This from the AFP/Google, (all bold highlights mine)
``China and Southeast Asia establish the world's biggest free trade area (FTA) on Friday, liberalising billions of dollars in goods and investments covering a market of 1.7 billion consumers.
`Eight years in the making, the ASEAN-China FTA will rival the European Union and the North American Free Trade Area in terms of value and surpass those markets in terms of population.
``Officials hope it will expand Asia's trade reach while boosting intra-regional trade that has already been expanding at 20 percent a year....
``China has just overtaken the United States to become ASEAN's third largest trading partner, and will leap Japan and the EU to become "number one" within the first few years of the FTA, said Pushpanathan, Deputy Secretary-General for the ASEAN Economic Community.
``Under the agreement, China and the six founding ASEAN countries -- Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand -- are to eliminate barriers to investment and tariffs on 90 percent of products.
``Later ASEAN members, including Vietnam and Cambodia, have until 2015 to follow suit...
``Average tariffs imposed on Chinese goods by ASEAN states will fall to 0.6 percent from 12.8 percent.
``ASEAN-China trade has exploded in the past decade, from 39.5 billion dollars in 2000 to 192.5 billion last year, Pushpanathan said.
Well the trend towards the deepening economic and financial integration has already been in place (see above charts from ADB), in spite of the just concluded pact.
This means that the implementation of the regional trade agreement has been merely a furtherance of an existing trend and that would likely get more entrenched in region's pursuit of freer markets.
Yet, this flies in the face of rabid mercantilists who continue to predict protectionism as imbecilic outcomes (actually desired solutions) in response to today's crisis.
According to ADB's Emerging Asian Regionalism, ``Asia is now broadly as interdependent in trade as the EU and North America each is. Indeed, Asia now trades more with itself than either the EU or North America did at the outset of their integration efforts."
Here are the benefits of the a regional trade integration as enumerated by the ADB:
"An integrated Asia can:
• link the competitive strengths of its diverse economies in order to boost their productivity and sustain the region’s exceptional growth;
• connect the region’s capital markets to enhance financial stability, reduce the cost of capital, and improve opportunities for sharing risks;
• cooperate in setting exchange rate and macroeconomic policies in order to minimize the effects of global and regional shocks and to facilitate the resolution of global imbalances;
• pool the region’s foreign exchange reserves to make more resources available for investment and development;
• exercise leadership in global decision making to sustain the open global trade and financial systems that have supported a half century of unparalleled economic development;
• build connected infrastructure and collaborate on inclusive development to reduce inequalities within and across economies and thus to strengthen support for pro-growth policies; and
• create regional mechanisms to manage cross-border health, safety, and environmental issues better."
While freer trade doesn't necessarily guarantee everyone's success, this should enhance opportunities in trade, investments, financing and migration flows aside from the benefiting consumers via lower prices and a greater array of choices of available products and services in the marketplace.
In short, benefits enjoyed by society would likely be immensely greater than the costs.
In addition, increased competition should bring about greater technological advancements via innovation, expands the division of labor and comparative advantages of producers which allows for more pricing and resource allocation efficiency.
As Austrian economist Hans F. Sennholz wrote, ``Surely, it is no easy task; it requires continuous changes in economic structure and adjustment processes. Labor markets need freedom and flexibility in order to create ever new employment opportunities that offset unavoidable job losses. Workers must have the opportunity and incentive to acquire knowledge and ability needed in a globalized economy. General education and vocational knowledge are becoming ever more important as are entrepreneurship, research, and development. But above all, the economic future of many businesses in a globalized economy greatly depends on the margin of political and social freedom they enjoy."
Nevertheless competition and greater choice translates to lower rates of inflation.
This has seen with the price of gold in the 1990s where the greater degree of global integration has resulted to what has been known as the "great moderation"
As we wrote in Gold: An Unreliable Inflation Hedge?, ``Global Exports sharply accelerated during the 1990s, which underpinned almost the same degree of expansion in Global GDP per capita.
``So increased global trade meant more US dollar financing, as manifested by the burgeoning trade deficits, yet the increased output from the world resulted to higher productivity and thus generally growth deflation or “disinflation”. Ergo, lower gold and commodity prices."
Of course, vested interest groups or economic rent seekers who profited from political privileges are exasperated,
Again the AFP/Google, ``Not everyone is happily singing the free-trade anthem, however.
``At the 11th hour, industry groups in Indonesia, Southeast Asia's biggest economy, and the Philippines are frantically pressing their governments to keep tariffs on vulnerable sectors until 2012."
SO it is yet unclear whether such trade pact will turn out successful because of the vast diversity of culture and political structures which could be sources of pressures or conflicts, aside from the required recalibration and standardization of trade and investment policies, to conform with and enforce on the trade pact.
Finally and importantly, the trade pact reinforces what we see as China's attempt to bolster or flex her geopolitical muscles by advocating that the world's largest free trade zone to utilize her currency, the yuan or the remimbi as the region's medium of settlement or transaction currency.
According to Xinhua, ``Beijing had embarked on the first step on a long road toward making the yuan one of the world's top currencies, allowing Chinese exporters and importers to start settling trade in yuan rather than dollars.
``Wichai [Wichai Kiatrengsuk, vice president of the Bangkok Bank] believes that after the launching of the ASEAN-China FTA in January, how to push forward the RMB-dominated trade settlement would become an immediate issue in this area." [emphasis added]
In short, the FTA appear to be a stepping stone for the yuan or the remimbi's long term path towards the goal to challenge the US dollar hegemony as a major international currency reserve as repeatedly discussed in this blog, such as in Central Bank Policies: Action Speaks Louder Than Words, The Fallacies of US Dollar Carry Bubble.
Bottom line: The fate of the China-ASEAN FTA would likely determine the success of China's tacit plan to become the world's premier geopolitical power. And this likewise could be reflected on her key trading partners.
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