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Why Australia should concentrate on entering the East asian trade bloc

By John Edwards - posted Tuesday, 23 December 2003

Driven by a new strategic competition between Japan and China, the economies of East Asia are concluding free trade pacts with each other at remarkable speed. Japan is now negotiating trade agreements with Korea, Thailand, Malaysia and the Philippines, and has already concluded one with Singapore. China already has a free trade pact with Thailand, and is now negotiating with the whole of the 10 member association of South East Asian economies, ASEAN. For its part ASEAN is now attempting to negotiate a faster development of its own free trade area AFTA. There are also tentative discussions between ASEAN and Korea, China and Japan (ASEAN plus three), and between ASEAN and India. Within a few years most trade between East Asian economies is likely to be transacted under agreements which minimise barriers between members of this newly emerging trade community, while leaving in place barriers against those left out.

Right now it looks like Australia will be left out. This quite sudden acceleration of trade pact negotiations in its own region thus confronts Australia with the greatest peril to the foundations of its prosperity in decades. Of every hundred dollars of national income in Australia, thirteen dollars are provided by exports to East Asia. Australian exports to East Asia have been growing faster than Australian exports generally, and they are not just raw materials. East Asia is also a major market for Australian manufactures and Australian services. Whether we applaud or deplore its development, if there is to be an East Asian trading community Australia must certainly do everything it can to be in it. Better still, it should do what it can to encourage the development of a trading community which better fits our own interests and those of the region.

Australia has made a start by negotiating free trade agreements with Singapore and Thailand. It recently reached an agreement with China to discuss over the next three years the possibility of negotiating a free trade agreement in later years. But Australia has already been excluded from the ASEAN plus three discussions, it has already been refused trade pact negotiations with ASEAN and with Japan, and the schedule with China means that the game will be well into the second half by the time Australian turns up to play. More importantly the Howard government has no grand plan to take advantage of the trade forces now reshaping East Asia, no vision of what outcome it would wish to encourage, and no willingness to deploy the means to achieve it.


While the new drive towards the creation of an East Asian trade bloc threatens Australia, it also presents opportunities. Because it is driven by strategic competition between China and Japan for regional dominance, the reduction in trade barriers may be bigger than would occur for trade reasons alone, and it may proceed farther and faster than liberalisation within the now-stalled Doha Round of global trade negotiations. Australia has good political and economic relations with both China and Japan, neither of which wish to exclude Australia from a regional trading community. China’s deal with Thailand allows preferential access for Thai fresh fruit and vegetables, while Japan now acknowledges that any trade deal it makes with Thailand, Malaysia and the Philippines must necessarily cover agriculture. If agriculture is up for negotiation, it is easier for Canberra to join the game.

Australia is today negotiating a free trade pact with the United States, which could well be useful. But a trade pact with the US is no kind of substitute for trade pacts with Asia. Australian exports more than five times as much to Asia as to the United States, and while exports to Asia have been rising exports to the US have been falling. The real importance of a trade pact with the United States is that while it is not Australia’s biggest export market it is usually the biggest or second biggest for East Asian economies. At the end of the day most East Asian economies will not only want trade pacts with each other, but with the United States as well. An Australia-US free trade agreement might offer Australia a seat at the table if and when all the agreements now being negotiated within the region are rolled into one overarching regional agreement.

A region-wide trade agreement would certainly be in Australia’s interests, because the more widespread and comprehensive agreement the greater than probability that Australia could talk its way into it, and the bigger the gain to our trade. Yet is not yet part of Australian policy to encourage the creation of such a wide and comprehensive pact in the Asia Pacific region. It should be. Australia should now be exerting whatever influence it can to encourage the making of agreements consistent with the ultimate goal of creating a free trade community embracing all of East Asia and North America. It would be an ambitious goal, perhaps romantically so. But so too were the projects to create APEC in the first place, and the annual Leaders meeting which gave it authority. They were ambitious ideas, both achieved, and both Australian.

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This article was first published in The Sydney Morning Herald on 3 December 2003.

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About the Author

John Edwards is Chief Economist of HSBC in Australia.

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