ANALYSIS-Asia's infatuation with two-way trade saps WTO

By Alan Wheatley, China Economics Editor

BEIJING, June 23 (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 liberalisation, then the World Trade Organisation 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 liberalisation.

But critics see them rather as stumbling blocks that penalise 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.