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Volume 24 | No.3 | May 2006

ContentsCOVER REPORT9-16 WORLD TRADE ON

THE EDGEProspects of a breakthrough in the DohaRound of World Trade Organisation talksaimed at preserving and enhancing the globalmultilateral trading system are diminishing,with negotiators missing a self-imposed dead-line. Failure would lead to a greater rush forbilateral Free Trade Agreements, which, withtheir conflicting ground rules, especially interms of rules of origin, could see the real costsof international trade escalate. In our specialreport, we examine the geographic fault zoneswhich have already emerged as governmentsrush to fill the void left by failure to reach settlement at the WTO. Increasingly, growthin cross-border trade is limited largely toneighbouring countries within geographiczones – a trend which should concern everytrader and manufacturer.

10-11 TRAPS FOR UNWARY IN KNOT OF AGREEMENTS

13 WHY MULTILATERAL TRADE IS UNDER THATDARK CLOUD

15 SOUTH KOREA REVAMPING ITS TRADE POLICY

15 WORLD TRADE ‘AT CUSP OF BIG CHANGES’16 OIL EXPORTERS SAVE MORE16 US CONGRESS DIVIDED ON TRADE ISSUES

OPINION5-6 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 miner-als and energy export boom.

THE REGION17 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 theworld’s largest exporter of IT goods.

BUSINESS TRAVEL22 SHANGRI-LA ON GROWTH TRACK – The Shangri-La Group

plans 80 properties by 2008, 40 of them in China.

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BANGKOK – It was one of the mostdisingenuous farewells of all time.

When Thailand’s Prime Minister, ThaksinShinawatra, announced on April 4 that hewould not accept the premiership for a thirdterm, street protesters who had beendemanding his resignation for monthsrejoiced. The celebrations were short-lived.

Thaksin was retaining his seat inParliament and his leadership of the rulingThai Rak Thai party, prompting his opponentsto charge that whoever succeeded Thaksin asPrime Minister would merely be his puppet.

With demonstrators vowing to take to thestreets again unless Thaksin completelydivorces himself from politics, Thailandappears to be heading for another round ofconflict and confrontation. That’s bad forbusiness, because while this drama drags on,a range of important decisions regarding theeconomy have been put on the backburner.

Among them are US$47 billion in infra-structure projects the Government was open-ing up to foreign bidders, privatisation ofState enterprises and the Thai-US Free TradeAgreement, which is now in limbo.

Although Thaksin’s Thai Rak Thai partywon a snap election on April 2, the strength ofthe anti-Thaksin movement has forced theparty to announce that the new Governmentwill remain in power for only seven to 15months, and be mainly concerned with imple-menting badly-needed reform of Thailand’sconstitution and political system. New elec-tions will then follow.

Contracts for infrastructure, therefore,won’t be handed out until the second half of2007 – at the earliest. That’s assuming theGovernment tasked with reforming the sys-tem can be seated soon and last long enoughto do the job.

Despite winning a landslide victory inFebruary 2005, Thaksin felt compelled to calla new election and seek a new mandate this

ASIA TODAY INTERNATIONAL MAY 2006 | 5

THEFAREWELLTHAT WASN’T

April. The reason was growing street protestsagainst his rule following the January sale ofhis family’s telecommunications business,Shin Corporation, to Temasek Holdings, anarm of the Singapore Government, for US$1.9billion. Several aspects of the deal – the factthat the Shinawatras paid no tax on the sale,that shares were moved around in offshoreshell companies while family members wereallegedly dumping shares during the negotia-tions, and that laws on foreign ownershipappeared to have been changed to facilitatethe deal – looked shady to the public.

To quell the uproar, Thaksin said he wouldanswer all questions about the sale inParliament. Then, rather than answer ques-tions, he dissolved Parliament and called anew election. Confident he would win, heannounced that no questions about the ShinCorp sale would be tolerated once he did. Inresponse, the Opposition chose to boycott.

Thaksin's Thai Rak Thai party won, sort of.TRT swept rural areas, but lost all major urbancentres, leaving Thailand clearly divided.Furthermore, 24 of Thaksin's candidates whoran unopposed in their districts failed to beelected because they could not muster the 20per cent of voters the law requires to win.Unless all seats are filled, Parliament cannotlegally be seated and a Prime Minister cannotbe elected. Another round of elections to fillthe empty seats was held on April 23, but notall were filled. The Election Commission isnow advising TRT to go to court to seek a rul-ing to open Parliament without the necessaryquorum, a move sure to spark more streetdemonstrations. Some protesters are askingThailand's King Bhumibol Adulyadej to inter-vene and appoint an interim impartialGovernment to carry out political reforms, astep his privy councilors have stated themonarch would prefer not to take.

Regardless of whether the nextGovernment is elected or appointed, ifThaksin remains part of it, or appears to be

pulling the strings from behind the scenes,protests will continue – and the risk of vio-lence will escalate. Blood running in thestreets will surely spell the end of any govern-ment and deter most investors. Furthermore,Thaksin’s presence in the halls of power is, initself, now an obstacle to the infrastructureprojects, privatisation and the Thai-US FTAmoving forward.

The reason is Thai public opinion. The Shinsale caused long-simmering suspicions to boilover among middle-class urban Thais thatThaksin and his friends were using theirGovernment positions to enrich themselves.

THE THAKSIN ELECTIONOOPPIINNIIOONN

IRONICALLY, in Thailand,Thaksin has given globali-sation a bad name. US$47billion in infrastructure proj-ects, privatisation of Stateenterprises and the Thai-USFTA are now in limbo . . .

Ô CONTINUED PAGE 6

Robert Horn*ANALYSIS

} Regardless of whetherthe next Government iselected or appointed, ifThaksin remains part ofit, or appears to bepulling the strings frombehind the scenes,protests will continue ~

From the pages of ASIA TODAY INTERNATIONAL

MAY 1986 – Falling world oil prices force Indonesia torestructure a number of trade and investment policies;Business looks for new direction as the AquinoGovernment assumes power in Manila, hoping for lowertaxes and a Board of Investment which promotes ratherthan regulates; more Chinese provinces consider adirect presence in Australia.

MAY 1991 – Political instability in India prompts asharp rise in the country’s risk rating; Widespread dis-counting in trade finance in Australia as banks fight formarket share; Coup in Thailand leaves intact plans to lib-eralise banking and financial policies.

MAY 1996 – Chinese banks attempting to renegotiatewool contracts, with payment problems emerging;India’s financial services industry hoping for return ofmarket liquidity and softer interest rates following pend-ing election; Rising yen opens new opportunities for for-eign firms to bid for Japanese-funded aid projects inAsia.

MAY 2005 – Hong Kong repositioning as CorporateChina realises the former British colony offers the bestroute through which to establish a global presence;Indonesia indicates interest in an FTA with Australia as itbegins negotiations with Japan and the US; World sugarprices forecast to fall, but cotton prices could increase 12per cent; Turning Macau into the Las Vegas of Asia;Singapore steals Hong Kong’s shipping crown.

Polls show that Thais regard corruption as theworst aspect of the Thaksin Administration.“He presented himself as clean by saying hewas so rich he had no need to be corrupt. Butscandals showed that wasn’t the case,’’ saidProf. Sunai Phasuk of ChulalongkornUniversity in Bangkok.

When the Government privatised thePetroleum Authority of Thailand, relatives ofCabinet members walked off with the largestlots of shares, while many average Thaisweren’t able to purchase them. And last April,news broke that a US company had admittedto the Securities and Exchange Commissionit had paid money to a Thai businessman inorder to bribe Government officials so theywould buy its scanning equipment for theNew Bangkok International Airport. Thaksinrefused to fire the Minister overseeing theproject, despite waging a much publicised“War on Corruption”. The result is that a sig-nificant portion of the public believes Thaksinand his men can’t be trusted not to use for-eign investment, privatisation and trade dealsas vehicles to line their own pockets.

A key theme of the protests was thatThaksin was “selling the country”. Just aboutall of Shin Corp’s businesses are Governmentconcessions or dependent upon Governmentregulations – which critics charge weredesigned to benefit the Shinawatra compa-nies. Now, concessions – including satelliteand telecommunications equipment and fre-quencies which have national security impli-cations – have been sold to Temasek.“Thaksin claimed to be patriotic and fre-quently called his opponents traitors. With theShin deal, he went totally against the notion

OOPPIINNIIOONN

6 | ASIA TODAY INTERNATIONAL MAY 2006

Ô FROM PAGE 5

Volume 24, No. 3, May 2006

email: asiatoday@asiatoday.com.auweb: www.asiatoday.com.au

PUBLISHERBarry Pearton

EDITORFlorence Chong

CHIEF CORRESPONDENTPhilip Bowring

CORRESPONDENTSHHoonngg KKoonngg – K.K. Chadha, James Yapp, IInnddiiaa – N.Hariharan, Rajendra Bajpai; IInnddoonneessiiaa – Tom McCawley;IInnddoo--CChhiinnaa – Steve Joel; JJaappaann – Russell McCulloch; KKoorreeaa– John Park; MMaallaayyssiiaa – Mages Ramakrishnan; PPaakkiissttaann– Raja Ashgar; PPhhiilliippppiinneess – Abby Tan; SSiinnggaappoorree – AndrewSymon; TThhaaiillaanndd –– Robert Horn; TTaaiiwwaann –– Michael Taylor.

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of patriotism. It was regarded as sellingnational assets,’’ Sunai said.

It’s a strange turn of events. Big infrastruc-ture projects, privatisation and FTAs arealways contentious issues – and would elicitopposition no matter what government is inpower. When Thaksin swept to office in 2001he was hailed as a globaliser, the kind ofleader who had the knowledge and savvy tonavigate these types of deals and giveThailand the advantage. But many nowbelieve that any deal under Thaksin will ulti-mately be to his own advantage.

Ironically, in Thailand, Thaksin has givenglobalisation a bad name.

* Robert Horn is Bangkok correspondent for ATI.

MANAGINGTHE GOLDENGOOSE

SINGAPORE – Resource-richAustralia looks set to enjoy a long mineralsand energy export boom fuelled by demandfrom the world’s industrialising giants,China, India and Brazil. Boosting prospectsfurther is the expectation of increasing salesof uranium oxide for China’s ambitiousnuclear power programme. Anticipating thisbonanza, Australia’s Federal and State gov-ernments, not to mention companies andinvestors, are rubbing their hands with glee.But like a man who wins a lottery, resourcesrevenues can be easily squandered.

Worldwide experience shows thatresources booms can, in fact, end up harmingcountries if governments do not managethem properly. One classic case is Nigeria,which has received more than US$280 billionin oil revenue in the last three decades –more than the total of all government devel-opment assistance to all of Africa in this per-iod, the World Bank says. Yet Nigeria’s realper capita income has declined.

While Australia should hardly find itself

AS Australia’s mineralsand energy exports contin-ue to rise, there is likely tobe more public concernover how governments usetheir mining and petroleumrevenues . . .

ending up as an Antipodean Nigeria, it needsto take heed of lessons elsewhere. Countriesgaining sudden and often relatively short-lived wealth – minerals, oil and gas, and coaleventually run out – may find that local man-ufacturing and agriculture becomes lesscompetitive and is squeezed out by thebooming resources sector as it causes thecurrency to appreciate.

Local currency values may rise significant-ly as exports surge and domestic inflationtakes off through the booming sector’s owndemand, easier bank credit as foreign cur-rency is converted into local currency – thusexpanding money supply – and increases ingovernment spending. Speculation may alsohold up value as traders put a premium onthe local currency in view of the outlook forstrong world commodity demand – as hasbeen Australia’s experience.

Resource prices may also turn out to bevery volatile, with economy-wide upheavalscaused by sudden falls, loss of export income,falling exchange rates and a consequent exo-dus of overseas capital. Australia, now with ahigh current account deficit sustained bylarge investment inflows – and high foreigndebt as a result – therefore needs to be wary.Although analysts expect commodity pricesto remain strong, a sudden drop could seeAustralia’s currency fall sharply. Interest ratesthen would have to increase to stabilise thesituation, possibly sending the local economyinto recession.

Resource booms can be especially fatal fordeveloping countries where the modern eco-nomic sector is small – until the advent of themineral or petroleum development – andmuch of the population is reliant on semi-tra-ditional agriculture. The new resourcesindustry overwhelms the economy.

Such danger is not exclusive to developingeconomies, as the Netherlands found in thelate 1960s and 1970s when North Sea gaswas first produced and exported. Economistsnow refer to the problem as the “Dutch dis-ease”. Government corruption – or perhapsmore accurately put, corruption facilitated ona grander scale than before – may also result.Where use of funds is not transparent andaccountable, ministers and officials mayfeather their own nests and use funds tocement political support through govern-ment contracts to cronies. In the case ofAustralia, though, whatever one may think ofpoliticians and bureaucrats, one would notexpect them to stash public funds into Swissbank accounts in the manner of, say, thenotorious former president of Zaire (now theDemocratic Republic of the Congo), MobutuSese Seko.

Yet whether a country is developing ordeveloped, there is always the danger of mis-management of public revenues. To avoidthis, should the resource income be dedicat-ed for longer-term investment in infrastruc-ture, education and training and R&D, ratherthan just being poured into treasuries to sup-port general recurrent spending?

One developed country taking this courseis oil- and gas-rich Norway, which puts itspetroleum revenues into a special fund toprovide for welfare and aged pensions overthe long term. The fund is invested domesti-

Ô CONTINUED PAGE 7

Andrew Symon*COMMENT

leum production is a small proportion ofAustralia’s total Gross Domestic Product – notmore than 10 per cent – taking into accountdownstream processing and services supply– and governments rely on many othersources of revenue apart from resource rents.

But mining and energy (coal, liquefied nat-ural gas, some oil, and uranium oxide) domi-nates Australia’s trading accounts. Mineraland energy exports made up 39 per cent oftotal goods exported in 2004/05. And this fig-ure underestimates the contribution of natu-ral resources because it excludes thoseexports of minerals partly processed.

Government resource revenue funds in theAustralian situation would most likely have tobe State-based affairs as they levy onshoreand immediate offshore resource royalties,not Canberra. Canberra does get royaltiesfrom offshore production beyond three nauti-cal miles, and these will grow sharply with the

assured and large expansion of liquefied nat-ural gas exports from fields offshore WesternAustralia and the Northern Territory. WesternAustralia, with vast resources deposits pro-ducing 40 per cent of the country’s mineralsand energy, could be a prime candidate.Mining and petroleum royalties currently con-tribute AUD1.3 billion, or about 10 per cent, ofthe WA State Government’s AUD13 billionannual revenue.

Natural resources strike an emotional chordfor the public as they are felt to be nationalassets from which all should gain some bene-fit as a result of development and export.Strengthening this feeling will be the proba-ble growing role of foreign companies andtheir investment – and here Australia is likelyto see growing investment from Chinesecompanies. Illustrating this, the ChineseState-owned Sinosteel Corporation recentlydangled US$3 billion in front of Australian ironore miners at a conference in Perth. Alreadyan investor in Australian mines, Sinosteelsaid it wanted to partner new projects inAustralia and elsewhere to diversify supply.

As mineral and energy exports rise – a sig-nificant increase is projected by theAustralian Bureau of Agriculture andResource Economics – and so play an ever-greater role in Australia’s fortunes, there islikely to be more public concern over howgovernments use their mining andpetroleum revenues.

* Andrew Symon is Singapore correspondent for ATI.

cally and internationally. The Parliament lim-its the amount of fund revenue that can beused by the Government in any one year. Thefund also helps avoid the “Dutch disease”resulting from excessive government spend-ing and credit expansion in the short term,and evens out the revenue ups-and-downsthrough volatile oil prices.

Similar funds operate elsewhere in theworld, with the most relevant for Australia interms of country and economy comparabilitybeing 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 andKazakhstan. Timor Leste (East Timor), whichrecently resolved a problem with Australiaover development of gas fields in the TimorSea, is also setting up a fund to manage its oiland gas revenue. Timor Leste is beingadvised by the Norwegian Government.

In the case of a poor country such as TimorLeste, the fund promises to prevent corrup-tion. A well-managed fund combined withcareful spending decisions should reduceTimor’s reliance on overseas governmentassistance loans and consequent debt forhealth, education and physical infrastructuredevelopment.

Of course, there are plenty of governmentsthat do manage effectively resource boomswithout such funds. This no doubt will be theargument from most Australian treasuries.They will also point to the fact that, unlikeclassic international cases, mining and petro-

HIDDEN DANGERS OF A RESOURCES BOOM

ASIA TODAY INTERNATIONAL MAY 2006 | 7

Ô FROM PAGE 6

} Countries gaining sud-den wealth may findlocal manufacturing andagriculture is squeezedout by the boomingresources sector as itcauses the currency toappreciate ~

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need a Round that unlocks the door to thedevelopment process across the full range ofeconomic activity – agriculture, goods and serv-ices," says Mandelson.

So far, each country is sticking to its positionand waiting very much to the last minute,according to Geneva trade sources. Each coun-try knows that it has to offer more – and this isespecially true of the so-called "triangular cen-tral element". The US must do more to cutdomestic subsidies to US farmers, while theEuropeans must increase access to their agri-culture market, and India and Brazil must openup their industrial goods access further.

"Everyone knows what he has to do to moveforward, but each is waiting for the other guy tomove first," said the source.

The US is putting the blame squarely on theEU. But Mandelson counters that the US ismaking "high sounding, unrealistic demands".Speaking to an audience in Finland last month,Mandelson said all the main players, includingthe EU, are required to do more and “must beready to supplement existing offers if all thepieces of the puzzle are to fall together.”

The Doha Round is scheduled to conclude inDecember – a deadline effectively required bythe scheduled expiration in mid-2007 of the USPresident's Trade Promotion Authority (TPA).Under TPA, Congress restricts itself only toapprove or reject a negotiated trade agreement,within strict time limits and without amend-ments. Missing the April 30 deadline simplymakes achieving successful conclusion byDecember that much more difficult, said the USsource, because the technical work involved indrafting the trade treaty would require several

DAILY WTO TALKS IN GENEVA

ASIA TODAY INTERNATIONAL MAY 2006 | 9

GGLLOOBBAALL TTRRAADDEE

source said that, even if the big players reachagreement, all 149 WTO members need toaccept it. "Everyone needs to feel that theyhave ownership of the outcome. There is a lotthat needs to be done. We have three to sixweeks – that is it," the source said. Until anagreement in agriculture is reached, negotia-tions on industrial goods and services areunable to move forward. One source explainedthat members are waiting to see what they canget in agriculture before making other offers.

Of course, agriculture is no longer the maindriver of world trade. EU Trade CommissionerPeter Mandelson says the biggest developmentgains would not come from agricultural liberali-sation. "Lasting economic and social develop-ment requires a broad basis for growth.Agriculture is not, in fact, where developingcountries would receive the largest of earliestbenefits. Patterns of international trade arechanging."

Indeed, although Korea, Japan, and China arenow among the world's largest exporters ofindustrial goods, they have clung stubbornly toprotect their diminishing agriculture sectors.

Mandelson says high-tech exports fromdeveloping countries have actually increased 20per cent a year since 1980, twice as fast as inindustrialised countries. The share of high-techexports in the developing countries’ total is nowaround one fifth. Meanwhile, the share of agri-cultural products in trade in goods by develop-ing countries has dropped from 42 per cent in1970 to 11 per cent today.

"So my starting point, as always, is that forDoha to succeed we need a balanced ambitionin all areas of negotiation, and a proportionatecontribution from all players in the talks. We

GENEVA – Trade negotia-tors are engaged in intensedaily discussions in Geneva in alast-ditch effort to reach a glob-al trade agreement over thenext few weeks. Having misseda self-imposed deadline of April30 to agree on modalities – spe-cific formulas and time frames –for agriculture and industrialtariffs negotiation, pressure hasintensified to produce an out-come by mid-June.

Without an agreement onmodalities, members cannot submit schedulesof tariff cuts because they don't have a formulaon which to base the cuts. And without theschedules, there can be no agreements.

Some four-and-a-half years have passedsince the Round was first launched in Doha,Qatar. If members have not been able to reachan agreement over that time, the chance ofreaching one within six weeks appears slim –unless, of course, there is a sudden burst ofpolitical will. "We have to have real, tangible,meaningful, substantial progress through Mayand June if we are going to get things donehere by summer – which is what we have to doto get the schedules together," said a US tradeofficial at an April 21 briefing in Geneva.

Pascal Lamy, Director General of the WorldTrade Organisation, said: "We may havemissed the deadline, but we are not in dead-lock." He added: "Genuine and importantprogress has been made, but not fast enough toallow us to reach agreement on modalities bythe end of the month."

Later, WTO spokesman Keith Rockwell toldATI: "The obvious inability to reach the dead-line is disappointing, but not in itself a catas-trophe. The good news is that we have a text-based approach in agriculture to work on. Workhas been intensified to finish it in comingweeks." Instead of having a weekly meeting,agriculture negotiations will work through con-tinuously until they find common ground.

A trade source in Geneva told ATI: "You areseeing governments negotiating in earnest onconcrete numbers which we have only seen inthe last couple of months. If it was six monthsago, we would be more sanguine about theprospects. It is now very late in the day." The

Negotiators struggle on Doha terms

TRADE ON THEEDGE

PROSPECTS of a breakthrough in the Doha Round of World TradeOrganisation talks aimed at preserving and enhancing the global multilat-eral trading system are diminishing, with negotiators missing a self-impo-sed deadline. Failure would lead to a greater rush for bilateral Free TradeAgreements which, with their conflicting ground rules, especially in termsof 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 oflight dinner party conversation, but what does emerge from Geneva talkswill have immense potential repercussions for world economies. In our spe-cial report on the state of global trade (pages 9-16), we examine the geo-graphic fault zones which have already emerged as governments rush tofill the void left by a failure of world leaders to reach settlement.Increasingly, growth in cross-border trade is limited largely to neighbour-

ing countries within geographic zones –a trend which should concern everytrader and manufacturer . . .

Trade Watch

Ô CONTINUED PAGE 11

EU Trade CommissionerPeter Mandelson:Patterns of trade are changing.

specific formulas and timeframes – to continuewith negotiations.

The deadline has come and gone, and pes-simism in terms of expectations of a successfulglobal Round has increased (see page 9).Therush to bilateral FTAs will now accelerate ascountries fend for themselves in the void.

Non-believers in bilateral agreements, suchas Malaysia and India, are slowly being convert-ed. But they look at such agreements, under-standably, with caution. In an recent interview,India's Finance Minister, PalaniappanChidambaram, told a Singapore newspaper:"FTAs are a necessary track. Industry doescomplain about inversion and about non-levelplaying fields. But one has to be very careful in

assessing the overall advantage of an FTA. Headded: "We have to divide FTAs into two cate-gories. One, with our immediate neighbours’concerns as the largest economy in the region.And another will be how we treat FTAs withdeveloped countries – ASEAN, Japan, SouthKorea and Singapore. In these, we have to exer-cise great caution.”

India inked a Comprehensive Economic Co-operation Agreement (CECA) with Singaporelast June, but the impression, from India's per-spective at least, is that it is not working asenvisaged. India has complained that the prom-ised investment flow from Singapore has yet tomaterialise. Investment is central to all theseagreements, especially from the perspective ofthe "junior partner". There is always the expec-tation that an FTA will offer a calling card forbusiness to invest in the partner country.

Foreign investment has proved to be a boonto exports, as borne out by the experience of

WITH THE FUTURE of multilateraltrade negotiations now in serious doubt, coun-tries are expected to intensify negotiations forbilateral and regional trade agreements.

But the Manila-based Asian DevelopmentBank warns that such agreements are nopanacea for global trading problems. Instead,they can add complexity to the global tradingsystem – and increase the cost of trade.

An important question is how to mitigate thedamage that may be caused by a knot of agree-ments that differ in terms of their coverage,treatment and ambitions, and which may con-tradict one another. In Asia, the ADB says,bilateral deals which emphasise closed reci-procity, rather than the "open regionalism"espoused in the past, are now on a strongupswing. These agreements discriminateagainst those not in the loop because of theirstrict rules of origins – which are often inconsis-tent and overlapping, adding to compliancecosts. The ADB says, problems associated withbilateral trade agreements have little to do withesoteric theories of being second best (to globalagreements) and everything to do with bread-and-butter commercial decisions.

Increasingly, bilateral agreements will influ-ence the volume and pattern of trade andinvestment flows, globally and within Asia.

For example, the ADB says, instead of simplychoosing locations that minimise costs, firmsmust now factor into their investment calcula-tions the trade-off between tariff preferencesmade available through direct investment andthe preference they can receive by contractingout to local suppliers under multiple rules of origin.

Customs administration can also becomecomplex quickly, and opportunities for corrup-tion and malfeasance expand where there areoverlapping and inconsistent rules of origin.

The trend to bilateralism has acceleratedsince 1999, when a Ministerial Meeting of theWorld Trade Organisation in Seattle brokedown. This was compounded when the nextMinisterial meeting in Cancun, Mexico, in2003, also stalled. After days of haggling by poorAfrican countries over cotton, access to agricul-tural markets and cuts in industrial tariffs, the2005 Hong Kong Ministerial Meeting narrowlyaverted failure. At the last minute, Ministerssigned off on a face-saver by agreeing to set adeadline by the end of April on the modalities –

10 | ASIA TODAY INTERNATIONAL MAY 2006

Trade WatchTraps for unwary in

knot of agreements

Ô CONTINUED PAGE 11

FIRMS must now factor inthe trade-off options betweentariff preferences availablethrough FDI and preferencesavailable by contracting tolocal suppliers under multi-ple rules of origin . . .

Global growth forecast

HONG KONG – Global economicgrowth is expected to average 4.3 per cent thisyear (measured using purchasing power parity–PPP–weights), modestly down on 2005,according to the latest global forecast from TheEconomist Intelligence Unit. A further gentleslowdown is expected in 2007, to 4.1 per cent,a pace of growth that will be broadly main-tained in 2008-10.

Measured using GDP at market exchangerates (which give greater emphasis to theOECD countries and reflect the exchange ratesat which firms trade and repatriate profits),world GDP growth is forecast to slow to 3.4 percent in 2006 and 3.1 per cent in 2007, beforepicking up modestly to 3.2 per cent in 2008.

The EIU says international investors' riskaversion seems to have increased in recentweeks, perhaps prompted by a change in pol-icy of the Bank of Japan (central bank).

Countries with a large external deficit haveseen their exchange rates come under pressure(including Iceland, New Zealand and Hungary)and the risk of the dollar coming under severedownward pressure has probably increased.

“We have revised our forecast for Japanesemonetary policy. With the Bank of Japan mak-ing rapid progress on draining liquidity fromthe financial system, we now expect interestrates to begin rising from the third quarter of2006 (previously end-2006),” the EIU says. ” Wehave revised up our forecast for German GDPgrowth in 2006 to 1.9 per cent (previously 1.6per cent), reflecting improved business senti-ment and a modest expected improvement inthe labour market. Our forecast for food, feed-stuffs and beverages (FFB) prices has beenrevised up, as surging demand for ethanol (apetrol substitute) has an impact on thesugar market.”

Source: Economist Intelligence Unit.

(FORECAST CLOSING DATE: APRIL 11, 2006)

WORLD SUMMARY(%)

RUSH TO FTAs TO FILL THE VOID?GGLLOOBBAALL TTRRAADDEE

economies also look to FTAs for access to thetrade partners' services sector. Services trade isgrowing rapidly, and countries like Australiaand Singapore see themselves as key providersof financial end professional services.

Indeed, the key concern of Hong Kong in pur-suing a Closer Economic Partnership Agree-ment (CEPA) with the Mainland has been toaccess China’s services sector –in distribution,retail, professional services and so on. Nowmoving on to the fourth phase (CEPA IV), thebilateral agreement is focussing on broadeningthe liberalisation of more service sectors.

Japan has either a free trade agreement or apreferential trade pact with five countries, whileSouth Korea has arrangements with three coun-tries. South Korea has recently begun negotiat-ing an FTA with the US. Despite its obviouspreference to stick to the multilateral arena,Malaysia, too, has begun bilateral negotiationswith the US, New Zealand and Pakistan.

China is seeking to play a more central role inEast Asia, and was an early proponent of thebilateral free trade agreement, in addition to themore ambitious pan-East Asian initiative whichwould also involve Japan, Korea with ASEAN,in a forum known as ASEAN plus 3.

ASIA TODAY INTERNATIONAL MAY 2006 | 11

GGLLOOBBAALL TTRRAADDEE

countries such as China – which has enjoyed asteady large inflow of direct foreign investment.Indeed, by some estimates, about 60 per cent ofChina’s exports are generated by foreign-owned firms, says the ADB. Foreign firmsaccount for 86 per cent of exports from tinyeconomies like Singapore, and for 73 per centfor Malaysia.

Estimates of export-sales ratios of manufac-turing establishments distinguished by foreignownership have been made in Indonesia,Thailand and Vietnam. Export propensities offirms with 90 per cent or greater foreign owner-ship shares exceed 50 per cent in all three coun-tries. In contrast, local firms tend to export anaverage of less than 10 per cent of sales, andfirms with intermediate foreign ownershipshares export about 25 per cent of sales.

As many as 300 bilateral trade agreements,including FTAs, are expected to come into forceby the end of this year. Of these, about 36involve Asian countries.

Before 1995, only three developing Asiancountries were party to bilateral FTAs, notes theADB in a recent paper, Routes for Asia's trade.By 2005, 27 agreements had been notified, witha much bigger number of other agreements innegotiation or under consideration.

Singapore, a free port, but with an economytotally dependent on external trade, has beenthe most proactive in negotiating such agree-ments. Singapore now has a trade agreementwith 11 trading partners, including Japan,Australia, the US and Singapore.

Most significant is the switch in Australia'strade policy from multilateral to bilateral.Australia has now completed four FTAs – withSingapore, the US, Thailand and New Zealand.Australia and New Zealand negotiated theirCloser Economic Relations (CER) agreementmore than two decades ago.

Generally, trade officials say FTAs are a use-ful means of breaking into new markets.Australian trade officials believe implementa-tion of the FTA with Thailand has contributedto a boost in bilateral trade. According to statis-tics from Australia’s Department of Trade andForeign Affairs, bilateral trade rose to AUD8.1billion in 2004/05 from AUD6.1 billion the previ-ous financial year and AUD4.9 billion in 2000-01. Australia's deficit with Thailand shrankfrom AUD1.2 billion in 2003-04 to AUD302 mil-lion last financial year. As more tariff cuts arephased in, exporters hope to sell more toThailand. However, looking at raw trade figures,Australia's FTA with Singapore has not pro-duced a lift in exports. If anything, Australia'sexports to Singapore have reversed. Exportstotalled AUD6 billion in 2000/01 and dropped toAUD3.3 billion in 2004/05. Australia’s deficitwith Singapore rose from AUD2 billion toAUD3.9 billion in the same period.

Similarly, Australia’s trade performance withthe US has not shown many gains. Australianexports have been steady at AUD9.4 billion inthe last two financial years. Imports from the USalso remained relatively stable at AUD21 billionlast financial year. Far from being disheartened,Australia is firmly on track with bilateral FTAs,currently negotiating with China, Malaysia, theUnited Arab Emirates and Japan. Australia andNew Zealand are negotiating with ASEAN tolink CER to the ASEAN Free Trade Agreement(AFTA).

It should, however, be said that developed

} Developed economiesalso look to FTAs foraccess to the trade part-ners’ services sector.Services trade is growingrapidly ~

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months in itself. Mandelson says the failure tomeet the April 30 deadline is due to differencesin the analysis of the relative value and weight,in market access terms, of what parties areoffering.

For example, he says, the EU believes sin-cerely that it is offering considerably more rawagricultural market access than the big agricul-tural exporters, notably the US and Brazil, areprepared to acknowledge.

Similarly, he says Brazil and other G20 coun-tries argue that what they are offering in indus-trial market access is worth more than the EUand the US believe.

This is because, principally G20 negotiatorsargue that reducing the ceilings limiting theirtariffs -- as opposed to the tariff themselves -- isworth much more economically than the mar-ginal cuts in certain applied tariffs they are alsooffering, he says.

"There is a real difference of opinionbetween developed and developing countriesabout how we should calibrate the levels ofambitions between agricultural and industrialmarket access," says Mandelson. He sums upthe differences as “conceptual, analytic and, toa certain extent, ideological".

If Doha was to fail, it would not be the end ofworld trade. But most certainly, smaller coun-tries which have been riding on the coat-tailsof the WTO could find themselvesincreasingly marginalised.

TRADE ON EDGEÔ FROM PAGE 9