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.