Commentary Type

Back to the Future: APEC Looks at Subregional Trade Agreements to Achieve Free Trade Goal

Speech given at the Pacific Basin Economic Council luncheon
Washington, DC


The origins of the Asia-Pacific Economic Cooperation (APEC) leaders' meetings and the work of the Eminent Persons Group (EPG) provide a perspective on where APEC stands today and what needs to be accomplished both in Brunei and Shanghai.

It is important to remember that APEC functions on two tracks. These tracks were captured in the summit declarations of the first two leaders' meetings in Seattle in 1993 and Bogor in 1994. The conclusion of the first summit, which President Clinton hosted, was "we want to put together a community of Asia-Pacific economies." I think this community building (the first of the two tracks) is happening. A large number of conferences, meetings, studies, networking private-sector groups, taskforces and the like are developing an extensive community across a range of functional topics in the Pacific region. APEC's trade facilitation agenda focuses on community building and promotes it across the governmental agenda. These are unspectacular topics that APEC deals with on a daily basis. I think, however, they are extremely important in developing that community over time and it is important to keep in mind that they are one of the two essential tracks of the APEC process.

The second track is characterized by the big-picture conclusion of the Bogor Declaration in 1994: to achieve free and open trade in the region by 2010 or 2020. This is trade policy-indeed economic relations-at the highest level and it was one of a series of summit spectaculars that came out of APEC for a number of years. Seattle in 1993 was spectacular for having happened; Bogor, for setting a free-trade goal; Osaka, for laying out the way to get there; Subic in 1996, for the Information Technology Agreement, in which APEC dramatically and effectively pushed for global liberalization.

The trade issue has been at the center of that series of developments and, rightly or wrongly, APEC has been characterized in the public mind by its big-picture conclusions, the work of the leaders, the innovations, and major achievements in the trade area. This characterization became enmeshed in another big area-the international financial crisis of 1997-98. APEC has been criticized for not doing much to help with the financial crisis. I think this is a bum rap and I will address this later.

My basic point is that the two tracks reinforce each other and, I would argue, are essential complements. If either one were to falter, the whole process would run the risk of erosion, atrophy, withering, and the very promising possibilities that are embodied in APEC would be lost.

I think we have to candidly observe now that APEC has indeed been eroding. In the last 3 or 4 years, the leaders' meetings have been unable to continue the pace of active liberalization on the trade front and to deal with the big issues in the region like the financial crisis, which are the components of the second track. At the last two summits, despite good efforts on the part of the organizers and continued work on track one (community building), I think it is fair to say that the big-picture initiatives have faltered. It is important to recognize this as we go into the next phase of meetings.

Why do I say that? Trade liberalization has been regarded as the focal point of APEC-this is how it got on the map in the first place and remained there for several years, but this is where it has faltered over the last few years. The APEC goal from Bogor-free and open trade in the region by 2010 and 2020-did not require much debate in the EPG when we recommended it nor in the business community where it was supported, not even in the leaders' meetings where it was adopted. There were some skirmishes about whether it should be comprehensive free trade or among only a couple of sectors; these battles were fought both at Bogor and Osaka and the naysayers were rejected. There was a clear conclusion to go for free trade, with no exceptions, in the region by the targeted date. So there was indeed widespread agreement on the goal of free trade in the region.

It has been extremely difficult, however, to implement. So far APEC has attempted three different strategies for achieving the Bogor goals. The first, enshrined in the Osaka action program and worked out in more detail in Manila the next year, were the individual action plans (IAPs). The IAPs required each country to declare how it intended to achieve its free trade commitment by 2010 or 2020. In practice, the IAPs have been almost a total failure. The individual countries have reported their previous year's activities, but they have had, to my knowledge, no forward-looking predicting value. So the first strategy-the IAPs-failed.

Within a couple of years, APEC moved to the second strategy: sectoral liberalization. It got off to a terrific start with the Information Technology Agreement in 1996, which was then shortly ratified by the Europeans and the others who could not say no at the WTO ministerial in Singapore. APEC was very successful in its first sectoral liberalization initiative. Emboldened and encouraged, and noting the failure of the IAPs, APEC then decided to go for sectoral liberalization as the strategy to achieve the Bogor targets. Hence EVSL- the early voluntary sectoral liberalization program-was born at Vancouver in 1997. Fifteen sectors were laid out, of which nine were prioritized. The goal was to achieve those over the next year for Kuala Lumpur in 1998. So far, so good.

But this second strategy also failed. The Japanese were unwilling to liberalize on a few key sectors. The United States-for reasons still unclear to me-did not push Japan very hard, as it traditionally does with these things. A few other countries hid behind the two countries and did not move ahead. The result was the failure of EVSL.

APEC then went to strategy three in Auckland: to bet the house on the WTO and suggest that APEC would achieve its trade goals embedded in broader global liberalization through the launch of a new round at the WTO. Fine words were said about how APEC would lead the world in that direction. Well, many of us were in Seattle in December 1999. We know what happened. It was a failure for many reasons. For one, APEC completely fell apart. Two of the biggest protagonists in the battle in Seattle were the United States and Japan, the two largest economies in APEC. APEC failed to contribute to a positive outcome in Seattle. In fact, divisions between the two biggest economies-the putative leaders in this area in APEC-contributed to the failure in Seattle. The result was a complete collapse of the third APEC strategy.

This then leaves one with several questions: What is next? Is there a fourth strategy? Is there an alternative? Should one try to go back to the earlier three strategies or is there something else?

In my view, a fourth strategy is in fact now developing on a de facto basis-what economists call "revealed preferences." I see the fourth strategy as the evolution of a very large number of subregional trade and financial arrangements in the area. This means that the APEC membership is working in smaller groups, setting their own timetables with selected partners, to move toward the broader goal. There now exists a set of such agreements at various stages-a few have actually been agreed upon, a few are being negotiated, some are being studied, and others are being contemplated. These agreements have emerged from Singapore-New Zealand to Japan-Singapore, Japan-Korea, Japan-Mexico, and Korea-Chile. The P5 (a proposed five-nation free-trade accord between Singapore, Australia, the United States, Chile, and New Zealand) was discussed with the United States one year ago and continues to surface.

There are also six subregional trade agreements within the Western Hemisphere. Some of these overlap with APEC. Like the North American Free Trade Agreement (NAFTA), some are, of course, in the APEC context a subregional agreement. Others include members of APEC and nonmembers like the Andean Pact. These free trade areas, incidentally, are part of a wider global movement of subregional and plurilateral trade agreements, which one could view as the de facto fourth step toward development of a strategy for achieving the Bogor targets.

It may not be known, unless you go back to the start of the APEC process 7 or 8 years ago, that using subregional agreements to move toward the desired outcome was in fact very actively considered at the start of the APEC process. It was espoused by such eminent persons as Lee Kwan Yew, a number of US government officials, and others. At the time it was called NAFTA extension. The idea-when NAFTA negotiations had just started and NAFTA had not yet become a dirty word in many circles-was that the United States and its NAFTA partners would offer membership in this subregional agreement to any APEC members willing to join. Over time, because of the competitive pressures not to be discriminated against in the US market, the NAFTA would eventually become a full Asia-Pacific-wide free trade agreement by a sequential series of countries tying onto NAFTA. Again, this was espoused by a number of key people around the region when APEC started. We discussed it at great length in our EPG, but it was rejected for a variety of reasons-trade discrimination, political divisiveness, and exporting of the North American model to Asia. Now I see "NAFTA extension" returning in a different guise-using subregional arrangements to move in the direction of broader liberalization.

Achieving these goals was obviously easier when the idea was to use the appeal of the American market to convince other countries to drop their trade barriers and join the parade. Paradoxically, the United States is now part of the problem. The reason, of course, is that the United States has had no trade negotiating authority to liberalize with any country for 6 years. The United States has been able to negotiate in a trade context only when a deal required it to make no changes in US laws, practices, or anything else. The United States has been forced to put forward unbalanced proposals. One of the reasons the WTO meetings in Seattle failed was because the United States went in with an agenda that conveyed only its interests. It was unable to talk about other countries' interests because it had no authority to deal with those topics. Likewise, in the EVSL in APEC-the United States only wanted the issues on which it has an export interest.

Hence the United States has been forced into a position of unbalanced proposals, which not surprisingly, have been rejected, because of the domestic stalemate at home over globalization and the future of trade policy and the like. The United States has been a huge hindrance to any of the trade liberalization initiatives including APEC. Conceptually, other countries are now frustrated by the lack of progress in the WTO and elsewhere and are looking to advance their trade agendas in the subregional contexts. It is now at least conceivable that a series of movements could provide a catalyst for broader APEC liberalization by pressuring a country excluded, including the United States, to get back in the game.

A Singapore-New Zealand free trade area is not going to worry too many Americans; neither is a Chile-Korea free trade area. A Japan-Korea free trade area might get some people to pay attention here. A Japan- Korea-China free trade area-their governments have asked think tanks in the three countries to jointly study its possibility-would turn heads here and undoubtedly convince the United States that the time has come to overcome domestic difficulties and get back in the game. We are not at that point yet. The progress is very uneven in the development of the subregional trade agreements. Many skeptics say that none of the big ones will go very far.

Doubts exist about whether this is going to mean much on the trade side. In response, I would note that there is enormous movement in East Asia on regional agreement in the financial area. I'll come back to that later in terms of the APEC agenda. It is worth noting, though, that Prime Minister Mahathir's East Asian Economic Group now exists and is becoming quite substantive. It is now called ASEAN+3. They have had three summits in a row. This has now become an annual process. They are developing a Network of Bilateral Swap Arrangements of between $60 billion and $100 billion to enable them to form an Asian Monetary Fund (AMF) and to defend the region the next time a crisis hits. It would help head off the next crisis by creating a preventive mechanism that would foresee and preempt future crises. This was born out of the East Asian unhappiness with the way the financial crisis was handled by the IMF, Washington, and the global consensus, and by a desire that next time around they not be in thrall to the rest of the world. I think this is a serious process. A blueprint for this network of bilateral swap arrangements has been worked out in great detail. I think there is no doubt it is going to happen and it will undoubtedly help galvanize trade agreements.

Questions remain, though: Who is in? How much catalytic effect will it have? I see a kind of revealed preference for the trade movement strategy at the moment. One concern is whether such an evolution is bound to be positive or not. It could be negative. It could create divisions across the Pacific and around the world. In economic terms, any preferential arrangement does create trade discrimination. On the financial side, an AMF could create competing conditionalities vis a vis the IMF. This is why there was such negative reaction to the Japanese proposal for AMF when it was first discussed in 1997.

On the political side, the idea of the subregional arrangements in Asia does conjure up some of the criticism of Mahathir's proposals of a decade ago. I remember Secretary of State Jim Baker saying very explicitly, "We want to avoid a dividing line down the middle of the Pacific." This indeed was one of the battle cries of the United States: to play an active role in APEC in its early days back in the Bush administration. The goal was to avoid political divisiveness that could be created by separate East Asian groupings.

Interestingly, the APEC leaders foresaw precisely this problem at Bogor. The Bogor Declaration set a goal of free trade by 2010. But later in that declaration the leaders raised the potential problem that subregional agreements could create-the issue of compatibility of the subregional agreements with the APEC-wide strategy that they had just enunciated. In fact, they asked the EPG to stay in business for another year. We were ready to declare victory, retire, and go home after Bogor, but they said, "No, stay another year and give us an analysis of how to make consistent the subregional and APEC-wide commitments that have now been reached." So we developed and released our last report in 1995 with proposals for what we called "open sub-regionalism." The proposals comprised a set of principles that would make sure subregional agreements are compatible with the broader seam.

For example, current agreements like AFTA-CER (the ASEAN Free Trade Agreement-Closer Economic Relations) or Japan-Singapore may be compatible with the WTO, but may not be compatible with APEC. What do I mean by that? The 75-page blueprint for the Japan-Singapore New Era Economic Agreement, which was released three weeks ago, consists of about 65 pages of very good information technology, high-tech, and new economy issues, which the Japanese quite seriously want to use to help promote internal reform in Japan. But the first ten pages deal with some very interesting old economy issues. For example, it states that Japan is unwilling to liberalize agricultural trade, even in a deal with Singapore where there is no agricultural trade. In other words, they do not accept the principle. They can argue, as this blueprint does, that that is perfectly compatible with the WTO. The WTO says you must substantially cover all trade. If there is no agricultural trade, you do not have to include it to meet the WTO test. But the APEC test, which was hammered out after much debate in both Bogor and Osaka, states that trade liberalization must be comprehensive-no sectors can be excluded. APEC was consciously being WTO+ and the Japan-Singapore agreement, if that study result becomes the actual outcome, would violate its precepts.

Moreover, the report says nothing about completion by 2010. That deadline is a commitment for countries in the APEC context. I say this not to criticize Japan and Singapore-though I hope in their negotiations, which were recently formally launched by their heads of state, they will rectify those elements-but to illustrate that two leaders in this new process of subregional agreements may be undercutting rather than supporting APEC. I say two leaders because we all know Singapore has been the country that has most actively pursued this notion of subregional agreements as a catalyst for liberalization. Indeed the Singapore-New Zealand bilateral is a textbook prototype-it meets all the APEC and WTO tests-and Japan is critical not only because it's the second biggest economy in APEC and the world but also because Japan has now for the first time in its history embraced the regional option. Japan, in other words, has undertaken a historic change in its trade policy, having relied totally on the multilateral process until now, by going heavily in the bilateral direction with Singapore, Mexico, Korea, and a number of other countries under consideration. For a variety of reasons Japan's move could be divisive and could move away from the broader goal rather than move forward. In the postwar period as a whole, regional initiatives toward trade liberalization have been supportive of the multilateral process. The two in fact have positively worked in tandem. The question is whether this will continue.

This leads me to my final point. I think what this suggests for APEC is extremely important, indeed critical to its future. What APEC must do at Brunei and Shanghai and for the next couple of years is provide a forum for intense consultation on the evolution of these regional and subregional arrangements-both trade and finance-particularly with an eye to how they relate to the broader APEC and global processes. If there is a failure to have close consultation, there is a serious risk, as I mentioned before, of raising new divisions, political suspicions, and political hostilities. For example, Japan and Singapore should be asked how their new agreement is compatible with APEC. AFTA and Australia-New Zealand (CER) should be asked the same question.

This should not only affect the countries in East Asia. The United States, Canada, and Mexico should be asked the same questions about NAFTA and, incidentally, the proposed Free Trade Area of the Americas: Are these compatible with APEC? The question of linkage between subregional and broader agreements needs to be put explicitly on the table. It should be the core of the trade liberalization agenda for APEC to start consultations with a goal of avoiding, at a minimum, conflict between the new subregionals and the broader context and, more positively, trying to ensure through open subregionalism that the subregionals do become positive catalysts for broader arrangements. Indeed one could imagine, after a couple of years of consultation, devising APEC principles for subregionalism, perhaps based on those we did in the EPG 5 years ago, but one could come up with others that have similar goals to ensure and indeed propel a positive interrelationship between the new approach and the broader objectives.

What I see occurring is indeed a fourth potential strategy. In a way it is back to the future because these ideas were discussed at the very beginning. They may now bear fruit if APEC perfects them. Discussions on the fourth potential strategy were started at the Darwin trade ministerial in June 2000. I understand there is an afternoon on the leaders' agenda in Brunei devoted to discussing the WTO and new regional arrangements. It seems to me the table is therefore set. I hope that APEC will do it. I think its future may lie in the balance.

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