Approaches to APEC free trade
By Suhadi Mangkusuwondo
JAKARTA (JP): APEC Economic leaders will have their third consecutive meeting in Osaka next month.
Many businesspeople in this region and elsewhere are closely watching the preparations for the important meeting. The skeptics expect nothing substantial will come out of Osaka now that APEC has gone beyond the easy stage of declaring its long-term vision and goals and move into the decisive stage.
They have grave doubts about the ability of the diverse Asia- Pacific economies to agree on any common concrete program, particularly in such a sensitive area as trade liberalization.
Sympathetic observers, on the other hand, hope that in Osaka APEC will agree on substantive issues that will move the process of closer regional cooperation forward. They recognize that APEC has reached a critical point in its short history. Osaka will prove whether APEC is a viable proposition, able to play a leading role in preserving and strengthening the global trading system.
In Seattle in November 1993, the APEC Leaders adopted the APEC Vision of a community of Asia-Pacific economies based on the spirit of openness and partnership, and ensuring stability, security and prosperity for its peoples. The leaders envision trade continuing to expand within the region and the world, and goods, services, capital and investment to flow freely.
Last year in Bogor, Indonesia, the APEC leaders adopted the long-term goal of free and open trade and investment in the region. They agreed to achieve that goal no later than 2020 for the developing member economies, and no later than 2010 for the industrialized economies.
In Osaka this coming November, the leaders must decide how to achieve the goal of free trade and investment by the agreed dates. Experience shows that it isn't easy to agree on a blueprint or an action agenda for trade and investment liberalization. It took the Uruguay Round more than three years to agree on its negotiation agenda, which was launched in 1986 in Punta del Este. It took another seven years for the round to wind up the negotiations.
APEC has only had one year to produce a blueprint for action. Due credit must be given to the able and hard working Japanese officials who are responsible for ensuring that a draft action agenda and action plan will be ready by the time the ministers and leaders meet in Osaka.
The APEC action agenda will cover much more than just trade liberalization. It covers trade facilitation, and economic and technical cooperation. It may also cover macroeconomic and monetary policy cooperation .
The senior officials therefore face a formidable task. As the APEC Eminent Persons Group stated in their latest report, it would not be sufficient for Osaka to deal only with the complex issues of principles, procedures and modalities.
Osaka must also deal with substantive actions that can be immediately taken as the first installments towards realizing APEC's long-term goal.
To achieve its goal, APEC seems quite clear about what it does not want to do, but less clear about what it does want. It does not want to create a new inward-looking, protectionist economic bloc. It also does not want to create another regional preferential trading area, like the European Community or NAFTA.
APEC wants to strengthen the multilateral trading system. One way to do that is through open regional cooperation. However, it is not clear what is meant by open regionalism. Some people define open regionalism as applying all regional liberalizations to members and non-members on an Most Favored Nation (MFN) basis. But this is not likely to be acceptable to a number of member economies. They will insist on some reciprocity from non-members, particularly from the Europeans.
Others define open regionalism as liberalization among the members, accompanied by some lowering of barriers for non- members. In addition, members will have the option to multilateralize their liberalization to other countries on an MFN basis. But this implies that APEC should be prepared to enter into an agreement to set up a preferential free trade area in order to be consistent with existing GATT rules; something which it has so far tried to avoid.
In formulating APEC's action agenda the senior officials are considering two concurrent approaches to trade liberalization: concerted unilateral action and collective action. Presumably, collective action would apply mostly to trade and investment facilitation, while concerted unilateral action would be applied to the liberalization of tariffs and non-tariff measures. Other approaches to liberalization should also be considered:
a. Multilateral liberalization through the World Trade Organization. Although the prospect for starting a new round of multilateral trade negotiations under the WTO at present looks rather slim, APEC should keep this option open. Acceleration, deepening and widening of the Uruguay Round commitments is part of that wider multilateral effort.
b. Unilateral liberalization by individual members. This should be encouraged, by allowing them to credit their unilateral actions to their contribution to the concerted APEC action.
c. Sub-regional trade liberalization. Individual APEC members and existing sub-regional groupings in the region should be persuaded to extend their sub-regional trade liberalization to other members and non-members. An example of this is what has been done by Indonesia through its liberalization package of May 1995. Indonesia extended its ASEAN Free Trade Area commitment to lower tariffs to between zero and 5 percent by the year 2003 to APEC members not in ASEAN. The free trade agreement permits this since ASEAN's ultimate goal is to expand trade not only within ASEAN but with the rest of the world.
d. Sectoral liberalization. Comprehensive liberalization covering virtually all sectors and all industries may be delayed because a couple of sectors are considered sensitive by some members. Sectoral arrangements should therefore be considered to allow progress in other non-sensitive areas to move forward.
One single approach is not likely to be effective in achieving open and free trade in the region. Since each approach has strengths and limitations, a combination of different approaches may be necessary.
A willingness to try approaches that suit the region's diverse economies, from open economies to economies where state enterprises play a major role, is needed to push APEC ahead.
The highly structured, legalistic methods used in the negotiations establishing the European Community and the North American Free Trade Area may not suit predominantly Asian region. On the other hand, the informal and very loose structure preferred by many Asian countries may not be effective for reaching the desired goals at the desired pace. The challenge to APEC leaders is to find suitable ways to enable the diverse region to move convincingly forward towards its stated objectives.
APEC should not allow the whole process to be grounded because of unresolved "philosophical" questions, such as conditional versus unconditional MFN, and whether or which sectors or products are exempted from the liberalization package. As we know, the problems of agriculture, services, competition policy, are and will remain contentious. However, these issues should not be allowed to block progress in other areas of cooperation, such as trade and investment facilitation, development and technical cooperation, and cooperation in macroeconomic and monetary policy. In these areas there is plenty of scope for immediate forward movement. Leaders should agree on a substantial "down payment" in all these areas to maintain momentum and APEC's credibility.
The strength of the "contagion effect" of liberalization should not be underestimated. Once a country or group of countries start liberalizing, that in itself will create pressure on other countries or groups to follow for fear of losing their competitiveness and their market share.
Examples are easy to find. When APEC leaders agreed in Bogor to achieve free trade in the region by a certain date, Latin and North American countries were pushed toward agreeing to create the Free Trade Area of the Americas. APEC's resolve also affected ASEAN, which subsequently decided to move forward the date for the completion of its liberalization scheme from the year 2008 to 2003. A process of competitive liberalization can be observed.
APEC must use this essentially voluntary and spontaneous liberalization, not negotiated reciprocal liberalization (within APEC or regarding other countries), as the driving force for its long journey towards free trade and investment in the region.
The writer is with the Institute for Economics and Social Research, School of Economics, University of Indonesia and a member of the APEC Eminent Persons Group.
Window: The challenge to APEC leaders is to find suitable ways to enable the diverse region to move convincingly forward towards its stated objectives.