EU firms keep faith with Asia

Date: 08/01/1998

By Shada Islam

TRADE and investment issues look set to take centre stage in EU-Asian relations this year.

Mutual commercial interests brought the two sides closer in the early 1990s. The challenge now is to ensure that the business fallout from Asia's financial crisis does not drive the two regions apart in the months ahead.

Keeping economic relations on an even keel is especially important in light of the Union's recent differences with members of the Association of Southeast Asian Nations (ASEAN) over policy towards Burma.

Analysts and officials in both regions are confident that if the mutually lucrative EU-Asia business link remains strong, chronic disagreements over human rights can be kept in check.

The EU-Asia dialogue could be in real trouble, however, if economic contacts also begin to falter.

"Building stronger EU-Asia trade and investment bonds is a key goal of the process of Asia-Europe Meetings (ASEM) started in Bangkok in February 1996," says an EU official, who adds that they are likely to top the agenda at the second ASEM summit in London in early April.

So far, despite Asia's financial woes, the outlook for EU-Asia investment relations remains upbeat. Most European firms are still bullish about Asia, and Asian companies appear anxious to reap the benefits of the single currency.

Trade relations could be more fraught, however. Asian countries trying to boost their foreign exchange earnings by expanding exports are likely to run into resistance from EU-based manufacturers who are already starting to fret about increased Asian competition, both on markets in Europe and abroad.

Although ailing South Korean conglomerates such as Samsung have signalled plans to rein in their British investments, Toyota's decision to invest 598 million ecu in a car manufacturing plant in Valenciennes in northern France and expand capacity at Burnaston in the UK are reassuring signs that Japanese companies are not planning to wind down their Union-based business interests.

Significantly, despite the financial upheaval in the region, most European firms continue to express confidence in Asia.

The Swedish-Swiss electrical engineering giant Asea Brown Boveri (ABB) has announced an expansion in the company's Asian operations, arguing that cheaper currencies have made ABB's production facilities in the region more competitive.

German auto giant Daimler-Benz is convinced that Asia remains the "growth area of the future". Executives say that while sales will be down in the short term, there are no plans to pare down investments in the region. In fact, the company plans to increase its Asian business from 8% to 20-25% in ten to 15 years.

Bayer, the German pharmaceutical firm, is planning to spend more than 2 million ecu on capital expenditure and acquisitions in Asia Pacific over the next decade. The aim is to increase Asia's share of total group sales from 14% in 1996 to 25% by the year 2010.

Similar sentiments are expressed by other companies across Europe. Finland's Nokia insists that Asia's currency crisis will not diminish the region's appetite for state-of-the-art telecommunication equipment. France's Alcatel-Alsthom is equally confident that "whatever the situation, Asian countries will continue to need telecom investments". Dutch electronics company Philips is targeting Asia as a market and investment location in spite of the region's economic upheavals, with special focus on China, and Asian economies are still acting as a "magnet" for Danish firms.

Clearly, European multinationals which have invested billions of ecu in Asia over the last few years cannot shut up shop and move out at the first sign of economic trouble in the region. "These are not easy decisions to make. Companies can't just switch plans overnight," says Joanne Collins of Nomura International in London.

But sticking it out in Asia may also reflect good long-term planning. "European companies could turn the crisis to their advantage," says Masata Fujita, an economist at the Geneva-based United Nations Conference on Trade and Development (UNCTAD).

For instance, he says, a slow-down in Japanese firms' presence in Asia will "open up the field to European operations".

Having weathered the Mexican peso crisis of 1994, many European firms feel they can do the same in Asia. They also believe the macroeconomic reforms prompted by the currency turmoil will make Asian economies even more powerful in the long term.

"Corrective measures will only serve to strengthen the economies of south-east Asia by stabilising expectations and ultimately strengthening the financial institutions," argues Dr Ruth Taplin, head of the Centre for Japan and East Asian studies in London.

For many Europeans and other foreign investors, currency devaluations across the region have made Asia an even more attractive platform from which to export to the rest of the world. Those who were attracted to the region by lower production costs are now finding that with Asian currencies worth between 20 to 40% less, they have an even more competitive base from which to sell.

There are also bargains to be had. "Companies interested in buying fixed assets like land will find things are much cheaper," says UNCTAD's Fujita.

Not all countries are being treated equally, however. China, still sheltered from the region's currency storms, remains European investors' first choice, although they are worried about the slow reform of China's state-owned companies, huge bureaucracy and corruption.

At the same time, as land and labour costs start declining in the region, Asia's so-called tiger economies - Thailand, Malaysia and Indonesia for instance - are regaining their attraction as investment destinations compared to low-wage locations like Vietnam, Burma and Cambodia.

The outlook on trade is less optimistic. EU officials are adamant that since Union exports to Asia (excluding Japan) represent only 7% of overall exports and about 2.2% of EU gross domestic product, the drop in demand in Asia will only shave about 0.25% from European growth in 1998. The countdown to the euro is therefore not in danger.

But other concerns remain. Although Asian countries signed up to the World Trade Organisation agreement on liberalising financial services in December, there are fears that if the crisis persists, Asia's weakened economies may be tempted to erect protectionist barriers to safeguard domestic manufacturing and services sectors.

"Raising tariffs and other trade barriers is always a temptation in times of economic crisis," says an EU trade official. "But it is important for Asians to allow foreign exporters fair access to their markets."

He warns that "there could be political problems if European exporters feel their access is being limited by Asians while Asian countries are still exporting freely to Europe".

Trade policy decisions taken by the new South Korean government will be especially important.

European exporters of automobiles, spirits and luxury goods have long complained about a range of South Korean import restrictions and the long-running "frugality campaign" which Seoul claims is driven by civic-minded non-governmental groups worried about their nation's economic future. The recent financial upheavals have made South Koreans even more reluctant to spend scarce resources on foreign goods.

"The South Korean market has always been a difficult one," says a European auto industry executive. "The question we are asking now is: will it close even further?" If barriers do go up, European carmakers will probably not hesitate to ask the EU to take action in the WTO to prise open the market.

Trade tensions also appear inevitable as Asian economies, aided by devalued currencies which make their products cheaper, try to export their way out of the crisis. "We expect our exporters to be more aggressive and more competitive," says an ASEAN trade official. "It's going to be full steam ahead."

Japan's auto exports to the EU are already on the way up, rising by 26.2% in August 1997 compared to figures for the previous year. "Whenever the yen goes down, Japanese exports go up," says an auto analyst. The Korean Trade Association predicts exports could soar to 130 billion ecu in 1998, compared to 115 billion ecu in 1996.

The upsurge in Asian exports could even tempt Europe-based firms to demand anti-dumping actions against Asian exporting firms.

Anti-dumping is the "instrument of first choice" when firms in Europe feel threatened by foreign competitors, says Patrick Messerlin, of the Paris-based Institute of Political Studies.

It is also the one EU trade measure that Asians love to hate.

Asia's hope now is that, given the financial crisis, the European Commission and Union governments will think twice before imposing anti-dumping fines on Asian firms.

"If markets in Europe close up just when we need to export more to rebuild our economies, we will be in big trouble," warns an Asian diplomat. In an increasingly interdependent world, that could also mean economic trouble for Europe.

Major feature.