BEIJING (Reuters) - Why is China, population 1.3 billion, discussing a free trade deal with Iceland, population 300,000?

Why has the government of Laos, one of Asia’s poorest countries, seen the need to spend time and treasure setting up a Department of Bilateral Trade Negotiations?
If, as many experts say, rising interest in two-way trade deals is a function of waning confidence in further multilateral liberalization, then the World Trade Organization might as well give up hope of ever wrapping up its marathon Doha round of market-opening talks, now in its seventh year.
Proponents say bilateral pacts -- preferential trade agreements (PTAs) in the jargon -- build political support for free trade, making them a stepping stone to wider liberalization.
But critics see them rather as stumbling blocks that penalize lower-cost suppliers, who can no longer compete with the low tariffs granted to the signatories of a two-way deal, and drain energy away from the Doha negotiations.
“These PTAs are a real diversion in terms of time, resources and, above all, political capital. Governments have been paying lip service to the WTO while doing these deals more for political than commercial reasons,” said Razeen Sally, co-director of ECIPE, a Brussels think-tank.
“For East Asia in particular, which depends so much on multilateral rules because they are so plugged into the global economy, that is very short-sighted indeed,” he said.
Sally, author of a new book “Trade Policy, New Century”, said the rules of origin determining the applicability of preferential tariffs are so dense, and the money to be saved so marginal, that many multinational companies simply throw their hands up.
“A company with a very complicated supply chain in East Asia linked back to final markets in the EU or the U.S. with a lot of sourcing coming out of factories in China finds it just too complicated,” he said in a telephone interview. “So they just pay the tariff. In other words, the PTA doesn’t count.”
-------------------Mad dash for deals
Ninety percent of the tariff concessions available under the 10-member Association of Southeast Asian Nations’ free trade agreement go begging, according to Jayant Menon, an economist with the Asian Development Bank in Manila.
“In a sense it’s a good thing. It means that these bilateral and regional agreements are not really interfering too much with trade patterns,” Menon said.
“But even if no one uses them, there are still costs involved in the whole maintenance of these various agreements,” he added.
So if the gains are so small, why is Asia at the centre of a veritable explosion of free trade agreements?
By Menon’s tally, Asia-Pacific countries had signed 77 bilateral pacts as of January -- four times more than in 2000 -- with 65 more under negotiation and a further 44 proposed, a number that is increasing by the week.
A fear of being shut out by their traditional trading partners is one motivation for governments. Foreign policy considerations also loom large. Ministers view PTAs as a means of cementing political and economic links with favored partners. And of course there is the publicity a deal-signing brings.
Sometimes, they are thinly disguised rewards.
Iceland, for instance, was the first European country to designate China as a market economy, a status that the European Union -- to Beijing’s resentment -- refuses to bestow.
Likewise, Beijing signed a free trade deal in April with New Zealand, the first member of the Organization for Economic Co-operation and Development, a club of 30 industrial democracies, to recognize China as a market economy. It was also the first to sign a bilateral agreement for China’s 2001 accession to the WTO.
“China, like other big countries, focuses less on the economic side in FTA talks and more on the political benefits for its peaceful rise,” said Tian Feng with the Institute of World Economics and Politics, a government think-tank in Beijing.
-------------------Noodle bowl
Two-way negotiations are also tempting because they are child’s play compared with the game of multi-dimensional chess that is the Doha round involving all 152 WTO members.
“Bilateral deals are the easiest to do, and China is using them in a reasonable way to have some influence in shaping the world,” said Cheng Dawei with the Beijing World Trade Centre, another government-funded think-tank.
Asia’s economy is vibrant. It is hard to discern a fallout on trade and investment even if critics say the proliferation of two-way deals has created a noodle bowl of overlapping rules.
But a thriving multilateral trading system is one of those public goods that is taken for granted and risks withering on the vine if neglected. Protectionism is an ever-present danger.
Sally said governments had grown complacent because world growth has been strong over the past few years.
“Now, with the end of a global Goldilocks economy, we’re going to see more cracks exposed around the world as a result of a lack of reforms in the past five to 10 years, and that’ll also expose cracks in the multilateral rules for trade,” he said.