APEC Should Pursue a Free Trade Area of the Asia Pacific

The APEC Business Advisory Council (ABAC) has proposed that the APEC Leaders at Santiago on November 20-21 "agree to further examine the feasibility and potential scope and features of a Free Trade Area of the Asia Pacific (FTAAP)." President Ricardo Lagos of Chile, the host of the APEC summit, has endorsed the concept.

I believe that APEC should actively pursue the FTAAP idea. It offers the best prospects of any available strategy for catalyzing a successful outcome of the Doha Round and thus revitalizing the World Trade Organization (WTO). By forging a new transpacific initiative, it can counter the very real risk of disintegration of the Asia-Pacific region that is evident in the progress of Asia-only cooperation on one side of the ocean and a Free Trade Area of the Americas on the other side. It is the best possible device to reenergize APEC's progress toward its own signature trade liberalization goals and thus those of APEC as an institution. It offers a unique win-win-win opportunity that should be seized, beginning at Santiago and then at Pusan a year from now.

APEC and World Trade

APEC has achieved important successes in a number of areas over its history of 15 years (including 10 years of annual summits). Its greatest ambitions and accomplishments lie in the realm of trade liberalization, however, and its public image will rise or fall on its success or failure in that domain.

APEC recorded a number of dramatic trade policy achievements during the mid-1990s:

• its initial summit at Seattle in 1993, with its call for free trade in the region, played a decisive role in convincing the European Union, after three years of stonewalling, to quickly agree to a successful conclusion of the Uruguay Round and creation of the WTO for fear of being discriminated against by a new Asia-Pacific grouping;

• its adoption in 1994 of the Bogor goals of "free and open trade and investment in the region" by a date certain represented the largest international trade commitment ever undertaken, successfully maintaining the pressure on the European Union and others to continue with multilateral liberalization;

• its agreement on the Information Technology Agreement (ITA) at Subic in 1996 paved the way for global liberalization of over $500 billion of annual trade in high-tech goods and services; and

• its agreement to pursue nine more sectors at Vancouver in 1997 preserved critical liberalizing momentum in the teeth of the Asian financial crisis.

Since 1998, however, APEC's trade liberalization initiatives have faltered badly. A review of the institution's history suggests that it has attempted four approaches to achieve the Bogor goals:

• Individual Action Plans (IAP), from 1995 forward, which turned out to be simply reports of national trade actions taken rather than blueprints of future liberalization;

• Early Voluntary Sectoral Liberalization (EVSL), which failed in 1998 due to Japanese intransigence in two sectors (and US failure to push Japan on them) after its promising start in 1996-97 as noted above;

• relying wholly on the WTO and multilateral liberalization, which failed spectacularly at Seattle in 1999 and again at Cancun in 2003 but has recouped to some degree (see below) at Doha in 2001 and Geneva in 2004; and

• adoption of bilateral and subregional preferential trade agreements (PTAs) to ap-proach the Bogor goals by modest steps (but with potentially much larger effects if ambitious PTAs like China-ASEAN, Japan-Korea, and especially an East Asian Free Trade Area were to eventuate).

At this point in time, EVSL is dead, and the IAPs are moribund. Hence APEC's de facto liberalization strategy rests on two "pillars:" the Doha Round in the WTO and the proliferation of PTAs around the region.

There are several major problems with this approach. The PTAs, of which 40 could be in place in the near future, are rapidly creating a "noodle bowl" of overlapping, inconsistent, and often low-quality agreements. They create large amounts of trade diversion and discrimina-tion within the Asia-Pacific region itself (as well as toward outsiders).

Moreover, the current approach threatens to again "draw a line down the middle of the Pacific." Especially if a Free Trade Area of the Americas and an East Asian Free Trade Area were to become reality, the result could be a bipolar Asia Pacific (and a tripolar global trading system). The United States would immediately lose at least $25 billion of annual exports from the discriminatory impact of an East Asian Free Trade Area, for example, and the geopolitical implications could be incalculably greater. APEC was created largely to avoid just such conflict in the late 1980s and early 1990s but has done little or nothing to head off its new, and potentially much more serious, manifestation.

A major new round of successful multilateral liberalization at the global level could mitigate this potential conflict to some extent. Unfortunately, the prospects that Doha will do so are highly uncertain. The Geneva agreement in July 2004 restarted the talks procedurally, but there is little more substantive agreement on them today than when they were launched three years ago. It would be extremely risky to count on the current Doha process to achieve substantial new liberalization in the Asia Pacific and to rescue the region and APEC from the prospect of further disintegration.

The FTAAP to the Rescue?

The only decisive way to restart the momentum of both APEC and global trade liberalization, with all their political and security as well as economic benefits, is to launch the FTAAP process at Santiago. An FTAAP would offer a device for amalgamating the existing PTAs and stopping their proliferation. It would supersede the two megaregionals, a Free Trade Area of the Americas and an East Asian Free Trade Area, halting the march toward a bipolar region and a tripolar world. It would resume the process of integration of the Asia Pacific. It would offer a concrete strategy for achieving the Bogor goals.

Some observers argue that a new initiative toward Asia-Pacific free trade would hurt, perhaps fatally, the global trading system and the WTO. To the contrary, the opposite result is much more likely. The APEC countries account for more than 60 percent of the world economy. Nonmembers, notably large ones like the European Union and key developing countries (including Brazil and India), could simply not afford to accept the discrimination that an FTAAP would imply for them. Hence they would have to "sue for peace" by insisting on a rapid and substantively ambitious conclusion to the Doha Round to (1) restore the primacy of the multilateral system, (2) restore the momentum of global rather than regional liberal-ization, and (3) minimize the discrimination they would suffer from an FTAAP. This would replicate the impact of APEC's liberalization initiatives in the mid-1990s when Sir Leon Brittan, EU chief trade negotiator at the time, repeatedly and publicly indicated that "the EU would not be left behind if APEC actually does what it says it intends to do."

Such an ambitious outcome for Doha would move APEC a considerable distance toward the Bogor goals. Indeed, the APEC members might then want to reconsider whether they needed to actually implement their plan to construct an FTAAP. It is clear, however, that launching the FTAAP process, via appointment of a "high-level task force to examine the FTAAP concept in more detail with a view to presenting a report to APEC leaders in 2005" as recommended by ABAC, is the most promising possible initiative toward renewing the vitality of both the global trading system and the Asia-Pacific region at this time. The Leaders should lead by endorsing the proposal at their meeting this weekend.