Developments in European trade and investment relations with Asia

Robert Madelin
Director for Asia, DG TRADE, European Commission

Introduction

I am delighted to have this opportunity to share with the Asia Society my views regarding the constantly evolving economic relationship between two globally important regions – Europe and Asia.

I do not need to define Asia in present company. But what is Europe for these purposes? In April next year, the European Union will comprise 25 sovereign states, half a billion souls, a GDP of over 9,000 billion Euro, with growth prospects for next year of close to 3% and a common regime for investors, with a single regulatory requirement to become a Europe-wide corporate citizen in sectors from banking to farming to manufacturing. The European Union has a single trade policy, a largely common visa system, a common but not monolithic approach to foreign and security policy issues, the objective of a common defence capability. We are an experiment in peaceful prosperity. We want and need to be in partnership with Asia.
European and Asian economies have become increasingly interlinked. There has been a steady pattern of trade development and growth between Europe and Asia over the past twenty years. Asia, taken as a whole, has been Europe’s biggest trading partner for over a decade.
With its growing export-led economies and a huge developing domestic market, Asia is a region of increasing economic and strategic importance, whose current and longer term potential continues to attract the strong commercial interest of EU industry.

Today, in the first quarter of 2003, the outlook for the global economy remains highly uncertain. We in Europe are experiencing sluggish growth, while Japan lingers in a deflationary trough. US growth remained below potential in 2002, and is only expected to recover slowly by next year. The poor economic situation in the industrialised countries has caused many emerging markets to also experience a slowdown over the past year. And that is without the impact of war or the rumours of war.

In contrast, however, the global growth rate of 2.8% in 2002 can largely be attributed to Asia, where growth was higher than in most, if not all, of the other major regions of the globe. In 2003, it is expected that Asia will continue to perform well. Growth in the ASEAN economies is expected to average 4% this year.

Regional and Multilateral co-operation

So, there are certainly sound economic motives for the EU to want to build upon its position as a key trading partner for Asia and forge a closer alliance to deepen economic ties with the region in the future. Europe and Asia need to look to each other as good friends with mutual interests who want to share experiences and learn from one another.
Whenever I visit Asia, I discover anew the large degree of commonality between Europe and Asia in the way in which we view globalisation and its opportunities and challenges. We are both trying to juggle the challenges of regionalism and multilateralism and to reach a satisfactory balance between the two approaches.

As a career public service official, my view is that governments may have a rather simplistic and poor grasp of the economic processes underway today, whether in Asia or more broadly. Trade policy makers tend to think of multilateral or regional negotiations for reciprocal liberalisation. We tend to see regionalism as a test-bed for global liberalisation: regional deals seem less risky in terms of possible abuse of outcomes by our partners, and may be easier to do in the short term. But we like to do both. That is notoriously true of Europe, and has become increasingly true world-wide in the last 15 years.

What trade policy makers may not grasp is that trade and investment are creating real-world integration on a more sustained basis and in more complex ways than treaties can capture. The danger here is that treaty-making trips up the traders.
There are some very striking recent data on this phenomenon in Asia produced by David Roland-Holst in a series of Asia Development Bank Institute Research Papers.

My take on this work is as follows: let me make 5 points:

• Trade policy works at WTO, regional and bilateral levels but business works on all these levels and more.
• Statistics on bilateral trade and investment linkages therefore mis-state and over-simplify where wealth is coming from: growth in the Chinese electronics sector, for example, has a positive impact on Japanese households, but one-fifth of that impact comes through trade and investment networks involving Korea and countries of ASEAN. Such indirect economic linkages can account for up to 70% of the impact in other cases of apparently bilateral relationships.
• In these circumstances, trade policy must tread carefully: liberalisation on too narrow a regional or bilateral basis may be justified by the crude trade statistics, but on this deeper vision, such second-best quick fixes could be cutting off the arteries through which wealth is really flowing.
• In the real world, Japan experienced such negative effects when US and Europe had FTAs with Mexico but Japan did not. Hence the Japanese change of heart on regionalism. Hence too the pressure for broader rather than narrower approaches to Asian regionalism.
• Finally, this analysis underpins an optimistic view of Chinese growth and WTO-led globalisation. Big China is an opportunity not a threat. A growing China will be a major market for ASEAN as well as maybe a rival. China will be Japan’s biggest trading partner in 15 years’ time.

The importance of the last two points cannot be overstated. They give analytical weight to the ASEAN-plus-3 vision. On this view, ASEAN-plus-3 is driven not by geopolitical fear of loneliness but by good sense.

I feel that this analysis is important too for the Asia-Europe relationship. The analytical message is that a broader Europe-Asia liberalising endeavour would underpin the reality facing European investors in Asia, boost Asia’s own growth and strengthen global trade. This is why Asia and Europe have been right to stand by the GATT and WTO processes even in the dark days of 1997, and why we have a common goal of fulfilling the current Doha mandate. But it is also just one reason why Europe is redefining its policy towards South East Asia.

So, how does this situation affect European relations with Asia, and how should Europe respond to these developments?

Asia-Europe Strategies

The strategic framework for the European Union's relations with Asia for the medium term adopted by the Commission in September 2001 defines a strategy which focuses on six key dimensions: strengthening EU engagement with Asia in the political and security fields, strengthening EU-Asia two-way trade and investment relations in both directions, contributing effectively to reduce poverty in the region, helping promote the spread of democracy, good governance and the rule of law across the region - in turn building global partnerships with key Asian partners (in combating global challenges as well as in international organisations), and promoting further the awareness between the two regions.

Asia seems to be pursuing its own strategy based on diversifying its political and economic bonds. In these circumstances, we believe that strengthening ties with Europe, a partner whose achievements in regional co-operation set a model for others, must be of strong interest to Asia.
For its part, Asia presents Europe with a series of very significant, and very different, challenges. The size and variety of these challenges is such that Europe is simply not capable of responding to them fully on its own. This is why I believe that we must combine our multilateral relations in the WTO with regional and bilateral approaches to engage more extensively together.

At multilateral level, is clear that the EU has played a significant role in the accession of China to the WTO, and we intend to remain equally supportive and involved in the accessions of the other Asian countries - Vietnam, Cambodia, and Laos. We hope that the current intense focus on developments within the Asian region will not lead to a situation where it closes itself off from the rest of the world, but instead that closer integration within Asia will ultimately be reflected in a stronger, more coherent Asian voice and influence in the WTO. But our multilateral ambitions do not preclude Europe from reinforcing its political, economic, technological, and cultural links with Asia by also intensifying our co-operation at regional and bilateral levels.

At regional level, we have ASEM, the Asia – Europe Meeting, inaugurated in Bangkok in 1996 as an informal process bringing together the fifteen EU Member States and the European Commission, with ten Asian countries (Brunei, China, Indonesia, Japan, South Korea, Malaysia, the Philippines, Singapore, Thailand, and Vietnam), strengthening the relationship between the two regions founded on mutual respect and equal partnership. Within the so-called Economic Pillar of ASEM, officials, experts and entrepreneurs work together to encourage greater economic interaction between enterprises, improve the business environment to increase trade and investment, and foster sustained and stable economic growth.

ASEM is primarily a forum for dialogue and co-operation, taking place at various levels – between businessman, experts, senior officials, and ministers. It has played an important role in EU-Asia relations, providing an established framework and process to encourage greater transparency and mutual understanding on trade and investment issues by exchanging information and experiences between two regions having common economic and commercial interests. It is not only a political forum, but has helped to reinforce other activities at international level involving the partners, including the current multilateral negotiations in the WTO on the Doha Development Agenda.

It is worth highlighting here that the benefits of ASEM extend beyond its direct achievements, because ASEM allows Asia to view the reality of European integration at first hand, at the same time as Europe can watch the evolution of ASEAN and the gradual process of integration in the Asian region. The changing interaction within and between the two regions remains a key subject of interest to both sides.

ASEM has progressed considerably in the few years since its inception, adapting both to new developments specific to the two regions involved, but also within the global context. ASEM is currently reviewing the achievements of its Economic Pillar, examining past results and looking at how to ensure that it remains relevant and effective. At the same time, ASEM Leaders agreed during their Summit last year to work towards a closer ASEM economic partnership. To this end, an action-oriented Task Force of high-level representatives, covering the political, commercial, and academic arenas, is being established to consider issues relating to trade, investment and finance between the two regions and define a direction and priorities for future collaboration together.

The challenges for the future will be how to ensure that the Economic Pillar remains an important constituent of the dynamic relationship between Asia and Europe, and how to encourage the business community, as a key stakeholder, to become a greater driving force within this relationship. The test of our success will be whether we can achieve a sense of ownership and commitment by the highest level officials responsible for trade matters as well as top business operators.

And now I turn to our bilateral interactions. The foundation for EU relations with Asian countries is currently based on a complicated framework of numerous and different agreements which does not do justice to the strength of the political and economic ties between the two regions:- there are comprehensive co-operation agreements with some Asian countries – Nepal, Laos, Cambodia, Bangladesh, South Korea, India, Mongolia, Sri Lanka, and Vietnam, as well as Macao, an older style co-operation agreement is in force with ASEAN as a whole, except for Myanmar, as well as with China, and relations with Australia, New Zealand, and Japan are governed by Joint Declarations.

ASEAN as one Framework for our Partnership

The EU strategy for its future commercial relations with ASEAN countries is based on support for ASEAN’s own efforts towards greater economic integration. It also seeks to take into account the commonality of trade interests between ASEAN members and the additional benefits of working within a broader forum - especially in terms of achieving economies of scale and making maximum use of the finite resources available to both sides. In this respect, we are convinced that EU-ASEAN co-operation on trade issues should therefore take place, where feasible, on a region-to-region basis.

Our key objectives for the next few years are:

• To expand two-way trade and investment flows;
• To establish an effective framework for dialogue and regulatory co-operation on trade facilitation, market access, and investment issues between the two regions; and
• To foster greater understanding and work more closely together in the various areas where we have mutual interests relating to the multilateral trading system, and particularly within the current round of multilateral trade negotiations.

The mechanism which we envisage to reach these objectives is a comprehensive new initiative, involving dialogue and joint activities in areas of mutual economic interest. The EU is currently putting in place similar frameworks with several other trading partners, notably Mercosur and Canada, but our concept is to introduce certain principles which will customise this approach to suit ASEAN’s unique situation and requirements.
I do not want to reveal hot news today. Preliminary, rather private exchanges took place between European and ASEAN Foreign Ministers in January in Brussels. The Commission will follow up at Pascal Lamy’s session with ASEAN Economic Ministers in Laos in April. Let me however give some flavour of the state of European thinking.

ASEAN is a very diverse association, comprised of countries at various levels of development and with differing priorities. This diversity mandates the creation of a flexible framework. Under the scenario which we are developing, each country would select from a comprehensive menu of commonly defined activities which have been agreed jointly by ASEAN as a whole.

These activities would address different areas relating to trade and investment facilitation – agricultural and industrial product standards, customs procedures, intellectual property rights, services, etc. A particular ASEAN member would then sign up for each one when they want to do so. Within this commonly agreed framework, a specific activity could thus commence with the involvement of two or more ASEAN countries, and gradually expand its membership, with the ultimate goal of having all countries participate on an equal basis.

At the same time, and to further accommodate individual preferences, certain activities could be divided into several phases. This would allow countries to gradually intensify their level of co-operation, to start with mutual confidence building exercises to learn about each other’s systems, then to progress to analysing the common elements as well as their differences and constraints, and eventually moving on to identify promising sectors for closer co-operation. Such a gradual process could lay the foundations for both sides to eventually enter into more substantial commitments between the two regions.

Close co-ordination will be needed with ongoing EU-ASEAN regional and bilateral trade-related technical assistance and capacity building activities to ensure that the activities and results which are foreseen are supportive and complementary. The initiative should foster contacts between EU and ASEAN economic operators. It will be vital to have the private sector from each side closely involved in both the definition and implementation of the various actions. Special attention will be given to the needs of SMEs, wherever appropriate. Activities should also enhance the capacity of the more developed ASEAN members to provide greater support to the others, in line with the Initiative for ASEAN Integration (IAI).

Vietnam’s Successes

I should not conclude without a word about our hosts today. Vietnam is making great strides on a pioneering road to diversity and prosperity. The parallel with experiences in Eastern Europe is often striking. Vietnam has a youth unmatched where I come from and seeks a turn of speed to match.

We applaud the open-ness of Vietnam to its ASEAN partners, to our transatlantic friends and above all to European technology, goods, services and investments. We rest confident on the assurances of the now Deputy Prime Minister there will be a level playing field in Vietnam for European friends. We see the BTA as a step on the road to WTO. We look to the day when Vietnam hosts meetings such as this as a WTO member.
In this sense, we view the US-Vietnam BTA as actually directly benefiting the EU, and all other WTO members. The implementation of WTO rules is central to the BTA, which requires such rules to be implemented rather quickly. In this sense, the implementation of the bilateral agreement with the US and accession to the WTO will not be a double effort for Vietnam, but just the opposite. Vietnam can build on the BTA to facilitate their WTO accession, and the sooner that these rules are put in place, the better it will be for all Vietnam’s trading partners.

But, as the evidence I have quoted has shown, no purely bilateral deal is enough however big the partner. So the ASEAN Free Trade Area (AFTA) is likely to have a much more substantial impact on long-term investment prospects in Vietnam and across the region.

EU investors, just like any other investors, strive to invest in countries where they fully understand the rules, where there is no discrimination, and where they feel reassured that the situation for investment will remain consistent and predictable over the longer term. The US BTA is thus unlikely to have a strong impact on EU investors. With AFTA, investors will now have a much wider choice of countries to consider for their investments, all promising them equal access to the ASEAN market as a whole. It is therefore far more important than before that significant differences in the conditions for investment should not exist between ASEAN countries. Those with less beneficial regimes will soon see their FDI dry up as investors turn to their more transparent and predictable neighbours.

I would also like to underline that signing up to an FDI framework such as the one that the EU proposes in the WTO context, and which is supported by many other developed and developing countries in the WTO, would prove a much stronger inducement for EU investors. Transparency and predictability create trust and reduce the perceived risk in the eyes of investors. A lack of transparency and predictability deter FDI, as empirical evidence shows.

CONCLUSION

The Asian economic miracle has been miraculous and is now more modest: we no longer see the excessive expectations of enormous profits to be made in Asian markets. Asia remains a key region of economic interest and opportunity, in the short, medium and longer term. If Asia has yet to decide on how far and how fast its integration will proceed, it seems to have embarked on a process which can only lead to a more cohesive future, and one where it will have an increasingly larger influence on the global scene. Asia is growing so fast, and changing in so many ways, that Europe has to step up its efforts if we are to remain useful partners, and I hope that I have made it clear that we are eager to do this.
The slowing down of the global economy and Asia’s overlapping integration efforts will also require a co-ordinated political response from Asia in order to promote essential internal structural reforms: the fight against corruption, the reform of State enterprises, corporate governance, financial markets, and the promotion of education. Here, the EU may be able to serve as a useful reference. Similarly, the economic reforms which the EU has had to introduce following the creation of the Common Market in 1992 may also interest Asia. We in Europe understand that Asia needs to define its own path and its own brand of integration. Integration can be modest but still valuable when it contributes to a good neighbourhood, to peace, to increased security, and to the promotion of economic growth for the benefit of its participants. The EU remains ready to respond to any Asian interest in learning from our experiences.

Asia and the EU have much in common and have taken similar approaches to a number of challenges that face us. We have an open approach to regionalism and a common belief in a rules-based multilateral trading system. This makes us co-operative neighbours - albeit on opposite sides of the globe, and partners in making our common agenda a success. In the next generation of global integration, Asia and its partners can together co-operate to nurture growth and prosperity, but governments have a role but do not have the monopoly, or even necessarily the lead: this endeavour will require many hands. My message is that Europe stands ready, modest but committed to this vocation.