NEW TRADE ROUTESPacificFINANCIAL TIMES SPECIAL REPORT | Wednesday November 9 2011

www.ft.com/pacifictrade2011 | twitter.com/ftreports

AirAsia, the Malaysian no-frills airline, has tappedinto demand from the fast-growing middle class insouth-east Asia with its slo-gan: Now Everyone CanFly.

But, in a region wherestate-owned behemoths andfavoured oligarchs stilldominate in many domesticair-travel markets, it is notalways so easy to get off theground.

The budget carrier pulledout of Vietnam last month,after four years of wran-gling with the government,which refused to let it flyunder the AirAsia brand,the key to its businessmodel.

Analysts believe the gov-ernment was acting indefence of Vietnam Air-lines, the well-connectedstate-owned flag-carrier,and that Vietnamese con-sumers will suffer as aresult of the failure to openup the market to interna-tional competition.

Such non-tariff barriers tothe expansion of trade andservices are widespreadwithin the 10-member Asso-ciation of Southeast AsianNations, despite an optimis-

tic plan to turn this loosebloc into an integrated,free-trading “economic com-munity” by 2015, completewith “open skies” for theregion’s airlines.

There is no doubt thatsouth-east Asia has vastpotential as an integratedmarket. Its 620m people andforecast gross domesticproduct of $1,800bn for thisyear, makes it the third-largest economy in Asia,behind China and Japan.Asean's GDP has risen by170 per cent over the past

Economic unityis long way offAseanBen Bland findstrade integration inAsia hampered byregional differences

AirAsia is leaving Vietnam

Continued on Page 3

A s the EuropeanUnion struggles toresolve its sover-eign debt crisisand the US worries over itssoaring fiscal deficit, theworld’s attention is focusedgrimly on Athens andWashington.

But there is a good argu-ment that the most impor-tant long-term economicchanges are emerging muchfurther south.

“The greatest show onearth is happening else-where,” says Stephen King,the London-based chiefeconomist of HSBC, thebanking group. He points tothe rapid creation of a net-work of new “south-south”trading routes connectingAsia, Latin America andother emerging regions.

“Southern trade is becom-ing turbocharged,” says MrKing, who calls the networkthe Southern Silk Road, ina nod to the ancient traderoute that connected Chinawith Europe.

Evidence for this sea-change in trade and invest-ment behaviour can be seenin much of the emergingworld. One good example isthe appearance in Rio deJaneiro six months ago ofthe Vale Brasil, the first ofa new breed of Chinamax-class bulk carriers with thecapacity to carry almosttwice as much Brazilianiron ore to China as mostprevious ships.

The new supercarrier is avisible manifestation of ris-ing trade volumes acrossthe Pacific, as Asia’s export-focused economies pursueLatin American naturalresources ranging fromChilean copper and Peru-vian gold to Argentine soyabeans.

In a paper* published lastmonth, Morgan Stanley, theinvestment bank, forecasthuge growth in Chinesedemand for a large range ofsoft commodities as risingprosperity leads towards amore protein-based diet.

The trade is not just oneway: in coal-rich Colombia,plans are being discussedfor a Chinese-funded rail-way connecting the Pacificand Atlantic coasts; Chi-nese and South Korean con-sumer goods are as popularin Santiago as in San Fran-cisco; and more sombrerosand bikinis are now madein China than in Mexicoand Brazil, respectively.

In the short term, busi-ness people on both sides ofthe Pacific are as depressedas anyone by the problemsin the developed world.

In a survey this month byPwC, the professional serv-ices firm, nearly a third ofAsia-Pacific chief execu-tives said their companieshad been seriously affectedby the weak economicrecovery in the US. Nearlya fifth said the same aboutEurope.

But economists say theseshort-term problems are notlikely to have a serious

impact on the long-termprospects for growth inAsia-Pacific trade – unlessthere is a complete westerneconomic collapse, followedby a sustained economicdepression.

Willem Buiter, chief econ-omist at Citigroup, the USbank, concluded in a reportin October that changingtrade patterns over the next40 years would be “littleshort of transformational”,with emerging Asia over-taking western Europe asthe world’s largest tradingregion by 2025, even thoughits share of world trade wasonly about half that of west-ern Europe in 2010.

“India, currently not evenon the list of the 10 largestnations by trade, will over-take the US and Germanyto become the world’s sec-ond-largest country bytrade in 2050,” predicts MrBuiter.

“Emerging markets willrise in significance as bothexporters and importers.In t ra - emerg ing -markettrade, which rose from only6 per cent of world trade in2000 to 15 per cent in 2010,is set to account for 27 percent in 2030 and 38 per centin 2050,” he adds.

The driver of all this isthe rapid growth in emerg-ing Asia since the Asianfinancial crisis of 1997-98,when a series of structuralreforms in the region re-energised the export-leddevelopment model, helpedby low interest rates inwestern markets, as infla-tion fears receded. Asiandemand for African, Aus-tralian and Latin Americancommodities soared.

However, there is a poten-tial obstacle. Even allowingfor the rapid growth ofdomestic consumption,much of the ability of theemerging economies to con-tinue growing in the longterm will depend on theirability to trade. But tradebarriers remain “thick”, as

Mr King puts it, bothbetween emerging andadvanced economies, andbetween emerging econo-mies.

This is an issue that willdominate the annual sum-mit in Honolulu of the 21-economy Asia-Pacific Eco-nomic Cooperation group,which coincides with thisFT report. Apec leaders arefully aware of the problem,having identified both for-mal tariff barriers and so-called “behind the border”problems, such as corrup-tion and intellectual prop-erty theft, as serious hin-drances to regional tradeintegration.

There has been progressat the margins. Eighteenmember states, not yetincluding the US, haveintroduced an Apec busi-ness travel card that signifi-cantly reduces immigrationformalities.

Apec has also helpedsmooth cross-border busi-ness activity by spreadingregulatory best practice,especially in relation to thesmall and medium-sizedcompanies that account forthe bulk of economic activ-ity.

Emerging Asian countrieshave also signed more than100 bilateral and multilat-eral trade agreements inthe past decade, seeking toreduce formal protectionistbarriers. However, this hasled to a confusing web ofoverlapping deals, memora-bly dismissed by HillaryClinton, the US secretary ofstate, as a “hodge-podge”.

As a result, exports ofgoods between Pacific Rimcountries in 2010 were val-ued at $3,542bn, most tradetook place between sub-regional groups on eitherside of the ocean – prima-rily within North America,north-east Asia and south-east Asia – rather thanacross it, according to thePacific Economic Coopera-tion Council, a business-orientated group with mem-bers in 23 countries.

As an example, exportsfrom South AmericanPacific Rim countries to thewhole of emerging Asia andOceania amounted to only$14bn, with $25bn flowingthe other way, according toPECC.

At their last summit in

Yokohama, Apec leaderscommitted themselves totaking “concrete steps”towards establishing anoverarching Free TradeArea of the Asia Pacific(FTAAP) that would some-how mesh the best of theexisting multilateral deals.

These include the four-

country Trans-Pacific Stra-tegic Economic Partnership(TPP) and a deal betweenthe 10-country Associationof Southeast Asian Nations.

Asean also has bilateraltreaties with other coun-tries, including China,which are known as theAsean+ agreements.

However, due to the com-plexity of negotiationsbetween so many econo-mies, and the widespreadpolitical sensitivitiesinvolved, a deal to establishan FTAAP is highlyunlikely.

The best hope is for anexpansion of the TPSEP,

which groups Singapore,Chile, New Zealand andBrunei. These countries andfive others, including theUS, Australia and malaysia,are negotiating membershipof a new agreement, puta-tively called the Trans-Pa-cific Partnership. Japan hasalso expressed interest.

But even a modest expan-sion of the TPSEP isfraught with difficultiesbecause of issues such asthe potential threat to ricefarmers in Japan.

“FTAAP is at best anaspirational target forApec,” says Yuen Pau Woo,president of the Asia PacificFoundation of Canada andhead of a committee thatdrew up PECC’s recentlypublished 2011-12 State ofthe Region report.

“To the extent that thereis a game plan for theFTAAP, it consists of‘stitching’ together TPP,Asean+, and other regionaltrade agreements to assem-ble an Asia-Pacific tapestry.No one knows how thismight be done, or expectsany serious effort by Apecto figure it out,” he adds.

*The China Files: China’sappetite for protein turnsglobal

Full speed ahead on new Silk Road‘Southsouth’ tradeis surging but moreneeds to be done toremove barriers,says Kevin Brown

Inside

European Union‘It’s as if the [European]

commission is driving aFiat 500 uphill, with27 mothersinlaw in theback seat’, Joshua Chaffinhears of the EU’strade talks with AsiaPage 2

TransPacificPartnership DavidPilling explains whynegotiations for extendedmembership have beendifficult Page 2

Interview Jayant Menon,the ADB’s lead economisttalks trade with RoelLandingin Page 2

Latin America Shiftingtrade patterns are fuellinggrowth across thecontinent as it looks westto commodityhungrynations such as China,writes John PaulRathbone Page 3

Country roundupAdapting to seachangesin global trade: FTcorrespondents report ontrends impacting China,India, Japan,S.Korea, Australia andIndonesia Page 4

Asian trade flows (merchandise)

Source: Asian Development Bank * Australia, Japan, New Zealand

$bn

0

1000

2000

3000

4000

5000

ExportsImports

Central and West Asia2009 2010

East Asia2009 2010

South Asia2009 2010

South-east Asia2009 2010

Developed Member countries*2009 2010

By 2025, emergingAsia will overtakewestern Europe asthe world’s largesttrading region

2 ★ FINANCIAL TIMES WEDNESDAY NOVEMBER 9 2011

New Trade Routes: Pacific

ContributorsKevin BrownAsia RegionalCorrespondent

Ben BlandVietnam Correspondent

Joshua ChaffinEU Correspondent

Anthony DeutschJakarta Correspondent

Mure DickieTokyo Bureau Chief

Roel LandinginManila Correspondent

James LamontSouth Asia Bureau Chief

Sarah MishkinHong Kong Reporter

David PillingAsia Editor

Simon RabinovitchBeijing Correspondent

John Paul RathboneLatin America Editor

Song JungaSeoul Correspondent

Andrew Baxter,Commissioning Editor

Steven Bird, Designer

Andy Mears, Picture Editor

For advertising details,contact: John Moncure,+1 212 641 6362,john.moncure@ft.com

In July, when the EuropeanUnion cut the ribbon on afree-trade agreement withSouth Korea after years ofsometimes frustrating nego-tiations, it was a momentfor celebration.

Karel De Gucht, EU tradecommissioner, hailed theagreement as the Union’smost ambitious ever and a“game-changer for ourtrade relations with Asia”.

The commission has esti-mated that the pact willwipe out about €850m($1.2bn) in duties on EUexports to South Korea inthe first year alone, givinga boost to the bloc’s busi-nesses in the midst of a pro-tracted economic crisis thathas led other governmentsto embrace protectionism.

Its sense of accomplish-ment was only enhanced bythe fact that Brussels had

beaten Washington to thepunch in closing the deal.

However, it is too early tosay whether the EU-SouthKorea deal will live up toexpectations.

But one thing is clear: thebilateral deal reflects theshape of things to come forthe EU in an era in whichthe Doha round of talks,held under the auspices ofthe World Trade Organisa-tion, which aims to delivera global trade deal, appearsbogged down, if not mori-bund.

EU officials still toutDoha, faithfully calling forits completion at everylarge international gather-ing – most recently, at lastweek’s G20 summit inCannes.

But their actions inrecent years may be morerevealing. Ever since 2006,when Peter Mandelson, theEU’s trade commissioner atthe time, published his Glo-bal Europe strategy, the EUhas abandoned a morato-rium on bilateral deals andbegun negotiating themalongside Doha.

“It was a big shift,” saysCarsten Dannöhl, an inter-

national affairs adviser atBusinessEurope, the conti-nent’s largest employers’group. “The Doha round isnot really progressing atthe moment, so the impor-tance of bilateral free-tradeagreements has becomevery clear.”

Since joining the commis-sion in 2009, Mr De Gucht, aformer Belgian foreign min-ister, has thrown his energyinto furthering that strat-egy, criss-crossing the globein an effort to push forwarda number of bilateral tradenegotiations.

Asia has been a particularpriority. Its appeal is obvi-ous, say commission offi-cials, given the region’shuge population and poten-tial for economic growth –attributes that are particu-larly alluring to an ageingcontinent that has beenmired in an economic crisisfor the past two years.

The 10-member Associa-tion of Southeast AsianNations already ranks asthe EU’s third-largest trad-ing partner, after the USand China, with bilateralflows of goods and servicesreaching €175bn last year.

In addition to the SouthKorea deal, Mr De Gucht isalso hoping to wrap upagreements with Singaporeand India before the end ofthe year. He has begunexploring options withJapan and opened informaldiscussions with Indonesia.Vietnam could also be acandidate.

But as the stakes becomehigher – particularly withthe India and Japan deals –there are already signs that

the going will become muchmore difficult for Mr DeGucht. The South Koreatalks were launched in 2007– before the economic crisissapped public enthusiasmfor free trade. They also fea-tured a negotiating partnerthat was eager to strike adeal with Europe in orderto balance its growing reli-ance on China.

Even though the potential

rewards are greater, thecommissioner may find lessappetite for pending FTAsin many corners of Europeat a time when he is facingbigger and more formidableadversaries at the bargain-ing table.

The India deal is a case inpoint. To many Europeanbusinesses, the potential isimmense. The spirits indus-try, for example, is salivat-ing at the thought of a mar-ket that consumed morethan 130m cases of whiskylast year.

Of that total, Europeanbrands accounted for lessthan 1 per cent, thanks totariffs of 150 per cent thathave relegated them to air-port duty-free shops andhigh-end hotels. Red tapeand high taxes have alsofrustrated internationaldrinks companies hoping toprise open the Indian mar-ket. Just a modest improve-ment in those restrictionscould yield big benefits.

But negotiations arebogged down, and officialsare doubtful they can pushthrough a deal before nextyear’s Indian elections. “Iwouldn’t bet money on it,”

one person briefed on thetalks says.

One impediment is Euro-pean automakers. They areunhappy with an arrange-ment in which India wouldcontinue to protect its mar-ket for low- and medium-end cars, and have insteadpushed for a “zero-for-zero”arrangement on tariffs.

Their frustration hasbuilt up since the SouthKorea deal, in which theEuropean industry believedit was sold out in favour ofthe continent’s serviceindustries.

As one of Brussels’ mostpowerful lobby groups, theyare not likely to roll overeasily this time.

Protecting patents for EUpharmaceutical companiesagainst Indian generics isalso a long-standing sourceof friction.

Perhaps the biggest stick-ing-point is the issue oftemporary visas for infor-mation technology andother service workers. Indiais pushing for a muchlarger award of these eachyear. But such visas aredeeply unpopular in manymember states, where oppo-

nents have accused authori-ties of giving domestic jobsto foreign workers at a timeof high unemployment andillegal immigration.

“Anything that looks likemigration is sensitive,” saysHosuk Lee-Makiyama, co-director of the EuropeanCentre for InternationalPolitical Economy, a Brus-sels think-tank.

To Mr Lee-Makiyama,negotiations with India andJapan raise a broader ques-tion of whether Mr DeGucht can bring off a diffi-cult deal with 27 crisis-hitmember states looking overhis shoulder.

“In the current politicalclimate, it is not possiblefor the EU to make any con-cessions, which means anybigger FTAs become muchmore challenging,” he says.

“It’s as if the commissionis driving a Fiat 500 uphill,with 27 mothers-in-law inthe backseat – and each onehas a hand on the hand-brake.”

If Mr De Gucht is to pre-vent the South Korea dealbecoming a one-off, then hewill have to get his moth-ers-in-law in line.

Stalled Doha round spawns rush of bilateral dealsEuropean UnionLack of progress onmultilateral talksredirects energies,says Joshua Chaffin

Karel DeGucht hasbeen pushingahead withbilateralnegotiations

If Asia’s network of bilateraland subregional tradeagreements is comparable to abowlful of noodles, JayantMenon’s job as lead economistfor trade and regional co-operation at the AsianDevelopment Bank is to pickthe strands apart, study andclassify them, and tell if theyare doing more harm thangood.

“The noodle bowl is gettingever more complicated, day byday”, he says in an interviewat the ADB headquarters inManila. But, he adds, it “is nothaving much of an impact onactual trade flows, because it’sbeing ignored largely, and thatmay not be such a bad thing”.

Exporters and importers arelargely bypassing trade deals,while governments are cuttingmost-favoured nation (MFN)tariffs to levels close to or thesame as preferential tariffrates, says Mr Menon, whowrote a 2009 Columbiauniversity study that examinedclose to 80 trade deals in theregion.

In effect, the customers areordering up other dishes andare not buying the noodles.

Some 80-90 per cent ofinternal trade within theAssociation of Southeast AsianNations (Asean) ignores thepreferences being offered underits free trade agreement, aswell as the bilateral dealsbetween members.

Mr Menon says that could betraced to a couple of factors:the cumbersome process ofcomplying with the complexrules of origins under the tradedeals; and the negligiblebenefits as a result of decliningmargins between preferentialduties and MFN tariffs thatapply to everyone else.

In Malaysia, Indonesia, thePhilippines, Singapore andThailand, the majority of tarifflines have no marginalpreference, he says. “Theyhaven’t made a song and danceabout it, but quietly,individually, countries havebeen reducing external tariffsto close the gap betweenpreferential and MFN tariffs,”adds the ADB economist.

That does not change hisview that the proliferation ofbilateral and subregional tradedeals still reduces overalleconomic welfare.

“It’s costly to negotiate andadminister, and it’s alsoconfusing to businesses,exporters and importers,” hesays. However, he adds theimpact could have been worseif they distorted or divertedtrade to the extent initiallythought.

The effective narrowing ofthe gap between preferentialrates and MFN duties in themajority of tariff lines inAsean’s five biggest economiesunderscores the important rolethat individual countriesultimately play in removing orlowering trade barriers.

“We often forget that most of

the trade liberalisation that hasoccurred in the world hasoccurred through unilateraldecisions, not through theWTO [World TradeOrganisation] nor bilateral orregional free tradeagreements”, says Mr Menon.

“It’s been independentdecisions by countries notrequiring reciprocity andreducing their barriers becausethey believe it’s in their selfinterest.”

The slow and gradual erosionof the margin of preferencethrough the introduction ofconsistent rules on origin orreduction in MFN rates is alsoless likely to provokeopposition from vested interestsenjoying protection from thepreferential tariffs.

“Harmonisation of the rulesof origin is often not seen ascontroversial. Everyone agreesthat it simplifies requirementsand makes trade a lot lesscostly”, he says. “Reducing theMFN tariffs is also less visibleand so less likely to provokethe protest from vestedinterests who are keen onthese preferences.”

A big worry is that furtherprogress in liberalising trade inthe region could be stymied byrising talk of protectionismamid the global economicslowdown triggered by the eurocrisis in Europe and falteringrecovery in the US.

Mr Menon says developingcountries such as China needto rebalance and diversify theirsources of growth but warnsagainst a turn towardsprotectionism in response tothe sharp economic downturnin the west.

“We can have all kinds ofshocks. What if you have adomestic shock or a regionalcrisis, do you switch backagain? You can’t keep doing itevery time you have a differenttype of crisis,” he says.

The Doha round ofmultilateral trade talks hasstalled and faces an uncertainfuture, which gives moreimportance to internationalbodies such as Asean and Apec(Asia-Pacific EconomicCooperation, which covers thePacific Rim). They advocateopen regionalism in pushingthe agenda of freer trade.

“Apec was designedoriginally to serve the purposeof countries coming together,and jointly, unilaterallyliberalising, which is a greatapproach,” he says.

“Unfortunately, Apec hasn’tbeen as successful as it shouldhave been, but certainly if youlook at its genesis, this wouldbe a great forum to pursuethis. Hopefully there can be asense of revival.”

Proliferation ofdeals ‘is costlyand confusing’InterviewJayant MenonRoel Landingin hearsfrom the leadeconomist at the ADB

Just what the global trad-ing system needs: anotheracronym. The TPP, orTrans-Pacific Partnershipto give it its full title, is a pro-posed trade agreement between,to put it politely, a disparate col-lection of nations.

The TPP is intended to buildon an existing arrangement, theTrans-Pacific Strategic Eco-nomic Partnership, of whichSingapore, Brunei, Chile andNew Zealand are already mem-bers. But the new TPP hastaken on a life of its own.

Spearheaded by the US, othercountries to show early interestin joining the founding mem-bers are Australia, Malaysia,Peru and Vietnam. Japan is alsoagonising over whether tothrow its lot in with the group-ing, though, predictably, theproposal has antagonised itsfarmers.

On the face of it, the countriesinvolved in negotiations, whichrecently concluded their ninthround in Lima, are a motleycrew. In addition to the world’slargest economy, they includetwo smallish Andean nations,two developed economies inAustralasia, a rich city state, asmall oil-rich kingdom and apoor communist country. Chinais notable by its absence.

Yet, at least in theory, the

nine negotiating partners are allcommitted to signing what hasbeen called a “state-of-the-art”trade agreement that would gofurther than existing arrange-ments. The idea is for the TPPto be a structure on to whichother nations, including possi-bly South Korea, and eventuallyeven China, could be bolted.

Ronald Kirk, the US trade rep-resentative, launched the initia-tive domestically in late 2009,saying the putative deal “pro-vides the opportunity to developa new model for US trade nego-tiations and a new regionalapproach that focuses more onjobs, enhances US competitive-ness and ensures that the bene-fits of our trade agreements areshared by all Americans”.

This is not, in other words,intended to be just another dealthat is good for multinationalcompanies but of uncertain ben-efit to US workers.

Last month, Thomas Dono-hue, chief executive of the USchamber of commerce, fleshedout his own vision, saying:“This must be an agreementwith high standards. Thesestandards will set the bar onregulatory coherence, invest-ment and intellectual property.”

Simon Tay, chairman of theSingapore Institute of Interna-tional Affairs, says talk of theagreement has energised thewider Asia-Pacific Economic Co-operation group (Apec), whichmeets in Hawaii this week.

The nine governments are dis-cussing “deep commitmentsthat go beyond tariff reductionand pass existing World TradeOrganization standards”.

So what is so special aboutthe TPP? Iwan Azis, head of the

Asian Development Bank’sregional integration office, saysthe agreement is intended todeal with what he calls “behindthe border” issues. Theseinclude areas of what couldbe deemed domestic policy, suchas government procurement,which go beyond the normalscope of trade agreements.

Other areas likely to be cov-ered include rules governing theconduct of state-owned enter-prises, which sometimes benefitfrom cheap financing or govern-ment protection. China, inparticular, is often criticised forseeking to ensure the successof national champions.

The TPP would also includelabour, environmental and intel-

lectual property standards.Finally, it is supposed to helpbring benefits to small andmedium-sized companies fromtrade integration.

“As a concept, this is defi-nitely something big,” says MrAzis of the ADB. “This is socomprehensive, it is like aGrade A agreement. But when itcomes to realisation, we have tobe a little less optimistic abouthow this is going to proceed.”

Indeed, the path to a compre-hensive TPP will not be easy.The negotiating partners havealready struggled. As a result,Barack Obama, the US presi-

dent, is unlikely to announceanything beyond the broadest ofprinciples at the Apec summit.

Negotiations are stuck onseveral points. Some partici-pants, for example, are warythat standards designed to pro-tect the intellectual property ofthe pharmaceutical industrycould restrict poor countries’access to life-saving medicines.

Malaysia, which has a sizeablestate sector, is worried aboutwhat entry to the TPP mightmean. It is unlikely to move for-ward decisively until electionsare held sometime next year.

There are even concerns thatthe US, whose government has acontrolling stake in GeneralMotors, not to mention the USPostal Service, could fall foul ofsome of the agreement’s stipula-tions.

The controversy that the TPPhas caused in Japan is also aharbinger of difficulties ahead.Opponents have threatened toleave the ruling DemocraticParty of Japan over fears thatsigning up would threaten thecountry’s farming industry.Japan produces just 40 per centof its calorific intake and manyofficials are opposed to becom-ing even more dependent on for-eign food.

Japan’s angst could berepeated elsewhere. Many tradeagreements put sensitive issuesto one side. But if the TPP is tobe genuinely more all-embrac-ing, it will also be that muchharder to conclude.

Ironically, one of the attrac-tions of the TPP for Japan – theabsence of China – is also one ofthe agreement’s biggest poten-tial pitfalls. Akihisa Nagashima,a special adviser to Yoshihiko

Noda, Japan’s prime minister,has said the TPP would “createa strategic environment, whereChina would see Japan as aformidable neighbour that can-not be pushed around”.

But China is now at the verycentre of an Asian supply chainthat is itself at the heart of theglobal manufacturing industry.“Any agreement that does notinclude China will not be so rel-evant,” says Mr Azis.

If the TPP smacks of “an any-one-but-China club”, it is likelyto be highly divisive in a regionwhere Beijing is becoming moredominant, politically as well aseconomically. Commentary inthe Chinese press often caststhe TPP as an “aggressive” US-led ploy to “squeeze China out”.

There is, undoubtedly, anelement of seeking to wrestback global trade for nationsperceived to play by the rules.But there is also a deeplypragmatic driving force behindthe TPP.

The US has watched intra-Asian trade balloon, while tradebetween Asia and other emerg-ing countries, from Brazil toSouth Africa, has flourished.

The TPP is an attempt toregain the initiative by openingup Asia-Pacific markets morefully to US business. Mr Kirkhas said that “a declining USmarket share in Asia-Pacificcountries means fewer US jobs”.

Everything now depends onthe willingness of negotiatingpartners to follow through.

Joining TPP will require giveas well as take. But making sac-rifices and pooling one’s inter-ests for the sake of a highercommon goal is never easy. Justask the Greek prime minister.

Farreaching agreement couldform powerful new trade blocTransPacificPartnershipDavid Pilling explainswhy negotiations forextended membershiphave been difficult

The TPP has beencalled a ‘stateoftheart’ agreement thatwould go further thanexisting arrangements

TPPing point: the ruling Democratic party of Japan faces trouble over fears that signing up to the partnership would threaten the country’s farming industry AFP

Menon: hopes for Apec summit

FINANCIAL TIMES WEDNESDAY NOVEMBER 9 2011 ★ 3

New Trade Routes: Pacific

Deng Xiaoping wasa leader withvision. And about24 years ago, theman who led China towardsa market economy madethis surprising remark: “Itis often said that the 21stcentury will be the centuryof the Pacific. But I believeit could also be the centuryof Latin America.”

For most of its history,Latin America has lookedeast across the Atlantic toEurope. Today, however, itincreasingly looks westacross the Pacific to Asia –especially when it comes totrade.

Between 1999 and 2009,the total value of LatinAmerican trade with Asiarose sixfold to $230bn –about half of that withChina alone.

Indeed, China – hungryfor the commodities thatSouth America produces, beit Brazilian iron ore, Chil-ean copper, or Argentinesoya – had by 2009 becomeBrazil and Chile’s biggestsingle trading partner, ac-cording to data from theInter-American Develop-ment Bank. It had alsobecome Peru’s second big-gest trade partner andArgentina’s third largest.

The impact of this pro-found shift in trade pat-terns can be felt throughoutthe region.

Most obviously, it helpedfuel a commodity priceboom that has been amongthe most prolonged in Latin

America’s history, which islittered with so many com-modity booms and busts.

Some countries havespent much of this bonanza.Of these, Venezuela hasbeen the most profligate.During the past decade, ithas been recycling its oilwealth, seeking to fulfilPresident Hugo Chávez’sdream of a united “Bolivar-ian” continent. Others havebeen more prudent. Chile,the world’s largest copperproducer, has squirrelledaway the windfall in sover-eign wealth funds.

Throughout the conti-nent, however, the boomhas fostered growth.

For the past decade, theregion has grown at anaverage of almost 4 per centa year. In the previous dec-ade, it grew at 3 per centper year.

Today, the shift towardsgreater Pacific trade is alsoproducing an upgrade ofthe infrastructure thatLatin America needs if it isto continue meeting Asia’sdemand for commodities.

Perhaps the most ambi-tious of these plans is a

Brazilian project to build aseries of roads across theAmazon that will link itswestern regions to Pacificports in Peru and thenceAsian markets.

Meanwhile, in Colombia,President Juan Manuel San-tos has talked about Chi-nese plans to finance andbuild a rival to the PanamaCanal, which would link thecountry’s Caribbean andPacific coasts.

The idea behind this “dry

canal” – it would be rail-way-based – is that it wouldfacilitate easier transport ofColombian coal to energy-hungry Asian markets.

In addition, there hasbeen a reconfiguration ofthe “soft infrastructure”that underpins trade. Chileand Peru have signed free-trade deals with China. The“Pacific Arc” group of coun-tries – Chile, Peru, Colom-bia and Mexico – havemeanwhile talked about

forming a trade bloc, partlyto achieve the economies ofscale that are required tosupply Asian markets effec-tively.

Nonetheless, greaterPacific-based trade has notbeen a painless ride for all.While China’s rise has com-plemented commodity-richSouth American economies,it has increased competitionfor Mexico’s more manufac-turing-based economy.

Still, the huge cost advan-

tage that Chinese manufac-turers enjoyed in 2001,when the country accededto the World Trade Organi-zation, has shrunk to about14 per cent, says ErnestoCordero, who was Mexico’sfinance minister beforestepping down in Septem-ber to run for president.

As trans-Pacific transportcosts have risen withenergy prices, Mexicanmanufacturers haveincreased their share of the

US market and found newcustomers abroad.

Then there has been theimpact of low-priced Chi-nese imports on domesticmanufacturers. After all, itwas more than a decade agothat China became a biggermaker of sombreros thanMexico. Last year, muchthe same thing happened inBrazil, when it transpiredthat most of the outfitsworn in its celebrated Riocarnival were made in

China. Combined withappreciating local curren-cies, this has led to LatinAmerican complaints thatlocal industry is being hol-lowed out.

Despite this, the increasein trans-Pacific trade has,on the whole, been a boon.

Many Latin Americaneconomies barely slowedduring the financial crisis.While developed marketsare mired in sluggishgrowth and high debt,emerging economies havecontinued to surge ahead.

In many ways, therefore,Asia has provided an anti-dote to the usual course ofeconomic events. When theUS economy caught a cold,Latin America used to getpneumonia. Now, Mexicoapart, when the US getspneumonia, Latin Americabarely gets a sniffle.

Yet that raises a newquestion: what would hap-pen to Latin America ifAsian economies stutteredand commodity prices fellwith them?

Nobody knows, althoughPeru’s finance minister hasa partial answer. Every dayLuis Castilla says he lightsa candle and prays Chinawon’t crash”.

Shift in direction fuels growth across continentLatin AmericaAsian demand forcommodities hascreated a bonanza,writes John PaulRathbone

Heavy metal: a security guard in Valparaiso port, Chile, walks past a shipment of copper destined for Asia Reuters

decade and the regionaccounts for 6 per cent ofglobal trade, with intra-regional trade on the rise.

But this politically andeconomically diverse bloc –composed of Brunei, Cam-bodia, Indonesia, Laos,Malaysia, Burma, the Phil-ippines, Singapore, Thai-land and Vietnam – is along way from turning thelofty rhetoric of economicintegration into reality.

“Asean as an entity isprobably far too diverse tobring about such a shift,”says Tai Hui, head of south-east Asian research atStandard Chartered bank inSingapore.

Not only is there a widearray of political systems,from communist dictator-ships to democracies, butalso, unlike the EuropeanUnion, Asean members areat very different stages ofdevelopment, from desper-ately poor Burma, Cambo-dia and Laos, to the gleam-ing city-state of Singapore.

And within south-eastAsia, says Mr Hui, regional-isation tends to take a backseat to domestic politics

during elections or times ofpolitical change.

Economists say that,faced with stiff competitionfor foreign investment fromChina and India, south-eastAsia has the potential toleverage its diversity tobecome an alternative pro-duction base and an attrac-tive regional market forgoods and services.

The region’s strategiclocation between Japan,China and India, in an areathat encompasses many ofthe world’s main traderoutes, leaves it well placedto capitalise if it can get itshouse in order.

“I see potential synergiesfor south-east Asia, withSingapore operating as aservice hub, Thailand andMalaysia as advanced man-ufacturing centres andIndonesia and Vietnam asbases for low-cost produc-tion, with all sides makinguse of the region’s com-modities and naturalresources,” says Mr Hui.

The key to this vision isestablishing free circulationof goods, services, capitaland, to some extent, people.

The more advanced econ-omies of the so-called AseanSix (Brunei, Indonesia,Malaysia, the Philippines,Singapore and Thailand)have done the most to bringdown regional tariffs undera series of phased free-tradeagreements that date backto 1992.

But utilisation of prefer-ential tariffs on offer toAsean members remainslow because of the complexadministrative proceduresthat companies must com-plete before they can bene-fit, according to ClaudioDordi, an Italian law profes-sor, who is advising theVietnamese government oninternational trade issues.

The predominance ofstodgy bureaucracy pointsto a big hurdle in Asean’spath: the lack of solid insti-tutions to implement andpolice liberalising traderules.

The “Asean way” is basedon consensus. The motleyassortment of Marxist-Leninists, retired generals,technocrats and dema-gogues who rule the regionhave long agreed not tointerfere in each other’sinternal affairs.

However, as Prof Dordipoints out, it was onlywhen the EU developedrobust intermediary institu-tions, such as the EuropeanCourt of Justice, that it wasable to push ahead withdeeper economic integra-tion.

This institutional weak-ness was one reason whythe EU abandoned plans tonegotiate a potentiallytransformative FTA withAsean, opting instead toenter bilateral trade talkswith some of the bloc’smore advanced nations.

Asean has managed toconclude more limitedFTAs with Australia andNew Zealand, China, India,Japan and South Korea.

Surin Pitsuwan, Asean’ssecretary-general, acceptsthat “the road to economiccommunity is still a longone, with bumps and chal-lenges along the way”. Buthe says he is “certain thatby 2015 the foundations ofthe Asean economic com-munity” will be there.

Prof Dordi believes thatAsean has already gained agreat deal from trade liber-alisation and can expectmany further benefits fromdropping barriers in future.

But he is less sanguineabout the speed with whichthe region can overcomechallenges. “Proper integra-tion will take years, if notdecades,” he says.

Economic unity isstill a long way offContinued from Page 1

The road toeconomiccommunityis bumpy,says SurinPitsuwan

4 ★ FINANCIAL TIMES WEDNESDAY NOVEMBER 9 2011

China Risingcosts promptfresh strategyWhen the global financial crisiserupted in 2008, concerns in Chinacentred on the fate of its exportsector, an essential cylinder inthe economy’s engine, writesSimon Rabinovitch.

The government halted renminbiappreciation in its tracks andunveiled a series of tax rebates tosupport exporters.

With international turmoil againlapping at China’s shores, thegovernment’s tune has changed. Ithas not turned its back on exporters,but neither is it rushing to rescuethem. Mild renminbi appreciationhas continued and no new taxrebates have been introduced.

The difference is easy to explain.Exports are playing a smaller andsmaller role in Chinese growth. Andthose companies that are succeedingas exporters are moving up the valuechain, producing more sophisticatedgoods.

Looked at from the outside,exporting prowess is a definingcharacteristic of the Chineseeconomy. China overtook Germanyas the world’s biggest exporter in2009 and the gap has only grownbigger since then.

From the inside, though, exportsare of diminishing importance. Thecountry’s trade surplus peaked at 8.7per cent of gross domestic product in2007 and will fall to about 3 per centthis year.

“In the past, we used trade todrive our growth. But now, trade hasbeen hit and domestic demand isbeginning to pick up the slack,” saysZhang Yanling, executive vice-president of the Bank of China.

Weak demand in the US andEurope, the two biggest exportdestinations, is a serious problem.But an even bigger challenge is apurely made-in-China phenomenon –labour costs are climbing 10-15 percent a year.

The export factories that thrive inChina’s coastal provinces have longstaffed their assembly lines with low-paid migrants drawn from a labourpool in the poorer interior that wasonce seen as inexhaustible. But theworking-age population is nowgrowing much more slowly, a resultof China’s one-child policy that waslaunched in 1979.

“The tightness in the labourmarket is not going to go away,”says Peng Wensheng, chief economistat Beijing-based ChineseInternational Capital Corporation, aninvestment bank. “Other emergingmarkets clearly have one advantageover China. That is demographics.”

Soaring labour costs naturallyhave the biggest impact on labour-intensive production. And the datado indeed show that China is gettingsqueezed out of sectors such astextiles and shoes. Its share of totallow-end light manufacturing importsin the US and Europe has peakedover the past 24 months, notesJonathan Anderson, an economistwith UBS. Cambodia and Bangladeshare among those eating into China’smarket share.

Beijing is not shedding much of atear for its exporters. Thegovernment has declared a goal ofmoving up the value chain. It wantsto spur domestic innovation and getaway from the processing trade,where Chinese workers simplyassemble components madeelsewhere, such as putting chips onto motherboards.

Rising labour costs help nudgeChina in the right direction.Ordinary trade – where goods aremostly made in China from start tofinish – grew twice as quickly asprocessing trade in the first threequarters of this year, Dragonomics,an advisory firm, observes.

So, China has less reason to beconcerned about the fate of itsexport sector than in 2008. But it isnot about to stand idly by whenthreats arise.

One area receiving increasedattention is the proposed Basel IIIframework for bank regulation thatwould make trade finance morecostly. Chinese banks have come outstrongly in favour of a report by theInternational Chamber of Commerce(ICC) arguing that trade finance is alow-risk asset class that should notbe over-regulated.

Ms Zhang at the Bank of China,who is also vice-chair of the ICC’sbanking commission, says: “Tradefinancing affects small- and medium-sized enterprises (SMEs) mostseriously. In this financial crisis, it isSMEs that have been hardest hit.This is a sensitive issue for us.”

India Delightat agreementwith PakistanAn important sign of India’s greaterglobal trading possibilities is animprobable development on itsdoorstep, writes James Lamont.

A thaw in vexed relations withneighbouring Pakistan promises to

break a freeze that has afflictedsouth Asian trade flows for decades,making it the world’s poorestperformer in terms of intra-regionaltrade.

Trade between the two nuclear-armed rivals has been minimal sincethe independence of both countriesfrom British rule 64 years ago. Todaythe flows between Pakistan, acountry with a population the size ofBrazil, and India, the world’s fastestgrowing economy after China, arelittle more than $2.7bn.

When Pakistan’s cabinet thismonth declared Most FavouredNation Status for India, New Delhicould barely suppress its delight overa promising trade diversification.

The move, which will allowIslamabad to start removingformidable barriers to imports ofIndian goods, has been described byAnand Sharma, India’s commerceminister, as part of a “paradigmshift”. He has backed a target ofraising bilateral trade to $6bn withinthree years.

“It will be beneficial for the bothcountries. It opens up pathways forelevating our economic engagementto a much higher level,” he says.

Pakistan’s top business leaders, farfrom fearing cut-throat competitionfrom Indian goods, see opportunitiesin exporting cement, engineeringproducts, food products and bankingservices to India.

“It’s a very good gesture,” saysMian Muhammad Mansha, one ofPakistan’s biggest industrialists andchairman of Muslim CommercialBank. “I would like to compete withIndian banks [in their home market].I would like to open for businessthere.”

Trade experts view the granting ofMFN status as a pivotal step thatcould in time unlock trade across theregion. “Intra-regional trade in southAsia has been low, owing much tothe geo-economic dynamics as wellas other factors, and not merely theexisting tariff regimes,” says PradeepMehta, a former adviser to the WorldTrade Organisation.

“Some of the impediments toregional trade include hightransaction costs, limited port andtransport infrastructure, and,crucially, the lack of political will.”

The breakthrough with Pakistanreflects a far wider global outreachby India’s trade negotiators over thepast three years, as they seekmarkets for a fast-growing services-orientated economy.

India, famously protectionist in thepast and renowned for formidabletariff and non-tariff barriers, isnegotiating bilateral tradeagreements with the EuropeanUnion, Israel, New Zealand, the US,South Africa and Japan. It hasalready chalked up agreements withthe Association of Southeast AsianNations and South Korea.

Some of these, like the EU tradedeal, are not progressing as fast aspartners would like. Equally, Indiafaces a big challenge balancing itstrade relationship with its neighbourChina. Bilateral trade is expected totop $60bn this year, but is heavilyskewed in China’s favour.

The drive to diversify and smoothtrade flows has also coincided withstrong export performance over thepast year, in spite of a contraction inoverall world trade.

This reflects the success of NewDelhi’s push to boost merchandiseexports to $500bn by 2014 throughincentive schemes.

In the current fiscal year, MrSharma predicts exports to surpass$300bn. In the first eight months ofthis year, they already total $231bn.

“The growth prognosis of newexport destinations [in Asia, Africaand Latin America] holds promise,”says Soumya Ghosh, head ofeconomic research at the Federationof Indian Chambers of Commerceand Industry. “We believe this mayhelp mitigate the possible decline inexports to the US and EU.”

Japan Regionaltrade dealstirs tensionsTrade deals often inspire heatedrhetoric, but political debate inJapan over the Trans-PacificPartnership has in recent monthsreached new heights of hyperbole,writes Mure Dickie.

For supporters of Japaneseinvolvement in the TPP, the regionaltrade pact is seen as almost a lastchance to shore up competitivenessand ensure growth for a nation besetby demographic decline and anaemicdomestic demand.

Naoto Kan, former prime minister,portrayed possible involvement inthe pact as part of a historic “21st-century opening of Japan” thatwould rank with the end of feudalrule in the late 19th century andpostwar revival as a peaceful tradingnation.

But opponents see the TPP as anexistential threat to farming and thelife of the Japanese countryside, aswell as a potential danger to sectorssuch as medical services that havehitherto been shielded frominternational competition.

“Resolutely Oppose a TPP ThatWill Destroy Regional Economies andSociety” ran one banner in a

demonstration of thousands offarmers and agricultural associationofficials in central Tokyo last month.

A placard at the same protest waseven more direct: “No! No! No! No!TPP, No! No! No! No!”, it read.

Masahiko Yamada, a formerJapanese farming minister and Dietmember for the ruling Democraticparty (DPJ), has emerged as one ofthe most vocal opponents to effortsof its leaders to push entry to theTPP and other trade deals thatwould require opening theagricultural sector.

Mr Yamada warns that tensionsover the TPP – currently thecentrepiece of multilateral efforts tolower barriers to trade in goods andservices around the Asia-Pacificregion – have the potential tofracture the DPJ.

“I’m deeply concerned that if ourparty really forces this issuethrough, then it may split,” he says.

Such tough talk in part reflectsexpectations that the pact wouldrequire fundamental opening of theagricultural market, exposing Japan’ssmall-scale farmers of rice – thetraditional staple – to competitionfrom more efficient overseassuppliers.

In principle, the TPP requiresmembers to cut import tariffs to

zero, but Japanese manufacturersargue that the impact on agriculturewill be more than outweighed by thebenefits to exporters, who are a vitalgrowth engine.

Manufacturers have recoveredimpressively since supply chainswere disrupted by the earthquakeand tsunami that hit north-eastJapan on March 11. Exports inSeptember rose 2.4 per cent year-on-year for a trade surplus of Y300bn.

But companies say they are underextreme pressure from a rising yenand would struggle further if theyare locked out of low-tariff regionaland bilateral trade deals.

Worries focus in particular oncompetition from South Korea, whichin recent years has increasinglythreatened to outshine Japan insectors ranging from computer chipsto consumer electronics.

The South Korean challenge hasbeen driven by rapid technologicaladvance, impressive productivitygains and a cheap won. In addition,Seoul’s success in sealing tariff-cutting trade deals with key markets– including the US and EuropeanUnion – means its companies aresoon to get a new edge. By contrast,trade deals sealed by Japan in recentyears have been with less importanttrading partners such as India.

Japanese exporters hope the TPPwill win them freer access to the US

market, while also paving the wayfor progress on tariff-cuttingagreements with South Korea, Chinaand Europe.

Yoshihiko Noda, Japan’s currentprime minister, insists farmers’worries cannot be allowed to stopefforts to remove barriers to trade.“It’s not a matter of whether or nota high level of economic integrationcan coexist with a revival ofagriculture. It has to,” Mr Noda says.

S Korea Dealwith USis ‘winwin’Soon after the US Congress passedthe long-delayed free tradeagreement with South Korea in mid-October, South Korea’s President LeeMyung-bak made a rare visit to anauto plant in Detroit, along with hisUS counterpart Barack Obama, topromote the landmark deal todisgruntled US workers, writesSong Jung-a.

“Some of you may think that theFTA will cost you your jobs. Butthat is not the case,” Mr Lee,

wearing a Detroit Tigers cap, toldhundreds of workers at the plant.“President Obama and I can promiseyou here that the FTA will protectyour jobs and create even more workfor others. I expect that Detroit willbecome a livelier city.”

President Obama also touted thedeal, predicting it would support atleast 70,000 American jobs and boostthe US economy by more than itslast nine trade agreements combined.

South Korea’s previous FTAs withother countries have certainlyworked in favour of Asia’s fourth-largest economy. Trade volume withthe five economic entities withwhich South Korea has FTAs –Chile, Singapore, the European FreeTrade Association (Efta), India andthe Association of Southeast AsianNations (Asean) – increased to$154bn last year, from $92.5bn a yearbefore each FTA went into effect,according to Seoul’s trade ministry.

South Korea has aggressivelypursued FTAs with its main tradepartners in recent years to boost itsexport-driven economy, highlightedby the sealing of a trade accord withthe European Union, which cameinto force in July.

Now, all eyes are on its long-pending trade pact with the US, itsthird-largest trading partner, whichmany South Koreans hope will boostthe slowing economy. The deal was

finally ratified by the US Congresslast month, after languishing formore than four years because ofcomplaints from US motor unions.

South Korea now ranks as theworld’s seventh-largest exporter, withits global trade poised to break the$1,000bn mark this year.

“The path we need to take isabsolutely clear. With a lack ofnatural resources and a limiteddomestic market, we cannot sustaingrowth without exporting. This iswhy free trade agreements areimportant for Korea,” said PresidentLee in a recent radio address, urgingKorean lawmakers to ratify the billquickly.

The trade pact with the US isforecast to boost South Korea’s realGDP by 5.7 per cent over the nextdecade and create 350,000 new jobs.Bilateral trade between the two,which reached $90.2bn last year, isexpected to increase substantially, asthe agreement is set to scrap tariffsfor more than 90 per cent ofproducts within three years.

Despite all the expected economicbenefits, S Korea’s opposition partiesare strongly opposed to the pact,calling for the “unfair” trade deal tobe revised and for more reliefmeasures to be introduced for thosehurt by the agreement. “We need tothink carefully whether we shouldhurriedly approve it just because theUS ratified it. We cannot accept alosing trade deal,” said Sohn Hak-kyu, leader of the oppositionDemocratic Party.

Analysts expect the oppositionparties to accept the agreement inthe end, as the national assembly iscontrolled by the ruling party.However, they caution that the high-profile deal may not bring hugeeconomic benefits immediately, giventhe sluggish US economy.

Bark Tae-ho, a trade expert atSeoul National University, notes:“When Koreans talk about FTAs,they often boast that they can nowexport more products abroad. Butthe economic effects of marketopening should be felt by both sidesequally,” says Mr Bark.

“The government should makemore efforts to ensure that anenvironment for fair competition isprovided for imports,” he adds.

Australia Pushto sign pactsacross regionChilean wines and South Koreandrinkers are not an obvious pairing,writes Sarah Mishkin.

Australia’s vineyards are far closerthan to Korea than Chile’s, andAustralian producers have beenramping up their marketing acrossAsia, yet Chilean wines are morepopular.

And Chile has sealed a free-tradeagreement with South Korea, whichpushed its producers to market theirwares more aggressively to Koreandrinkers. Australia’s free tradeagreement with South Korea is stillin the works.

There was a clear advantage forChilean winemakers, says LucyAnderson, Asia regional director forWine Australia, a government-backedtrade group. “We expect and hopethat Australia’s [trade agreementwith South Korea] will go throughearly next year.”

Australia has been pushing hard toseal trade deals across Asia tobolster its status as a regional leaderand increase the trade that has madeit one of the strongest developedmarket economies during thefinancial crisis.

Chinese demand dominatesAustralia’s exports. In 2010, nearly aquarter exports went to China.Japan, with 16 per cent of exports,was the second largest partner,according to Australia’s Departmentof Foreign Affairs and Trade.

Smaller Asian nations are alsosignificant markets. Last year,Australia exported goods worth acombined A$15.8bn to Taiwan andThailand together, which is morethan it exported to either the US orUK that year.

But as the global Doha trade talksstumble, Australia is not just turningto seal bilateral and regional deals,so its goods can get privileged accessto overseas markets. Beyond that,trade deals are a way for Australiato put its imprimatur on shaping thedevelopment of the region’s tradeties.

“There’s a strong conviction inAustralia that promoting this sort ofintegration that moves economiesinto positions where they’ll supportopen markets is very important inthe long run for building prosperityin the region,” says Alan Oxley, acareer Australian trade negotiatorwho now runs a policy consultancy,ITS Global.

The trade deals that Australiapursues, he says, are comprehensiveagreements that liberalise movementof goods as well as services, andpromote inward investment.

Other regional heavyweights,namely China, have been morewilling to negotiate deals that omitdiscussion of investment andservices.

“It’s important for Australia to beon the ground floor and have a sayin what the rules of the game are

going to look like,” says JoshuaMeltzer, formerly with the Australiandepartment of foreign affairs andtrade and now a fellow at theBrookings Institute. “Free tradeagreements are a vehicle for drivingeconomic reform towards greatertransparency and greater openness,and that’s true of most of the FTAsthat are being negotiated.”

But success in key negotiationshas been slow. Talks between Chinaand Australia, launched in 2005, are“wholly stalled,” says Mr Oxley.

The continued success of Australiaand China trade has reduced thepressure on Australia to conclude afree trade deal, some experts say.

Not only is a trade deal seen asless necessary to the success of therelationship, but public antipathy toChina has grown alongside itsexpanding place in the Australianeconomy.

A leading opposition politicianrecently downplayed the importanceof a China trade deal, suggesting adeal with Japan would be hispriority, a move seen by manyanalysts as a move for the support ofthe manufacturing sector.

Indonesia Insearch of abetter balanceBuyers from nearly 100 countriescrowded stands in downtown Jakartalast month, placing orders for morethan $460m worth of furniture,equipment, shoes and services duringa five-day trade fair, writes AnthonyDeutsch.

The value of deals at theIndonesian expo rose 26 per centfrom 2010, beating even the mostoptimistic expectations of organisersin the capital – a sign of thestrength of the rebound inIndonesia’s export sector since theAsian financial crisis of 1997-1998.

Yet, for all the positive economicmomentum – with inflation fallingback below 5 per cent and grossdomestic product averaging above 6per cent a year for the past fouryears – Indonesia’s share of globaltrade is relatively small consideringit ranks as south-east Asia’s largesteconomy and the world’s 18thlargest.

Roughly a third of its exports areof unprocessed natural resourcessuch as coal, oil and precious metals,making Indonesia overly reliant onnon-value-added trade. Thegovernment hopes to shift thebalance by offering tax breaks andencouraging manufacturers to locatethere.

The country faces other challenges.It is struggling to liftcompetitiveness against moreproductive south-east Asian peers,such as Malaysia and Thailand, anddiversify the destinations ofmanufactured goods. That task isfurther complicated by weakinfrastructure,.

“If Indonesia is going to grow, it isimportant that this increasingdemand is met by supply,” NourielRoubini, the economist, said on arecent trip to Jakarta. “It needs moreinvestment in infrastructure, butalso in human capital.”

Even with these constraints,Indonesia’s trade is flourishing. Inthe first eight months of 2011, totalexports climbed 37 per cent to$135bn, putting it on track to hit a$200bn target for the full year.

So far this year, exports to Indiaand China jumped by more than 50per cent, driven by huge demand forcoal and palm oil, commodities inwhich Indonesia is the largest globalsupplier. China surpassed Japan asthe largest export destination for thefirst time this year.

Edimon Ginting, senior economistfor the Asian Development Bank inIndonesia, says: “Despite theJapanese earthquake and tsunamiand other global turmoil, exportsexpanded rapidly. At the same time,manufacturing is also getting muchstronger,” rising from 60 to 62 percent of total exports this year.

He adds: “Although Indonesia’sexport markets are relativelydiversified, (they) are still relativelylow in such big new markets asIndia and South Africa,” citing as amain weakness poorly developedtrade finance.

Gita Wirjawan, newly appointedtrade minister, says he aims to focushis energy on policies for supportingvalue-added industries, productdiversification and efforts to widenthe market for Indonesian goods.

“Clearly, we have to diversify intonon-traditional markets, includingAfrica, the Middle East, central andsouth America. This is inanticipation of a possible slowdownin traditional export destinations,”he says.

Unlike, say, China, Mr Wirjawannotes Indonesia is heavily centred ondomestic consumption. That hashelped it withstand recent globalfinancial turmoil, but has left itisolated during boom years enjoyedby other south-east Asian countries.

“Indonesia needs to reconfigureitself from an economy centred ondomestic consumption to a moreexport-centric one,” he says. ‘Thatcould help us lift growth from the 6.5per cent we have now, to a levelmuch higher.”

Adapting to seachanges in commerceTrade has played a vital role in the prosperity of Asian countries but each has very different opportunities

and faces a variety of challenges, FT correspondents report from across the region

Just bobbin’ along: Chinese textile exports face stiffer competition EPA

New Trade Routes: Pacific