Asian Leaders Plan Free-Trade Area From India to N.Z.

from Bloomberg

By Arijit Ghosh and Francisco Alcuaz Jr.

Jan. 15 (Bloomberg) -- Asia's largest economies will start planning a free-trade zone that would rival the U.S. and the European Union, after overcoming China's reluctance to include India and Australia.

Leaders of 16 nations endorsed the plan for a trade zone stretching from India to New Zealand in a meeting in Cebu, the Philippines.

The proposal may ultimately lead to lower tariffs and increased trade in a region with a combined economic output of $9 trillion that is home to almost half the world's population. It's the first time Asian nations agreed on an integration similar to the creation of the EU, where per-capita gross domestic product rose more than fivefold in the last 30 years even as the bloc grew and its population rose almost 80 percent.

``China and Japan now see it in their national interests to play a more active role'' in regional integration, said Malcolm Cook, program director for Asia and the Pacific at the Lowy Institute in Sydney. ``If Asia is a more united region, they are going to want a greater role in global affairs.''

Both the Australian and New Zealand dollar rose against the U.S. dollar on the news.

``This trade deal will have huge economic benefits,'' said Warwick McKibbin, a professor of international economics at the Australian National University and a member of the Reserve Bank of Australia's policy-setting board. ``It gives Asean some teeth, although it may complicate world trade talks.''

Earlier Discord

The first East Asia Summit in Kuala Lumpur in December 2005 ended in disagreement over the concept. Japan backed a free- trade plan that included all 16 nations. China wanted a 13- nation bloc that excluded India, Australia and New Zealand.

Today's meeting was attended by Chinese Premier Wen Jiabao, Japanese Prime Minister Shinzo Abe, Indian Prime Minister Manmohan Singh, Australian Prime Minister John Howard, New Zealand Premier Helen Clark and leaders from the 10-member Association of Southeast Asian Nations. Japan, the region's largest economy, will fund an $85 million study of the proposal.

``There was acceptance that a study be done and New Zealand strongly supports that,'' Clark told reporters in Cebu. ``This will be a very, very significant bloc. Of course, it's not the only horse running around the Asia-Pacific area.''

Rival Plans

The proposed free-trade area will rival a similar plan by the Asia-Pacific Economic Cooperation, which includes the U.S., China, Russia, Japan and South American nations. It will take years for either plan to be realized, said Charles Adams, a professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore.

China's relations with both Japan and India have improved since the 2005 summit. President Hu Jintao went to India in November, the first visit by a Chinese head in a decade. Hu said he wanted to ``increase mutual trust'' and signed 13 agreements.

Japan's Abe visited Beijing in October to repair ties damaged by visits by his predecessor, Junichiro Koizumi, to Tokyo's Yasukuni shrine, a war memorial.

``India and China are the powerhouse economies in Asia and the world, so it's fitting to include both of them in such a trade bloc,'' said Peter Drysdale, a professor in Asia-Pacific relations at the Canberra-based Australian National University.

16 Nations

The 16 countries that would be included in the free-trade area are Japan, China, India, South Korea, Australia, Indonesia, Thailand, New Zealand, Malaysia, Singapore, the Philippines, Vietnam, Brunei, Laos, Cambodia and Myanmar.

``In the back of everyone's minds is that the WTO has stalled and that major economies like the U.S. are coming up with their own trade-bloc proposals,'' said Song Seng Wun, regional economist at CIMB-GK Securities in Singapore. ``If Asia doesn't do something, it faces marginalization. This is a pragmatic response rather than an anti-American one.''

Leaders should try to revive the World Trade Organization talks that began five years ago, said Adams of the Lee Kuan Yew School. ``We should still give primary focus to the WTO,'' he said. Setting up so many regional agreements can be ``messy, and there is the risk of undercutting the multilateral system.''

For leaders of the 10-member Asean group, who proposed the bloc to avoid being left out as investors focus on India and China, the meeting in Cebu has been a success as nations signed trade accords and a treaty to counter terrorism, and Asean got tough on itself by setting up rules for the first time in four decades.

`Home Runs'

``The Asean group hit home runs on multiple fronts,'' Robert Lees, president of business lobby group the Pacific Basin Economic Council, said in an interview. ``Asean is getting its act together, speaking more and more with a single voice.''

Asean has also proved itself as the lead organization for bringing Asian nations together, said Sheng Li Jun, senior fellow of the Institute of Southeast Asian Studies in Singapore.

``China, Japan and India need Asean as a platform to discuss regional integration; they can't deal directly, bilaterally, because of border rivalries or historical mistrust,'' he said by telephone today. ``Asean is in the driver's seat of Asian economic integration, and it can stay there, if only as a taxi driver.''

Nafta and EU

Integration in Europe and North America has fostered growth in trade among the members of the trading blocs in those regions. Trade among the 15 members of the European Union at the start 2004 accounted for 34 percent of the total EU GDP that year, up from 26 percent in 1993, according to the bloc's statistics office.

Across the Atlantic, trade among the three countries in the North America Free Trade Agreement -- the U.S., Canada and Mexico -- doubled in the first decade after that deal took effect in 1993, according to International Monetary Fund data.

The Asian leaders also agreed to reduce dependence on conventional fuels such as coal and invest in biofuels and nuclear energy. Each nation said it would adopt a 12-point plan to reduce fossil fuels and invest in so-called green energy to combat climate change.

The leaders said global energy needs are growing rapidly and fossil fuel supplies are limited. They also said world oil prices are ``unstable'' and there is an ``urgent need'' to address global warming and climate change.

To contact the reporters on this story: Arijit Ghosh in Cebu at aghosh@bloomberg.net ; Francisco Alcuaz Jr. in Cebu at falcuaz@bloomberg.net