Asia: coming together or falling further apart? The events of 11 September revived talks of an Asia-wide economic partnership. But has the case for unity actually been pushed back? - Cover Story - Brief Article

Business Asia, April, 2002

FOR A WHILE, it seemed the events of 11 September and the corresponding global shockwave would jumpstart Asia's attempts to become an economically unified region.

With the world economy taking a serious hit after the devastating terrorist attacks on New York City, Asian leaders agreed that the best way to protect themselves from this current (and future) shock would be to strengthen regional ties.

This grand unified view gathered steam last November when China and the 10 nations forming the Association of South East Asian Nations (ASEAN) agreed to create a free trade area within 10 years. This was followed less than two months later by a whirlwind visit by Japanese Prime Minister Junichiro Koizumi to ASEAN countries espousing similar free trade proposals (this time including Australia, South Korea and New Zealand).

But beyond the platitudes, little real movement has happened. In fact, instead of moving towards greater unity, the region is fracturing, with individual countries pursuing bilateral deals and putting Asia-wide agreements on the back burner.

The problems seems to be that while leaders, particularly South-East Asian leaders, agree their wounded economies can fare better standing together than facing the global slowdown alone, they are deeply divided on how best to promote unity.

Some countries favour free trade. Others abhor the idea. The region's financial systems run the gamut from strongholds of market liberalism like Singapore to the rigid Myanmar economy, governed by a mix of mysticism and communist-style planning. Given their differences, analysts say, efforts to build a regional economic bloc will be glacially slow.

ASEAN, as well as the larger Asia Pacific Economic Cooperation (APEC), certainly have grand plans for free trade. The ASEAN Free Trade Area (AFTA) agreement envisages slashing import tariffs across the region in the next few years. APEC has its Bogor goals, which aims to have free trade between APEC's developed members by 2010 and 2020 for developing economies.

ASEAN's agreement with China to work towards creating a free trade area within 10 years is seen as crucial by many economists if South-East Asia is going to compete with China to attract investment aimed at tapping the vast Chinese market.

The reality, however, falls well short of the rhetoric. AFTA has been undermined by Malaysia's insistence on keeping tariffs on its auto industry, and by Kuala Lumpur's suspicion of wider free trade deals. An attempt to strike an ASEAN free trade deal with Australia and New Zealand fell through in 2000 largely due to opposition from Malaysia.

Instead of progress towards a unified regional deal, the last few years have seen a proliferation of bilateral trading pacts, as more market-friendly ASEAN and APEC members strike deals on their own rather than try to win over their more cautious neighbours.

Analysts say all these individual deals are undermining progress on regional and global free trade agreements, making Asian integration more difficult.

"You don't get a critical mass if you form a bilateral free trade area with a big country half a world away," said Supavud Saicheua, head of research at Merrill Lynch in Bangkok. "It would be far better to aim for multilateral deals, although of course that is very cumbersome," he said.

"One argument is that if you have a multitude of bilateral deals, you could generalise them into a multilateral deal. But each bilateral deal might have different conditions, which could make it very hard to generalise."

Singapore has led the way when it comes to bilateral deals. The city-state is finalising a trade pact with the US, and in February signed a landmark free trade agreement (FTA) with Japan.

Japan, in an attempt to stem China's growing influence in the region, has also increased its focus on bilateral agreements. It has already started on the path to a FTA with South Korea, with the two signing an accord last month to boost mutual direct investment.

The events of 11 September have also contributed to the increased push towards bilateral agreements. Take Indonesia as an example. Indonesian President Megawati Sukarnoputri, along with several cabinet ministers and 200 business executives, visited China last month to boost ties between the two countries. The two signed five new deals deepening cooperation within their energy links, including a partnership between China's biggest oil firm, PetroChina, and Indonesia's state-owned Pertamina.

It wasn't all about economics though. Many analysts saw Megawati's recent visit as a way for Indonesia to seek support in the face of stepped up US pressure to do more in the war for terror, which many in Muslim-dominated Indonesia oppose. China could prove to be the counter weight Megawati needs to balance US demands.

The US sees Indonesia's cooperation as essential to the success of the war on terror, as US officials believe the world's most populous Muslim country is a fertile breeding ground for the terrorist al Qaeda network.

Singapore and Thailand have also increased their cooperative links. Worried by falling foreign investment in South-East Asia, the two countries earlier this year agreed to work more closely to combat terrorism and dispel the region's image as a risky place to do business.