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The pending Singapore-US bilateral free trade deal signals a new era in regional trade diplomacy marked by competitive bilateral, rather than co-operative preferential, regional trade diplomacy. Since the middle of 2002, led by Singapore, all the major economies of South East Asia have embarked upon a flurry of bilateral trade negotiations with major extra-regional trading partners such as the United States, Japan, China, and South Korea. Thailand has even announced that it is willing to begin trade talks with North Korea in response to North Korean advances.
Regional states’ current economic concerns strongly suggest that bilateralism’s momentum will not be short-lived, but should continue to grow. The region’s much slower export and economic growth trajectories since 1998 and the steep decline in foreign direct investment inflows from Japan, the United States, and South Korea have forced all states to try to bolster their flagging relations with major trading partners. China’s hothouse growth for over a decade and its accession to the World Trade Organisation (WTO) in December 2001 have added extra pressure on regional states to sign free trade deals with traditional export partners and with China so that they do not miss out on new export opportunities. In addition, the WTO’s growing complexities and the shift by major trading partners towards bilateralism, whereby their individual market power can be better leveraged, means that regional states cannot rely solely on multilateral trade diplomacy to assure continued market access for their exports. Reflecting these concerns, Malaysia, the strongest critic of Singapore’s shift from preferential regionalism to competitive bilateralism, recently agreed to consider a free trade deal with the United States with the United States promising to use the Singapore agreement as a template for other bilateral deals in the region.
This new focus on bilateral trade deals with extra-regional partners reverses the traditional concern with preferential regional trading initiatives, like the well-advanced ASEAN Free Trade area (AFTA) process and the still flickering East Asian Economic Grouping/Caucus (EAEG/C) proposal. Instead, it may trigger a round of competitive trade diplomacy whereby regional states feel obliged to negotiate bilateral trade deals to keep pace with their regional rivals so as to avoid export losses through trade diversion. The demands of multiple bilateral free trade negotiations and the WTO’s Doha Round will severely burden regional states’ modest trade diplomacy resources and, thus, may impinge upon further progress in AFTA. The much greater market size of extra-regional trading partners and the competitive pressures on regional states to match each others’ bilateral free trade deals may force open long-protected sectors to these extra-regional trading partners - sectors the AFTA process has hitherto failed to open. Singapore has already agreed to provide preferential access for American financial institutions to its long-protected financial services sector - access still denied to regional firms.
WATCHPOINT: The growth in bilateral free trade deals with extra-regional trading partners may stall AFTA expansion and trigger increased trade diplomacy friction.
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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