Liberalization will affect APEC members differently

Liberalization will affect APEC members differently

Contrary to what advocates of trade liberalization say, some APEC members will benefit more from free trade than others, says Martin Khor in this Inter Press Service analysis.

KUALA LUMPUR: The proponents of "free trade" and "investment liberalization" often imply that everyone gains and no one loses from the process.

However, a recent study shows that if Asia-Pacific Economic Cooperation (APEC) countries were to liberalize according to a set schedule, a few countries would greatly benefit, but others, including those in ASEAN, would suffer.

"Free Trade" is being promoted so vociferously by some influential quarters -- mainly in industrial countries -- and through the international media that many people almost automatically think it is a good thing for all nations practicing it. But it is logical that opening borders to allow easy entry of imports can create problems for a country unless it can also raise exports to other countries at the same rate or faster.

Strong countries with big companies usually take advantage of trade liberalization while weaker countries could well end up losing. It is just not true that everyone gains from free trade.

This point has important policy implications, including for policy makers of countries that are asked to liberalize their economies in line with multilateral organizations such as the World Trade Organization (WTO) or with regional groupings such as APEC.

Some developing Asian countries in APEC have resisted the strong moves by the United States and Australia to convert the organization into a formal and legally binding free trade agreement.

At the Osaka Summit meeting of APEC last November, they insisted that economic liberalization by APEC countries should be on a voluntary basis, and not be compulsorily dictated by fixed uniform schedules and a binding time-table. There is merit in the reluctance to agree at this stage to a formal trade agreement.

APEC has big, medium and small countries. Some are already economically advanced (United States, Australia, Japan). Others are almost as developed (South Korea, Taiwan, Singapore). Some are middle-income and fast growing (Malaysia, Indonesia, Thailand, China), others are still grappling with the more basic issues of getting growth going.

It is by no means clear that all parties would gain or gain equitably from liberalization. It is also not clear in what way different countries would be effected by liberalization in terms of growth, employment or trade performance.

A recent study conducted by Yoshisha Inada of Konan University in Japan shows what would happen if APEC countries follow an agreed regime of trade and investment liberalization.

Inada's paper, The Economic Impact of Regional Integration with Special Reference to APEC, was distributed at a recent Conference on East Asian Development organized by the United Nations in Kuala Lumpur.

The paper compares growth rates and trade performance of different groups of countries under three different scenarios:

* Scenario 1 projects future growth and trade movements based on current trends without an APEC agreement. This is the "baseline" position.

* Scenario 2 assumes that APEC countries have agreed on tariff reductions between 1995 and 2003 at the following rates: U.S. and Japan by 4.0 percent; Korea and Taiwan by 4.0 to 8.0 percent; and China and five ASEAN countries by 4.0 to 12 percent.

* Scenario 3 assumes the above tariff reductions plus an agreed deregulation of foreign investment, resulting in increased investment inflow to China and the five member-countries of the Association of Southeast Asian Nations.

The paper shows that liberalization has different effects on the economic growth rates (measured by the Gross Domestic Product) of different groups of APEC countries.

APEC countries as a whole would gains as their overall average growth in the 1995-2003 period would rise from 2.7 percent in Scenario 1 to 2.9 percent in Scenario 2 and 3.0 percent in Scenario 3. But the benefits and cots are unevenly shared.

Among the losers are ASEAN countries. Scenario 1 has their average growth at 7.6 percent whereas the rate drops to 7.4 percent under Scenario 2 and 7.5 percent in Scenario 3. The gainers are Japan (growth rate up from the baseline 2.8 percent to 3.2 percent in Scenarios 2 and 3) and Korea (up from 6.3 percent 6.7 in Scenario 2 and 7.3 percent in Scenario 3). The effect on the United States is neutral, its growth remaining at 2.3 percent in all situations.

As Inada's paper puts it: "The merits of integration are not equal in the member countries. The tariff rate reductions encourage APEC member countries' intra-trade flow and APEC as a whole gets merits from it."

But member countries and regions do not always get merits equally. Even more interesting in Inada's paper the estimates for what would happen to the trade balance.

Under Scenario 1, the ASEAN 5 would have had a trade surplus of US$ 48 billion in the year 2003. But under Scenario 2 this surplus would be reduced to $27 billion. And in Scenario 3 the surplus would be cut to only $9.0 billion.

In other words, trade and investment liberalization under APEC auspices would have a $39 billion negative effect on the trade balance of ASEAN in the year 2003, compared to the balance if there were no trade and investment liberalization. These of course are only projections and cannot be taken as firm data. In any projection, one can get varying results under different assumptions.

The study shows the real possibility that some countries can gain and others can lose under conditions of trade and investment liberalization. There may be disagreements over the accuracy of the assumptions and the predictions of conditions and thus of the estimates. This is normal in the art of economic forecasting.

-- IPS