Liberalization takes step toward free trade

Liberalization takes step toward free trade

By Hadi Soesastro

JAKARTA (JP): Trade liberalization, trade facilitation and
development cooperation can be viewed as the three main
components of the Asia Pacific Economic Cooperation (APEC) forum.

They are essential to achieving the APEC vision of free and
open trade and investment in the region. The APEC Eminent Persons
Group (EPG) in their second report, submitted to President
Soeharto at the end of August 1994, proposed that this goal be
achieved by the year 2020. In mid October, 1994, another advisory
group of APEC, the Pacific Business Forum (PBF), also submitted
its report to President Soeharto. The PBF, representing the views
of the business community, supports the APEC vision and has
proposed an earlier date for its realization, namely by the year
2010.

It is almost certain the APEC vision of free and open trade
and investment in the region will be endorsed by APEC ministers
and leaders in their coming meeting in Indonesia in November
1994. Although supporting trade liberalization, the Chinese have
made known that they are opposed to the setting of a binding
timetable. APEC ministers or leaders may engage themselves in a
discussion to reach some consensus on this issue, but this should
not detract them from the more fundamental problem of how to
achieve free and open trade in the region. Perhaps they will
leave this to further deliberations, and certainly they are well
advised to do so.

It is certain, however, that the question of the different
pace for the developing countries will be addressed, since its
importance has been indicated by President Soeharto. This concern
has been well taken care of in both the EPG report and the PBF
report. The EPG suggested the developed members of APEC complete
their liberalization by the year 2010, the newly industrializing
countries by the year 2015, and the developing countries by the
year 2020. The PBF proposed that the developed countries
completed their liberalization by the year 2002 and the
developing countries by no later than the year 2010.

There are other important principles to achieving free trade
in the region that may or may not be settled at the meetings in
Indonesia. In its report, the PBF suggested a framework for free
trade and investment liberalization that include such measures as
the full implementation of the existing Uruguay Round
commitments, further unilateral liberalization, liberalization
within the existing sub-regional free trade areas in APEC, and an
APEC-wide negotiation covering all goods and services,

It may be useful to briefly examine the various possible ways
to achieving the APEC vision. To begin with, it may be necessary
to define what constitutes free and open trade in the region. Is
it realistic to expect that tariffs and non-tariff barriers (NTB)
be totally eliminated?

If Singapore is taken as an example of a country that
virtually practices free and open trade, the following criteria
can be offered: (a) that 99 percent of all tariff lines under the
nine-digit Harmonized System (HS) level be bound at a zero rate;
(b) that the average Most Favored Nation (MFN) tariff rate not
exceeds 0.5 percent and that import tariffs be imposed only for
health, social and environmental purposes; (c) that NTBs (to be
permitted only in the form of import bans) be applied only for
reasons of national and public security as well as environmental
protection; (d) that the services sectors be fully opened with an
allowance for the imposition of very limited restrictions for
reasons as mentioned above. It should be noted that Singapore has
reached this degree of openness through unilateral
liberalization.

The immediate question is whether APEC should from the outset
agree on a set of criteria of free and open trade in the region
and how this can be negotiated. The answer may depend on the
modality for achieving free and open trade in the region that
will be agreed upon by APEC. The following is a brief examination
of the various options.

The first option (Option I) amounts to an APEC support for
continued unilateral liberalization by its members. Consultation,
cooperation and trade facilitation efforts among APEC members
could help ensure that they fulfill their Uruguay Round
liberalization commitments. APEC could then encourage its members
to accelerate implementation of their commitments and undertake
further liberalization beyond their Uruguay Round commitments.
Here, peer pressure will be the main instrument. Perhaps this
approach will be accompanied by some commonly agreed progressive
liberalization schedule which functions as a guidance for
members' unilateral liberalization efforts. This option can be
seen as the "softest" approach towards free and open trade in the
region.

The second option (Option II) is a modality for regional trade
liberalization which has been originally conceived of by the
proponents of the concept of "open regionalism". Under this
modality, APEC initiates concerted reduction of barriers and
extends this regional liberalization to non-members on an
unconditional MFN basis. This approach can be implemented on a
sector-by-sector basis. The main issue here is on the selection
of sectors to be included in this regional initiative.

The third option (Option III) is that of a Free Trade Area
(FTA) in which APEC members negotiate and implement regional
liberalization under Article 24 of the GATT. It was made clear,
at the time of its establishment in 1989, that APEC will not be
transformed into a trading bloc and therefore, this option cannot
be considered unless APEC leaders return to the drawing board and
to come to a new consensus.

The EPG has offered an approach towards free and open trade in
the region (EPG Option) which includes Option I and some mixture
of Option II and III. The EPG proposal strongly supports further
unilateral liberalization. In addition, it proposes that members
undertake regional liberalization--called APEC liberalization --
that can be extended to non-members only on a mutually reciprocal
basis. It further suggests that individual members can
unilaterally extend its APEC liberalization to non-members on an
unconditional MFN basis.

This proposal needs some further clarification: If this APEC
liberalization is undertaken under GATT Article 24, what
distinguishes it from the FTA approach? If, however, this APEC
liberalization is not undertaken under GATT Article 24, isn't
GATT illegal?

As referred to earlier, the EPG proposal also suggests a
three-way differentiation in the timetables for liberalization.
What was initially somewhat unclear was, whether during the
process, discrimination will be applied amongst APEC members.
This is so because the Report recommends that "flexible
implementation" be adopted as a principle in carrying out APEC's
liberalization, meaning that members who are liberalizing at a
pace slower than the general liberalization schedule will not
receive reciprocal benefits. If, indeed, this is applied to the
APEC liberalization, the region may end up with a scheme that
contains a three-stage FTA. Fred Bergsten, the EPG Chairman,
stated for the record that the EPG proposal for liberalization
among APEC members is on an MFN basis (non-discrimination).

There certainly are other options. In the final analysis,
however, APEC leaders are confronted with the following
fundamental questions:
(1) is the region only ready to accept Option I or is it
willing to go beyond this and undertake negotiated
regional trade liberalization?
(2) should regional trade liberalization be extended to non-
members on an unconditional (Option II) or unconditional
MFN basis (Option III and the EPG Option)?

Unless these questions are unambiguously answered it will not
be easy to agree on the modality to achieving APEC vision of free
and open trade in the region. It seems there is, as yet, no
consensus within APEC on those issues. Even within ASEAN there is
a wide divergence of views. Indonesian Minister Moerdiono
recently explained to President Soeharto that free trade in the
region means free trade not only among APEC members but free
trade that would benefit all countries in the world. This could
mean that APEC liberalization should be extended to non-members
on an unconditional MFN basis.

Malaysia's Prime Minister Mahathir Mohamad also strongly
opposes the creation of a trade bloc. However, Singapore's Prime
Minister Goh Chok Tong is of the view that APEC liberalization
should be extended to non-members only on a reciprocity
(conditional MFN) basis.

In view of these different ideas, it is not surprising that in
their recent meeting President Fidel Ramos of the Philippines and
Thailand's Prime Minister Chuan Leekpai proposed that an informal
meeting of ASEAN government heads be held prior to the APEC
leaders meeting to formulate ASEAN's common position on APEC's
future development. This is certainly in ASEAN's own interest but
it will also be critical to APEC's success.

The writer is executive director of the Jakarta-based Center
for Strategic and International Studies.