VINACHEM

WHY sacrifice national or regionalgrowth for the sake of freer global trade?

This is a question the blog has beenasking itself since the breakthrough last week at the World TradeOrganisation (WTO) talks in Bali. This follows our earlier thoughts on how regional trading blocsmay become much more significant.

The so-called “Bali Package”involves “a speed up customs procedures that will make make trade easier,faster and cheaper and provide clarity, efficiency and transparency, reducebureaucracy and corruption, and use technological advances,” said the WTO, in astatement released after the meeting.

“It also has provisions on goods intransit, an issue particularly of interest to landlocked countries seeking totrade through ports in neighbouring countries.”

The initial response of some peoplein the chemicals industry has been very positive, as my colleague Nigel Daviswrites, in another of his excellent Insight articles.

For example, there is talk about howthe Bali Package could cut the annual tariff burden for the European chemicalsindustry by €2bn a year.

“Most of the world’s major chemicalcompanies rely heavily on exports and global trade. Cefic makes the key pointthat about 80% of the chemicals produced are used in the chemical industry forfurther processing,” wrote Nigel.

But the blog’s recent trips toSoutheast Asia have left it with the impression that some people in thisparticular region are deeply worried about the damage, rather than thebenefits, of more open global borders. In the chemicals industry, theseconcerns are heavily focused on the potential for a flood of low-cost commoditypetrochemicals imports from the US.

With all the focus on US capacityadditions, they also add that the Middle East should not be overlooked, as theregion will see the start-up of two new major cracker complexes over the nextfew years.

And then there is China. One of thefeelings we picked up was that countries in Southeast Asia, such as Thailand,are building closer trading links with China in the knowledge that cooperationand partnership is the way forward. To compete with China would be impossible,given the massive scale of its state-of-the-art industries and low tariffs thathave resulted from the ASEAN - China Free Trade Area.

Borders within ASEAN will becomeeven more open in 2015, when the ASEAN Economic Community is launched.

This thinking is supported by anarticle in yesterday’s Financial Times.

“Trucks are due to thunder fromWednesday over a vast new crossing on the Mekong River connected to highwayseither side that opens up north Thailand as a way station for goods headedbetween China and the 10-strong ASEAN group of nations mainly to the south andeast,” said the article.

“It is part of Bangkok’s broaderregional ambition to become the dominant link for trade between China andASEAN, where exports and imports surged more than six fold to $400bn last year,from $55bn in 2002, according to the Chinese data provider Wind Information.

“It is also meant to dovetail withthe easing of regional trade barriers, as ASEAN heads for the creation of aplanned economic community of more than 500m people by 2015.”

And so we think if that if the Balideals is fully ratified, this will not necessarily mean more open global borders.

Stronger regional trading blocs –such as that which is being formed within ASEAN and with China – might want toprotect their borders through increasingly taking advantage of antidumping andsafeguard measures. This might especially be the case if the global economyfalters, forcing the US to aggressively export more petrochemicals volumes thanit had anticipated.

Practical enforcement of the Baliaccord might also stumble.

It is one thing to import high-valuespeciality chemicals from the West that cannot be produced locally. The valueproposition of accepting large imports of largely commodity polymers that couldjust easily be made locally is something entirely different.

From the perspective of a regionsuch as Southeast Asia, which contains several developing countries, a strongmotive for creating a fairly well protected regional trading bloc might bepoverty alleviation.

The above chart illustrates the hugepotential here for alleviating poverty, which would lead to much-greaterconsumer spending.

One means of achieving this is byhaving local integrated industrial chains from local hydrocarbon reserves, torefining-petrochemicals and on to finished-goods manufacturing.

The construction phase of newrefining and petrochemicals plants creates a lot of direct jobs – and alsoindirect jobs via all the service providers.

New refining-petrochemical complexeswould then become the heart of much wider ongoing economic development throughall the downstream industries that would be guaranteed secure local supplies ofraw materials – and all the restaurants and shops, etc, which would serve allof this manufacturing.

Plus, by developing local skills youare upgrading the capabilities of local people, far beyond just a few customsofficials who can handle increased import flows. People with betterqualifications and higher skill levels earn more money and, thus, spend moremoney – adding to the economic multiplier effect. Why outsource these skills topipe fitters, welders and chemicals engineers in the US?

This seems to be some of thethinking behind several of the proposed petrochemicals investments in SoutheastAsia that, on paper, seem to make less economic sense than importing from theUS and the Middle East.

It is also the thinking behindefforts to improve infrastructure links, as we have described above.