Approaches to APEC free trade

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.