APEC faces risk from WTO failure

By Tony Hartono

JAKARTA (JP): Integrating liberalization and economic and technical cooperation objectives into a balanced agenda would sustain the momentum of the Asia Pacific Economic Cooperation forum in Brunei, because it would meet the needs of both its developed and developing member countries.

The 21 APEC leaders will meet in Brunei from Nov. 15 to Nov. 16, only this time it will be different. This time the forum gathers in the shadow of the failed attempt to launch a new global trade round at last year's World Trade Organization meeting in Seattle.

Amid this inauspicious atmosphere there are grave doubts about the APEC summit's ability to achieve anything.

Before the 1996 Manila Declaration, APEC had achieved significant progress. It set a timetable for liberalization by 2010 and 2020, and developed an action plan to meet the target dates.

The progress continued until APEC had trouble implementing the action plan involving tariff reductions on 15 products.

New Zealand Prime Minister Helen Clark has described APEC as out of steam and unlikely to make much progress at the Brunei meeting. She has good reason to say this, particularly because of disillusionment with the U.S. and the internal conflict within APEC.

These two issues must therefore be carefully addressed if APEC's momentum in Brunei is to be sustained.

Disillusionment with the U.S. stems from the indirect impact of the 1985 Plaza Accord on the Asian economic crisis from 1997 to 1999. Under the accord, the U.S. appealed to Japan to allow the yen to appreciate with a view toward eliminating its trade deficit with Japan.

However, the accord did not reduce the U.S. trade deficit, but rather had a hand in the depreciation of other Asian currencies.

The strength of the yen caused a rise in Japan's production costs in terms of U.S. dollars, thus making Japanese exports less competitive. This, in turn, forced Japan to relocate its industries, particularly labor-intensive ones, to other Asian countries such as Indonesia, Thailand, Malaysia and the Philippine, where labor costs were cheaper.

This relocation greatly stimulated economic growth in these countries, leading to the so-called "Asian miracle". But the host countries became addicted to the high rates of growth and sought more overseas funds, until their currencies fell as overseas investors withdrew.

In the aftermath of the crisis, the feeling has emerged that the U.S. has been less supportive than it might have been. Instead of establishing an Exchange Stabilization Fund as it did for Mexico in 1995, the U.S. left the International Monetary Fund (IMF) to deal with the crisis, perhaps seeing it as an opportunity to liberalize the Asian economies.

As it has done to debtor countries elsewhere, the IMF has taken dramatic steps by adopting tight fiscal and monetary policies, combined with a freeing up of Asian economies. Although the IMF has succeeded in stabilizing Asian currencies, the deflationary nature of its remedies has added to massive unemployment, rising global poverty and other social costs.

If this current trend continues, says UN Secretary-General Kofi Annan, global poverty will not decline until 2015. Protesters campaigning against poverty and globalization during the IMF/World Bank meetings in Prague last month strongly criticized the IMF, accusing it of increasing global poverty. They want IMF reform and separate roles for the IMF and the World Bank.

In Bangkok in July, a meeting between the member states of ASEAN and Japan, China and South Korea established a Currency Swap Agreement (CSA). Many international commentators mistakenly saw the CSA as a latent trade or currency threat to the rest of the Asia Pacific. Like the ESF, the CSA is not a trade or currency bloc.

It was created partly to prevent another Asian crisis as a result of external disturbances and partly to alleviate the impacts of the IMF's deflationary measures on worldwide social costs. The APEC senior officials and ministers' meetings should take into account this issue when shaping the agenda for the eighth leaders' meeting in Brunei.

The conflict within APEC has arisen because of the failure of Japan, the U.S. and other APEC members to agree on various trade issues at the WTO meeting in Seattle last year.

Japan and Korea, for the sake of their food security, were reluctant to reduce their subsidies on farm products, while Australia, New Zealand and Thailand demanded just the opposite, arguing export subsidies created unfair competition.

Except for Singapore and Brunei, other developing APEC economies, including China, have felt that liberalization has gone too fast, resulting in a widening income gap.

They say environmental and labor standards have been used as disguised barriers to block their exports to rich markets.

The U.S., meanwhile, protected its steel industry by refusing to change its antidumping policy and imposed tariffs on New Zealand and Australian lamb to reduce its large trade deficits with the countries.

The APEC trade ministers' meeting in Darwin earlier this year considered eliminating the internal conflict as a precondition for relaunching the next round of WTO trade talks. This could be done by treating APEC's pillars of the Trade Investment Liberalization Facilitation, known as "liberalization", and the Economic and Technical Cooperation, known as "ecotech", in an integrated manner rather than as separate processes.

However, a perception has emerged that developed APEC members have focused heavily on the "liberalization", accusing ecotech champions of blurring the free trade goal. Some ecotech projects in developing APEC economies, such as human resources development, poverty reduction and development of small and medium enterprises were put on hold, while liberalization projects such as standard and customs procedures have gained a high priority.

Integrating liberalization and ecotech objectives into a balanced agenda will sustain APEC's momentum in Brunei, because it meets the needs of both developed and developing APEC member countries.

However, floating the balanced agenda idea is challenging for small APEC member countries like Brunei, the chairman of APEC this year. Yet it is essential, not only to realize trade liberalization in the Asia-Pacific region, but also to reduce poverty, unemployment and other social evils.

Dr. Tony Hartono is a former senior economic researcher with the ASEAN Secretariat in Jakarta and is currently employed by The Open University, Department of Economics, Wellington, New Zealand.