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The Tie that Binds

 November 20, 2012 12:20 PM


The annual ASEAN and East Asian summits are in full swing—and in a rather surprising development considering the raft of territorial disputes in Asia, this year's summits are a hotbed for free trade talks.

In fact, one big development concerned the nations locked in two of the year's most heated disputes: China, Japan and South Korea. Recall, these nations' efforts to commence trilateral free trade talks stalled when Japan and China sparred over the Senkaku/Diaoyu islets and Korea and Japan wrangled over the Dokdo/Takeshima islets. This week, however, they reached a breakthrough: Trade ministers from each nation vowed to push forward despite ongoing political tension. They meet Tuesday to set a framework, and talks will start in earnest in early 2013. All three shared the same sentiment: Freeing trade will expand markets, boosting investment and overall economic activity over time, benefiting all participants.

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Overall, the restarted talks further increase the likelihood the disputes' impact on trade—evident in Japan's recent export data—should be temporary. That said, we wouldn't expect negotiations to go off without a hitch. All three countries have a history of protectionism, and if the Liberal Democratic Party wins next month's Japanese election, likely incoming Prime Minister Shinzo Abe may not support the deal as much as current Prime Yoshihiko Noda does. Then again, should Japan waffle, China and Korea could still push forward, as Chinese Premier Wen Jiabao and Korean President Lee Myung-bak pledged to do Monday. Though both nations are approaching leadership transitions, Chinese policy doesn't appear likely to change, and two of Korea's three presidential candidates support freer trade. So at least some barriers likely fall.

Trade also seems to have trumped territorial spats in Southeast Asia. China and several ASEAN countries have long tussled over boundaries and military conduct in the South China Sea, and tensions over energy exploration in the region have flared recently. But at this week's summits, nations are downplaying these disputes and calling for unity—specifically, economic unity, in the form of the Regional Comprehensive Economic Partnership (RCEP). Talks begin Tuesday, and officials want a deal by the end of 2015. If completed, it will merge ASEAN's free trade agreements with China, Australia, India, South Korea, Japan and New Zealand into a 16-member free-trade bloc. Currently, the region accounts for over one-fourth of global trade and one-third of global GDP. Freeing trade among its constituents would likely add nicely to global growth as well as benefit the half of the world's population residing in those nations—some of which have only recently begun opening economically. A regional trade bloc would do wonders for a nation like Myanmar, which just emerged from a repressive, closed dictatorship. It might even promote freer markets in still-communist Vietnam. Where economic freedom takes root, political freedom often tends to follow.

Of course, despite the obvious global benefits of freer trade in the East, some bemoan the US's exclusion from RCEP. Certainly, the US would benefit from joining that bloc. But the US isn't exactly isolated without it. Trans-Pacific Partnership (TPP) talks are accelerating and attracting new participants—Thailand just expressed interest in joining, and Taiwan and Japan still aim to join. With several overlapping participants, there's no reason RCEP and TPP can't flourish together. In fact, the more they compete for new members and earlier completion, the more trade barriers get torn down sooner. A race toward zero protectionism around the Pacific would be a positive for all involved.

And, best of all, it would likely be contagious, giving the EU extra incentive to complete free trade agreements with Canada and ASEAN and launch talks with Japan and Taiwan in earnest. Let the race begin!

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

source: Market Minder
Disclaimer: This article reflects personal viewpoints of the author and is not a description of advisory services by Fisher Investments or performance of its clients. Such viewpoints may change at any time without notice. Nothin herein constitutes investment advice or a recommendation to buy or sell any security ot that any security, portfolio, transaction or strategy is suitable for any specific person. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
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