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Shayne Heffernan looks at Asia's Economic New Year

While Asia remains a hot topic for the world investors, and country to country Asia reflects strong growth in all directions, a new Free Trade Deal in the Region is set to embark many nations on the road to new levels of growth. We at Ebeling Heffernan feel the importance of this FTA has been under estimated by many, so here is a look at the deal and he implications.

The emerging free trade agreement (NASDAQ:FTA) between China and the ten Southeast Asian countries that form ASEAN will no doubt serve as a gateway for the Asian community to further integrate and might give rise to a much broader, more Euro styled trading pact across the region.

The China-ASEAN free trade area covered a population of 1.9 billion and a combined gross domestic product close to 6 trillion U.S. dollars. It is the world's largest trading bloc in terms of population covered and the third largest in terms of trading volume.
"There is a lot of expectation of this FTA," said Jayant Menon, principal economist of ADB's Office of Regional Economic Integration in Manila. Xinhua interviewed Menon on the eve of the establishment of the China-ASEAN free trade area on Jan. 1, 2010.

China and the ASEAN have come a long way in the past eight years so expect no fireworks on the 1stof January, but this is an important step. China-ASEAN is one of the worlds largest trading blocs in terms of population and economic growth. The improved trade the FTA brings will increase cross border relations and bring about more and more inter-Asian trade.

"But this FTA can be seen as a stepping-stone towards a broader agreement, and eventually, hopefully, a multilateralized trading arrangement whereby the achievements are offered to non-members in a non-discriminate manner," Menon of the Asian Development bank told Xinhua.

The Asian Development Bank also said other regional economic powers such as Japan, South Korea and the United States are expected to join once this FTA expands. That step, although distant now, will bring about a new round of growth in the Asian nations.

Trade between China and ASEAN countries have picked up rapidly in the past decade. Official statistics indicated that trade between China and the ASEAN bloc expanded to a total worth of 231.1 billion U.S. dollars in 2008, from 19.5 billion U.S. dollars in 1995. Trade has especially doubled in the past four years and continues growing.

Agreements on the trade of goods and services and a pact to encourage inter-regional investment have been separately signed. The reduction of many duties has begun since 2005 and more than 7,000 trading items covered by the agreements will be tariff-free products by Jan. 1, 2010.

While the Free Trade Agreement is good, yet another deal that would see a free investment environment in Asia is yet another huge potential stimulus to an already booming region. China now is already a big investor in the region and there is a lot of room for allocation of investments in the region to facilitate the type of product fragmentation network trade that has already taken place.  The other set to be big winners here identified by Ebeling Heffernan are Thailand, The Philippines and Indonesia.

Gains from the FTA will not be in the short term future, rather the agreements are setting a base for a more developed Asian region over the next 5 to 10 years. Initially as with all such agreements there will be some economic pain to some. This will be offset by the long term great gains of the economies in Asia.

Gains will come in the long run and for instance a lot of farming communities could benefit by specializing in different commodities and doing two-way trade of commodities within agriculture. Ebeling Heffernan have noted such gains  in the mutually beneficial farm trade between China and Thailand covered by the free trade agreement.

While it may take many generations before an integrated Asia moving close to a European Union style economic union the process of a more unified Asia is underway.

An ADB study shows that 60 percent of the manufactured goods in the region eventually entered the Western market and China's role as an assembling hub for the region's goods has not changed. 

As ASEAN countries developed and as China gets richer, there is still enough room for the increase of regional demand to sustain some of the growth, and the surrounding economies to develop into better stronger economies.

Shayne Heffernan

Disclosure: Long Asia