignation for months
rejoiced. The celebrations were short-lived.
Thaksin was retaining his seat in
Parliament and his leadership of the ruling
Thai Rak Thai party, prompting his opponents
to charge that whoever succeeded Thaksin as
Prime Minister would merely be his puppet.
With demonstrators vowing to take to the
streets again unless Thaksin completely
divorces himself from politics, Thailand
appears to be heading for another round of
conflict and confrontation. That’s bad for
business, because while this drama drags on,
a range of important decisions regarding the
economy have been put on the backburner.
Among them are US$47 billion in infrastructure
projects the Government was opening
up to foreign bidders, privatisation of
State enterprises and the Thai-US Free Trade
Agreement, which is now in limbo.
Although Thaksin’s Thai Rak Thai party
won a snap election on April 2, the strength of
the anti-Thaksin movement has forced the
party to announce that the new Government
will remain in power for only seven to 15
months, and be mainly concerned with implementing
badly-needed reform of Thailand’s
constitution and political system. New elections
will then follow.
Contracts for infrastructure, therefore,
won’t be handed out until the second half of
2007 – at the earliest. That’s assuming the
Government tasked with reforming the system
can be seated soon and last long enough
to do the job.
Despite winning a landslide victory in
February 2005, Thaksin felt compelled to call
a new election and seek a new mandate this
April. The reason was growing street protests
against his rule following the January sale of
his family’s telecommunications business,
Shin Corporation, to Temasek Holdings, an
arm of the Singapore Government, for US$1.9
billion. Several aspects of the deal – the fact
that the Shinawatras paid no tax on the sale,
that shares were moved around in offshore
shell companies while family members were
allegedly dumping shares during the negotiations,
and that laws on foreign ownership
appeared to have been changed to facilitate
the deal – looked shady to the public.
To quell the uproar, Thaksin said he would
answer all questions about the sale in
Parliament. Then, rather than answer questions,
he dissolved Parliament and called a
new election. Confident he would win, he
announced that no questions about the Shin
Corp sale would be tolerated once he did. In
response, the Opposition chose to boycott.
Thaksin's Thai Rak Thai party won, sort of.
TRT swept rural areas, but lost all major urban
centres, leaving Thailand clearly divided.
Furthermore, 24 of Thaksin's candidates who
ran unopposed in their districts failed to be
elected because they could not muster the 20
per cent of voters the law requires to win.
Unless all seats are filled, Parliament cannot
legally be seated and a Prime Minister cannot
be elected. Another round of elections to fill
the empty seats was held on April 23, but not
all were filled. The Election Commission is
now advising TRT to go to court to seek a ruling
to open Parliament without the necessary
quorum, a move sure to spark more street
demonstrations. Some protesters are asking
Thailand's King Bhumibol Adulyadej to intervene
and appoint an interim impartial
Government to carry out political reforms, a
step his privy councilors have stated the
monarch would prefer not to take.
Regardless of whether the next
Government is elected or appointed, if
Thaksin remains part of it, or appears to be
❝ Regardless of whether
the next Government is
elected or appointed, if
Thaksin remains part of
it, or appears to be
pulling the strings from
behind the scenes,
protests will continue ❞
pulling the strings from behind the scenes,
protests will continue – and the risk of violence
will escalate. Blood running in the
streets will surely spell the end of any government
and deter most investors. Furthermore,
Thaksin’s presence in the halls of power is, in
itself, now an obstacle to the infrastructure
projects, privatisation and the Thai-US FTA
moving forward.
The reason is Thai public opinion. The Shin
sale caused long-simmering suspicions to boil
over among middle-class urban Thais that
Thaksin and his friends were using their
Government positions to enrich themselves.
THE THAKSIN ELECTION
Polls show that Thais regard corruption as the
worst aspect of the Thaksin Administration.
“He presented himself as clean by saying he
was so rich he had no need to be corrupt. But
scandals showed that wasn’t the case,’’ said
Prof. Sunai Phasuk of Chulalongkorn
University in Bangkok.
When the Government privatised the
Petroleum Authority of Thailand, relatives of
Cabinet members walked off with the largest
lots of shares, while many average Thais
weren’t able to purchase them. And last April,
news broke that a US company had admitted
to the Securities and Exchange Commission
it had paid money to a Thai businessman in
order to bribe Government officials so they
would buy its scanning equipment for the
New Bangkok International Airport. Thaksin
refused to fire the Minister overseeing the
project, despite waging a much publicised
“War on Corruption”. The result is that a significant
portion of the public believes Thaksin
and his men can’t be trusted not to use foreign
investment, privatisation and trade deals
as vehicles to line their own pockets.
A key theme of the protests was that
Thaksin was “selling the country”. Just about
all of Shin Corp’s businesses are Government
concessions or dependent upon Government
regulations – which critics charge were
designed to benefit the Shinawatra companies.
Now, concessions – including satellite
and telecommunications equipment and frequencies
which have national security implications
– have been sold to Temasek.
“Thaksin claimed to be patriotic and frequently
called his opponents traitors. With the
Shin deal, he went totally against the notion
➔ CONTINUED PAGE 6
From the pages of ASIA TODAY INTERNATIONAL
MAY 1986 – Falling world oil prices force Indonesia to
restructure a number of trade and investment policies;
Business looks for new direction as the Aquino
Government assumes power in Manila, hoping for lower
taxes and a Board of Investment which promotes rather
than regulates; more Chinese provinces consider a
direct presence in Australia.
MAY 1991 – Political instability in India prompts a
sharp rise in the country’s risk rating; Widespread discounting
in trade finance in Australia as banks fight for
market share; Coup in Thailand leaves intact plans to liberalise
banking and financial policies.
MAY 1996 – Chinese banks attempting to renegotiate
wool contracts, with payment problems emerging;
India’s financial services industry hoping for return of
market liquidity and softer interest rates following pending
election; Rising yen opens new opportunities for foreign
firms to bid for Japanese-funded aid projects in
Asia.
MAY 2005 – Hong Kong repositioning as Corporate
China realises the former British colony offers the best
route through which to establish a global presence;
Indonesia indicates interest in an FTA with Australia as it
begins negotiations with Japan and the US; World sugar
prices forecast to fall, but cotton prices could increase 12
per cent; Turning Macau into the Las Vegas of Asia;
Singapore steals Hong Kong’s shipping crown.
ASIA TODAY INTERNATIONAL MAY 2006 | 5

OPINION
INTERNATIONAL
Volume 24, No. 3,
May 2006
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– Raja Ashgar; Philippines – Abby Tan; Singapore – Andrew
Symon; Thailand – Robert Horn; Taiwan – Michael Taylor.
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➔ FROM PAGE 5
of patriotism. It was regarded as selling
national assets,’’ Sunai said.
It’s a strange turn of events. Big infrastructure
projects, privatisation and FTAs are
always contentious issues – and would elicit
opposition no matter what government is in
power. When Thaksin swept to office in 2001
he was hailed as a globaliser, the kind of
leader who had the knowledge and savvy to
navigate these types of deals and give
Thailand the advantage. But many now
believe that any deal under Thaksin will ultimately
be to his own advantage.
Ironically, in Thailand, Thaksin has given
globalisation a bad name.
* Robert Horn is Bangkok
correspondent for ATI.
MANAGING
THE
GOLDEN
GOOSE
AS Australia’s minerals
and energy exports continue
to rise, there is likely to
be more public concern
over how governments use
their mining and petroleum
revenues . . .
COMMENT
Andrew Symon*
SINGAPORE – Resource-rich
Australia looks set to enjoy a long minerals
and energy export boom fuelled by demand
from the world’s industrialising giants,
China, India and Brazil. Boosting prospects
further is the expectation of increasing sales
of uranium oxide for China’s ambitious
nuclear power programme. Anticipating this
bonanza, Australia’s Federal and State governments,
not to mention companies and
investors, are rubbing their hands with glee.
But like a man who wins a lottery, resources
revenues can be easily squandered.
Worldwide experience shows that
resources booms can, in fact, end up harming
countries if governments do not manage
them properly. One classic case is Nigeria,
which has received more than US$280 billion
in oil revenue in the last three decades –
more than the total of all government development
assistance to all of Africa in this period,
the World Bank says. Yet Nigeria’s real
per capita income has declined.
While Australia should hardly find itself
ending up as an Antipodean Nigeria, it needs
to take heed of lessons elsewhere. Countries
gaining sudden and often relatively shortlived
wealth – minerals, oil and gas, and coal
eventually run out – may find that local manufacturing
and agriculture becomes less
competitive and is squeezed out by the
booming resources sector as it causes the
currency to appreciate.
Local currency values may rise significantly
as exports surge and domestic inflation
takes off through the booming sector’s own
demand, easier bank credit as foreign currency
is converted into local currency – thus
expanding money supply – and increases in
government spending. Speculation may also
hold up value as traders put a premium on
the local currency in view of the outlook for
strong world commodity demand – as has
been Australia’s experience.
Resource prices may also turn out to be
very volatile, with economy-wide upheavals
caused by sudden falls, loss of export income,
falling exchange rates and a consequent exodus
of overseas capital. Australia, now with a
high current account deficit sustained by
large investment inflows – and high foreign
debt as a result – therefore needs to be wary.
Although analysts expect commodity prices
to remain strong, a sudden drop could see
Australia’s currency fall sharply. Interest rates
then would have to increase to stabilise the
situation, possibly sending the local economy
into recession.
Resource booms can be especially fatal for
developing countries where the modern economic
sector is small – until the advent of the
mineral or petroleum development – and
much of the population is reliant on semi-traditional
agriculture. The new resources
industry overwhelms the economy.
Such danger is not exclusive to developing
economies, as the Netherlands found in the
late 1960s and 1970s when North Sea gas
was first produced and exported. Economists
now refer to the problem as the “Dutch disease”.
Government corruption – or perhaps
more accurately put, corruption facilitated on
a grander scale than before – may also result.
Where use of funds is not transparent and
accountable, ministers and officials may
feather their own nests and use funds to
cement political support through government
contracts to cronies. In the case of
Australia, though, whatever one may think of
politicians and bureaucrats, one would not
expect them to stash public funds into Swiss
bank accounts in the manner of, say, the
notorious former president of Zaire (now the
Democratic Republic of the Congo), Mobutu
Sese Seko.
Yet whether a country is developing or
developed, there is always the danger of mismanagement
of public revenues. To avoid
this, should the resource income be dedicated
for longer-term investment in infrastructure,
education and training and R&D, rather
than just being poured into treasuries to support
general recurrent spending?
One developed country taking this course
is oil- and gas-rich Norway, which puts its
petroleum revenues into a special fund to
provide for welfare and aged pensions over
the long term. The fund is invested domesti-
➔ CONTINUED PAGE 7
6 | ASIA TODAY INTERNATIONAL MAY 2006

HIDDEN DANGERS OF A RESOURCES BOOM
➔ FROM PAGE 6
cally and internationally. The Parliament limits
the amount of fund revenue that can be
used by the Government in any one year. The
fund also helps avoid the “Dutch disease”
resulting from excessive government spending
and credit expansion in the short term,
and evens out the revenue ups-and-downs
through volatile oil prices.
Similar funds operate elsewhere in the
world, with the most relevant for Australia in
terms of country and economy comparability
being those in the State of Alaska in the US,
in Alberta, Canada, and in Chile. Elsewhere,
there are funds in Venezuela, Botswana,
Kuwait, Oman, Iran, Azerbaijan and
Kazakhstan. Timor Leste (East Timor), which
recently resolved a problem with Australia
over development of gas fields in the Timor
Sea, is also setting up a fund to manage its oil
and gas revenue. Timor Leste is being
advised by the Norwegian Government.
In the case of a poor country such as Timor
Leste, the fund promises to prevent corruption.
A well-managed fund combined with
careful spending decisions should reduce
Timor’s reliance on overseas government
assistance loans and consequent debt for
health, education and physical infrastructure
development.
Of course, there are plenty of governments
that do manage effectively resource booms
without such funds. This no doubt will be the
argument from most Australian treasuries.
They will also point to the fact that, unlike
classic international cases, mining and petro-
❝ Countries gaining sudden
wealth may find
local manufacturing and
agriculture is squeezed
out by the booming
resources sector as it
causes the currency to
appreciate ❞
leum production is a small proportion of
Australia’s total Gross Domestic Product – not
more than 10 per cent – taking into account
downstream processing and services supply
– and governments rely on many other
sources of revenue apart from resource rents.
But mining and energy (coal, liquefied natural
gas, some oil, and uranium oxide) dominates
Australia’s trading accounts. Mineral
and energy exports made up 39 per cent of
total goods exported in 2004/05. And this figure
underestimates the contribution of natural
resources because it excludes those
exports of minerals partly processed.
Government resource revenue funds in the
Australian situation would most likely have to
be State-based affairs as they levy onshore
and immediate offshore resource royalties,
not Canberra. Canberra does get royalties
from offshore production beyond three nautical
miles, and these will grow sharply with the
assured and large expansion of liquefied natural
gas exports from fields offshore Western
Australia and the Northern Territory. Western
Australia, with vast resources deposits producing
40 per cent of the country’s minerals
and energy, could be a prime candidate.
Mining and petroleum royalties currently contribute
AUD1.3 billion, or about 10 per cent, of
the WA State Government’s AUD13 billion
annual revenue.
Natural resources strike an emotional chord
for the public as they are felt to be national
assets from which all should gain some benefit
as a result of development and export.
Strengthening this feeling will be the probable
growing role of foreign companies and
their investment – and here Australia is likely
to see growing investment from Chinese
companies. Illustrating this, the Chinese
State-owned Sinosteel Corporation recently
dangled US$3 billion in front of Australian iron
ore miners at a conference in Perth. Already
an investor in Australian mines, Sinosteel
said it wanted to partner new projects in
Australia and elsewhere to diversify supply.
As mineral and energy exports rise – a significant
increase is projected by the
Australian Bureau of Agriculture and
Resource Economics – and so play an evergreater
role in Australia’s fortunes, there is
likely to be more public concern over how
governments use their mining and
petroleum revenues.
* Andrew Symon is Singapore
correspondent for ATI.
ASIA TODAY INTERNATIONAL MAY 2006 | 7

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GLOBAL TRADE
DAILY WTO TALKS IN GENEVA
TRADE ON THE
EDGE
Negotiators struggle
on Doha terms
EU Trade Commissioner
Peter Mandelson:
Patterns of trade
are changing.
GENEVA – Trade negotiators
are engaged in intense
daily discussions in Geneva in a
last-ditch effort to reach a global
trade agreement over the
next few weeks. Having missed
a self-imposed deadline of April
30 to agree on modalities – specific
formulas and time frames –
for agriculture and industrial
tariffs negotiation, pressure has
intensified to produce an outcome
by mid-June.
Without an agreement on
modalities, members cannot submit schedules
of tariff cuts because they don't have a formula
on which to base the cuts. And without the
schedules, there can be no agreements.
Some four-and-a-half years have passed
since the Round was first launched in Doha,
Qatar. If members have not been able to reach
an agreement over that time, the chance of
reaching one within six weeks appears slim –
unless, of course, there is a sudden burst of
political will. "We have to have real, tangible,
meaningful, substantial progress through May
and June if we are going to get things done
here by summer – which is what we have to do
to get the schedules together," said a US trade
official at an April 21 briefing in Geneva.
Pascal Lamy, Director General of the World
Trade Organisation, said: "We may have
missed the deadline, but we are not in deadlock."
He added: "Genuine and important
progress has been made, but not fast enough to
allow us to reach agreement on modalities by
the end of the month."
Later, WTO spokesman Keith Rockwell told
ATI: "The obvious inability to reach the deadline
is disappointing, but not in itself a catastrophe.
The good news is that we have a textbased
approach in agriculture to work on. Work
has been intensified to finish it in coming
weeks." Instead of having a weekly meeting,
agriculture negotiations will work through continuously
until they find common ground.
A trade source in Geneva told ATI: "You are
seeing governments negotiating in earnest on
concrete numbers which we have only seen in
the last couple of months. If it was six months
ago, we would be more sanguine about the
prospects. It is now very late in the day." The
Trade
Watch
source said that, even if the big players reach
agreement, all 149 WTO members need to
accept it. "Everyone needs to feel that they
have ownership of the outcome. There is a lot
that needs to be done. We have three to six
weeks – that is it," the source said. Until an
agreement in agriculture is reached, negotiations
on industrial goods and services are
unable to move forward. One source explained
that members are waiting to see what they can
get in agriculture before making other offers.
Of course, agriculture is no longer the main
driver of world trade. EU Trade Commissioner
Peter Mandelson says the biggest development
gains would not come from agricultural liberalisation.
"Lasting economic and social development
requires a broad basis for growth.
Agriculture is not, in fact, where developing
countries would receive the largest of earliest
benefits. Patterns of international trade are
changing."
Indeed, although Korea, Japan, and China are
now among the world's largest exporters of
industrial goods, they have clung stubbornly to
protect their diminishing agriculture sectors.
Mandelson says high-tech exports from
developing countries have actually increased 20
per cent a year since 1980, twice as fast as in
industrialised countries. The share of high-tech
exports in the developing countries’ total is now
around one fifth. Meanwhile, the share of agricultural
products in trade in goods by developing
countries has dropped from 42 per cent in
1970 to 11 per cent today.
"So my starting point, as always, is that for
Doha to succeed we need a balanced ambition
in all areas of negotiation, and a proportionate
contribution from all players in the talks. We
PROSPECTS of a breakthrough in the Doha Round of World Trade
Organisation talks aimed at preserving and enhancing the global multilateral
trading system are diminishing, with negotiators missing a self-imposed
deadline. Failure would lead to a greater rush for bilateral Free Trade
Agreements which, with their conflicting ground rules, especially in terms
of rules of origin, could see the real costs of international trade escalate.
The language of Doha is stilted and the subject itself hardly the stuff of
light dinner party conversation, but what does emerge from Geneva talks
will have immense potential repercussions for world economies. In our special
report on the state of global trade (pages 9-16), we examine the geographic
fault zones which have already emerged as governments rush to
fill the void left by a failure of world leaders to reach settlement.
Increasingly, growth in cross-border trade is limited largely to neighbouring
countries within geographic zones –
a trend which should concern every
trader and manufacturer . . .
need a Round that unlocks the door to the
development process across the full range of
economic activity – agriculture, goods and services,"
says Mandelson.
So far, each country is sticking to its position
and waiting very much to the last minute,
according to Geneva trade sources. Each country
knows that it has to offer more – and this is
especially true of the so-called "triangular central
element". The US must do more to cut
domestic subsidies to US farmers, while the
Europeans must increase access to their agriculture
market, and India and Brazil must open
up their industrial goods access further.
"Everyone knows what he has to do to move
forward, but each is waiting for the other guy to
move first," said the source.
The US is putting the blame squarely on the
EU. But Mandelson counters that the US is
making "high sounding, unrealistic demands".
Speaking to an audience in Finland last month,
Mandelson said all the main players, including
the EU, are required to do more and “must be
ready to supplement existing offers if all the
pieces of the puzzle are to fall together.”
The Doha Round is scheduled to conclude in
December – a deadline effectively required by
the scheduled expiration in mid-2007 of the US
President's Trade Promotion Authority (TPA).
Under TPA, Congress restricts itself only to
approve or reject a negotiated trade agreement,
within strict time limits and without amendments.
Missing the April 30 deadline simply
makes achieving successful conclusion by
December that much more difficult, said the US
source, because the technical work involved in
drafting the trade treaty would require several
➔ CONTINUED PAGE 11
ASIA TODAY INTERNATIONAL MAY 2006 | 9

GLOBAL TRADE
RUSH TO FTAs TO FILL THE VOID?
Traps for unwary in
knot of agreements
FIRMS must now factor in
the trade-off options between
tariff preferences available
through FDI and preferences
available by contracting to
local suppliers under multiple
rules of origin . . .
WITH THE FUTURE of multilateral
trade negotiations now in serious doubt, countries
are expected to intensify negotiations for
bilateral and regional trade agreements.
But the Manila-based Asian Development
Bank warns that such agreements are no
panacea for global trading problems. Instead,
they can add complexity to the global trading
system – and increase the cost of trade.
An important question is how to mitigate the
damage that may be caused by a knot of agreements
that differ in terms of their coverage,
treatment and ambitions, and which may contradict
one another. In Asia, the ADB says,
bilateral deals which emphasise closed reciprocity,
rather than the "open regionalism"
espoused in the past, are now on a strong
upswing. These agreements discriminate
against those not in the loop because of their
strict rules of origins – which are often inconsistent
and overlapping, adding to compliance
costs. The ADB says, problems associated with
bilateral trade agreements have little to do with
esoteric theories of being second best (to global
agreements) and everything to do with breadand-butter
commercial decisions.
Increasingly, bilateral agreements will influence
the volume and pattern of trade and
investment flows, globally and within Asia.
For example, the ADB says, instead of simply
choosing locations that minimise costs, firms
must now factor into their investment calculations
the trade-off between tariff preferences
made available through direct investment and
the preference they can receive by contracting
out to local suppliers under multiple rules of
origin.
Customs administration can also become
complex quickly, and opportunities for corruption
and malfeasance expand where there are
overlapping and inconsistent rules of origin.
The trend to bilateralism has accelerated
since 1999, when a Ministerial Meeting of the
World Trade Organisation in Seattle broke
down. This was compounded when the next
Ministerial meeting in Cancun, Mexico, in
2003, also stalled. After days of haggling by poor
African countries over cotton, access to agricultural
markets and cuts in industrial tariffs, the
2005 Hong Kong Ministerial Meeting narrowly
averted failure. At the last minute, Ministers
signed off on a face-saver by agreeing to set a
deadline by the end of April on the modalities –
10 | ASIA TODAY INTERNATIONAL MAY 2006
specific formulas and timeframes – to continue
with negotiations.
The deadline has come and gone, and pessimism
in terms of expectations of a successful
global Round has increased (see page 9).The
rush to bilateral FTAs will now accelerate as
countries fend for themselves in the void.
Non-believers in bilateral agreements, such
as Malaysia and India, are slowly being converted.
But they look at such agreements, understandably,
with caution. In an recent interview,
India's Finance Minister, Palaniappan
Chidambaram, told a Singapore newspaper:
"FTAs are a necessary track. Industry does
complain about inversion and about non-level
playing fields. But one has to be very careful in
Trade
Watch
assessing the overall advantage of an FTA. He
added: "We have to divide FTAs into two categories.
One, with our immediate neighbours’
concerns as the largest economy in the region.
And another will be how we treat FTAs with
developed countries – ASEAN, Japan, South
Korea and Singapore. In these, we have to exercise
great caution.”
India inked a Comprehensive Economic Cooperation
Agreement (CECA) with Singapore
last June, but the impression, from India's perspective
at least, is that it is not working as
envisaged. India has complained that the promised
investment flow from Singapore has yet to
materialise. Investment is central to all these
agreements, especially from the perspective of
the "junior partner". There is always the expectation
that an FTA will offer a calling card for
business to invest in the partner country.
Foreign investment has proved to be a boon
to exports, as borne out by the experience of
➔ CONTINUED PAGE 11
Global growth forecast
(FORECAST CLOSING DATE: APRIL 11, 2006)
WORLD SUMMARY
(%)
HONG KONG – Global economic
growth is expected to average 4.3 per cent this
year (measured using purchasing power parity
–PPP–weights), modestly down on 2005,
according to the latest global forecast from The
Economist Intelligence Unit. A further gentle
slowdown is expected in 2007, to 4.1 per cent,
a pace of growth that will be broadly maintained
in 2008-10.
Measured using GDP at market exchange
rates (which give greater emphasis to the
OECD countries and reflect the exchange rates
at which firms trade and repatriate profits),
world GDP growth is forecast to slow to 3.4 per
cent in 2006 and 3.1 per cent in 2007, before
picking up modestly to 3.2 per cent in 2008.
The EIU says international investors' risk
aversion seems to have increased in recent
weeks, perhaps prompted by a change in policy
of the Bank of Japan (central bank).
Source: Economist Intelligence Unit.
Countries with a large external deficit have
seen their exchange rates come under pressure
(including Iceland, New Zealand and Hungary)
and the risk of the dollar coming under severe
downward pressure has probably increased.
“We have revised our forecast for Japanese
monetary policy. With the Bank of Japan making
rapid progress on draining liquidity from
the financial system, we now expect interest
rates to begin rising from the third quarter of
2006 (previously end-2006),” the EIU says. ” We
have revised up our forecast for German GDP
growth in 2006 to 1.9 per cent (previously 1.6
per cent), reflecting improved business sentiment
and a modest expected improvement in
the labour market. Our forecast for food, feedstuffs
and beverages (FFB) prices has been
revised up, as surging demand for ethanol (a
petrol substitute) has an impact on the
sugar market.”

➔ FROM PAGE 10
countries such as China – which has enjoyed a
steady large inflow of direct foreign investment.
Indeed, by some estimates, about 60 per cent of
China’s exports are generated by foreignowned
firms, says the ADB. Foreign firms
account for 86 per cent of exports from tiny
economies like Singapore, and for 73 per cent
for Malaysia.
Estimates of export-sales ratios of manufacturing
establishments distinguished by foreign
ownership have been made in Indonesia,
Thailand and Vietnam. Export propensities of
firms with 90 per cent or greater foreign ownership
shares exceed 50 per cent in all three countries.
In contrast, local firms tend to export an
average of less than 10 per cent of sales, and
firms with intermediate foreign ownership
shares export about 25 per cent of sales.
As many as 300 bilateral trade agreements,
including FTAs, are expected to come into force
by the end of this year. Of these, about 36
involve Asian countries.
Before 1995, only three developing Asian
countries were party to bilateral FTAs, notes the
ADB in a recent paper, Routes for Asia's trade.
By 2005, 27 agreements had been notified, with
a much bigger number of other agreements in
negotiation or under consideration.
Singapore, a free port, but with an economy
totally dependent on external trade, has been
the most proactive in negotiating such agreements.
Singapore now has a trade agreement
with 11 trading partners, including Japan,
Australia, the US and Singapore.
Most significant is the switch in Australia's
trade policy from multilateral to bilateral.
Australia has now completed four FTAs – with
Singapore, the US, Thailand and New Zealand.
Australia and New Zealand negotiated their
Closer Economic Relations (CER) agreement
more than two decades ago.
Generally, trade officials say FTAs are a useful
means of breaking into new markets.
Australian trade officials believe implementation
of the FTA with Thailand has contributed
to a boost in bilateral trade. According to statistics
from Australia’s Department of Trade and
Foreign Affairs, bilateral trade rose to AUD8.1
billion in 2004/05 from AUD6.1 billion the previous
financial year and AUD4.9 billion in 2000-
01. Australia's deficit with Thailand shrank
from AUD1.2 billion in 2003-04 to AUD302 million
last financial year. As more tariff cuts are
phased in, exporters hope to sell more to
Thailand. However, looking at raw trade figures,
Australia's FTA with Singapore has not produced
a lift in exports. If anything, Australia's
exports to Singapore have reversed. Exports
totalled AUD6 billion in 2000/01 and dropped to
AUD3.3 billion in 2004/05. Australia’s deficit
with Singapore rose from AUD2 billion to
AUD3.9 billion in the same period.
Similarly, Australia’s trade performance with
the US has not shown many gains. Australian
exports have been steady at AUD9.4 billion in
the last two financial years. Imports from the US
also remained relatively stable at AUD21 billion
last financial year. Far from being disheartened,
Australia is firmly on track with bilateral FTAs,
currently negotiating with China, Malaysia, the
United Arab Emirates and Japan. Australia and
New Zealand are negotiating with ASEAN to
link CER to the ASEAN Free Trade Agreement
(AFTA).
It should, however, be said that developed
GLOBAL TRADE
❝ Developed economies
also look to FTAs for
access to the trade partners’
services sector.
Services trade is growing
rapidly ❞
economies also look to FTAs for access to the
trade partners' services sector. Services trade is
growing rapidly, and countries like Australia
and Singapore see themselves as key providers
of financial end professional services.
Indeed, the key concern of Hong Kong in pursuing
a Closer Economic Partnership Agreement
(CEPA) with the Mainland has been to
access China’s services sector –in distribution,
retail, professional services and so on. Now
moving on to the fourth phase (CEPA IV), the
bilateral agreement is focussing on broadening
the liberalisation of more service sectors.
Japan has either a free trade agreement or a
preferential trade pact with five countries, while
South Korea has arrangements with three countries.
South Korea has recently begun negotiating
an FTA with the US. Despite its obvious
preference to stick to the multilateral arena,
Malaysia, too, has begun bilateral negotiations
with the US, New Zealand and Pakistan.
China is seeking to play a more central role in
East Asia, and was an early proponent of the
bilateral free trade agreement, in addition to the
more ambitious pan-East Asian initiative which
would also involve Japan, Korea with ASEAN,
in a forum known as ASEAN plus 3.
TRADE ON EDGE
➔ FROM PAGE 9
months in itself. Mandelson says the failure to
meet the April 30 deadline is due to differences
in the analysis of the relative value and weight,
in market access terms, of what parties are
offering.
For example, he says, the EU believes sincerely
that it is offering considerably more raw
agricultural market access than the big agricultural
exporters, notably the US and Brazil, are
prepared to acknowledge.
Similarly, he says Brazil and other G20 countries
argue that what they are offering in industrial
market access is worth more than the EU
and the US believe.
This is because, principally G20 negotiators
argue that reducing the ceilings limiting their
tariffs -- as opposed to the tariff themselves -- is
worth much more economically than the marginal
cuts in certain applied tariffs they are also
offering, he says.
"There is a real difference of opinion
between developed and developing countries
about how we should calibrate the levels of
ambitions between agricultural and industrial
market access," says Mandelson. He sums up
the differences as “conceptual, analytic and, to
a certain extent, ideological".
If Doha was to fail, it would not be the end of
world trade. But most certainly, smaller countries
which have been riding on the coat-tails
of the WTO could find themselves
increasingly marginalised.
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