The difficulties of trading with Asian dragons and tigers

No one expects negotiating a free trade agreement with China to be easy and the type of free trade agreement that both sides want is likely to be very different.

China is expected to pursue an FTA which is traditional in the sense that it deals with cutting tariffs and quotas on manufactured goods.

The authorities in Beijing are likely to demand the recasting of the EU’s trade defence mechanisms, making it easier for Chinese manufactured goods to reach European shops. But because 20% of China exports already go to the EU and European manufacturing is already struggling to compete, this is a sensitive issue.

On the other hand the EU is likely to call for China to observe international standards on intellectual property and to open its markets to European service providers and investors, something which may conflict with the government’s long-standing China-first trade polices.

On a political level, talks are likely to be equally fraught. Officials expect China to use any FTA negotiations as a means of pressing the EU to lift its arms embargo against China, an issue that remains deeply controversial in many European capitals and which the US is likely to oppose strongly.

Asia’s other emerging giant India is also like to be a target for an EU trade deal. Despite calls for a free trade area to be established quickly and claims that the two are "natural trading partners" bilateral trade remains relatively weak.

In 2004 total trade between the EU and India was worth €33 billion, a sixth the size of trade with China.

The UK - which of all the EU member states has the closest relationship with India - sends less than 1% of its overseas investment to India.

Despite this, India’s business community appears keen to deepen ties. In a recent survey of the top 100 Indian CEOs, 80% said that progress towards an EU-India free trade agreement should be speeded up.

But protectionist sentiments in India and the EU’s limited room for manoeuvre on lowering agricultural tariffs could mean that any deal is limited to investment.

China and India are not the EU’s sole targets in Asia. Preliminary talks have already taken place between the EU and South Korea, where the EU accounts for one third of foreign investment.

Like other countries in south and east Asia, South Korea has watched China’s economic rise drain some of its foreign direct investment away and officials hope they may be willing to develop ties further.

The political terrain may also favour the EU. A long-planned South Korea-US free trade area is facing strong political opposition from a public in which anti-Americanism is a recurring theme.

Up against this opposition, South Korea’s political leaders increasingly appear to be focusing on the free trade area with the EU.

Perhaps one of the more difficult FTAs which the EU would like to agree is with the Association of South East Asian Nations, or ASEAN. The politics of negotiating with a bloc of ten members would be difficult enough in itself but ASEAN’s composition makes that task even more difficult. Singapore’s diplomats who have crisscrossed the world in the last five years trying to secure an FTA with the EU, feel that they are at the head of the queue and the Singaporean government is now insisting that a bilateral deal should come before any agreement between the EU and ASEAN.

The recent coup in Thailand, one of ASEAN’s strongest economies, also makes that deal all the more difficult to negotiate, at least until the formation of a democratic government.

But it is perhaps Myanmar that will pose the most problems for the EU. Given the country’s human rights record the EU is likely to face intense criticism if Burma is included in any free trade deal. On the other hand some ASEAN members are likely to insist that Myanmar is included.

No one expects negotiating a free trade agreement with China to be easy and the type of free trade agreement that both sides want is likely to be very different.