Region sees waning economic interdependence

Hadi Soesastro

The Asia-Pacific region enters the year 2004 with a great deal of confusion about the direction of regional economic cooperation. Economic interdependence was one of the main rationales for organizing the region. It was the basis upon which an Asia-Pacific community was to be developed. The idea of regional community building based on economic cooperation led to the creation of APEC (Asia Pacific Economic Cooperation) in 1989.

East Asia recognized the importance of having the US in APEC. The U.S. was still the most important economic power. It was an important engine for the Asia-Pacific economy. But, equally important was the realization on the part of East Asians that they remained strategically dependent on the U.S. East Asia too, was very serious about Asia-Pacific community building.

There was the belief that the kind of economic interdependence that has emerged within East Asia and between East Asia and North America, the US in particular, was beneficial to the regional economies. However, economic interdependence needed to be managed. Economic interdependence created new economic opportunities, but it also could become a source of friction. The developing countries saw that they could benefit from economic interdependence if they could fully participate in a "catching-up" process and a dynamic development in regional and global division of labor.

The ASEAN economies opted for a strategy of economic interdependence, which was logically extended to a strategy of globalization. Together, with other Asia-Pacific economies, they embarked on efforts to achieve "free and open trade and investment in the region" by 2010 for the developed economies and 2020 for the developing economies. In addition, they made it clear that their fundamental interest in their trade agenda was to strengthen the WTO and the integrity of the multilateral trading system. These were the essence of "open regionalism" that the region was promoting.

The breakdown of the WTO ministerial conferences in Seattle in 1999 and again in Cancun in 2003 highlighted the strained relations among WTO members. Trade tensions between China and the US have reached a dangerous level and need careful management by both sides. The multilateral trading system is also in great danger. The APEC economies were not in the position to rescue the Cancun meeting, and in their Summit in Thailand last October they failed to craft a strong determination to restart the Doha Development Agenda (DDA).

Geo-economics would have predicted that the Asia-Pacific region would have seized the opportunity to lead in the efforts to uphold the integrity of the WTO and the multilateral trading system, because the region's economic well-being rests on an open global trading system. It appears that economic interdependence no longer provides a strong rationale for the region to organize itself and to pursue global objectives. In the final analysis, economic interdependence is as much as matter of perception as it is a fact of life.

The changed environment

The world trade situation today is characterized by trade policy initiatives that are being pursued at the global, regional and bilateral levels at the same time. Many governments have adopted a policy of moving on multiple fronts. This is best exemplified by the U.S. strategy of "competitive liberalization", in which global, regional and bilateral trade negotiations are seen as complementing and reinforcing each other. U.S. Trade Representative Robert Zoellick called this the era of "free trade on the offensive". A recent assessment by The Economist concluded that this US policy has not been successful. Cancun ended in failure. The FTAA (Free Trade Area of the Americas) is being watered down. U.S. bilateral FTAs have no economic significance for the U.S.

Economist Fred Bergsten is of the view that the U.S. remains "the pivotal operator" in the global trading arena. Through its regional and bilateral trade deals the US intends to put pressure on non-members of individual trade agreements either to join the group itself or to conclude broader agreements. This policy is mainly, but not exclusively, directed towards the European Union. It is the view of the U.S. that Europe badly needs outside pressure to implement internal reforms, especially in agriculture, and that such outside pressure can come primarily from the US. The US could use its bilateral trade deals to reward members of the Coalition-of-the-willing and penalize, or even punish, members of the "coalition of the unwilling". A suggestion has been made that the U.S. was ready to sign the U.S.-Singapore bilateral FTA but delayed the signing of the U.S.-Chile bilateral FTA to demonstrate the use of such trade deals as an instrument of its foreign policy. The use of bilateral FTAs as an instrument to promote global free trade can have political implications due to the selectivity in which such instruments can be used.

There are developing countries that can readily take part in bilateral, regional and global trade liberalization efforts, but a larger number do not have the capacity to do so. This was perhaps recognized in designing the Doha Development Agenda (DDA) as reflected in the inclusion of technical cooperation and capacity building as well as the reaffirmation of the special and differential (S&D) treatment for developing countries in the WTO. There has been a concern all along that the DDA would not deliver on its development promise because of its over-ambitious and far- reaching agenda. This was partly proven right by the failure of the Cancun meeting. Some have argued that many of the concerns of the developing members cannot simply be addressed through S&D treatment. It has also been argued that the WTO may not have a comparative advantage in technical cooperation and capacity building.

A role for the region?

At the Summit in Los Cabos in 2002, APEC leaders did reaffirm their strong support for the multilateral trading system. To restart the DDA, APEC's agenda must be restructured. APEC also needs to address the issue of creeping protectionism that is evident in many regional economies. It should also monitor the formation of FTAs and RTAs (regional trading arrangements) in the region as these could undermine APEC's trade agenda.

WTO members had experienced great difficulty in negotiating the DDA. A key issue remains agriculture. The U.S. and the Cairns Group are, on one side, demanding deeper cuts in agricultural support and tariffs, which are opposed by Europe and Japan. For their part, Europe and Japan have been pressing on with what have been termed multi-functionality and non-trade measures. APEC members have diverse interests with regard to agricultural liberalization. It should be noted, however, that while agriculture is a sensitive issue in several East Asian economies, none have relied on export subsidies to protect the sector. This provides a common ground for APEC to form an effective coalition to work towards the elimination of export subsidies, which is a major source of disruption to international trade in agricultural products.

Another set of problems are the so-called "Singapore issues", namely trade and investment, trade and competition policy, transparency in government procurement and trade facilitation. The U.S., and in particular the EU, have been pressing for an outcome on these new issues, but most developing countries are opposed to their inclusion in the negotiations.

The region might have been too preoccupied with initiatives to form bilateral and sub-regional FTAs. Bilateral and sub-regional FTAs are being promoted on the assumption that they will produce a kind of "competitive liberalization". It is also proposed that these separate agreements could become "building blocks" towards regional and ultimately global free and open trade.

FTAs in East Asia are essentially politically driven. The Japan-Korea FTA proposal was meant to cement a political relationship with significant improvements in the late 1990s. The Japan-Singapore agreement, signed in January 2002, can be regarded as politically driven as well. In the context of Southeast Asia's development post-crisis, Singapore sees the need to differentiate itself from the rest and to remain firmly on the radar screen of its major trading partners by forming bilateral FTAs. The deal with New Zealand, which was a first for Singapore, provided a training ground for Singapore. Japan was next, and the negotiations with Singapore provided a suitable training ground for Japan as Singapore has virtually no agricultural sector. One main purpose for Japan is to gradually erode the domestic resistance to agricultural liberalization through a series of FTA commitments. However, this erosion appears as if it will be extremely slow.

Singapore's FTAs with Australia and the U.S. are mainly about services. The FTAs will accord substantial market access across each other's entire services sectors, subject to a "negative list". The U.S. side does not expect any significant economic effects from the agreement with Singapore because of the relative small size of Singapore. This agreement has been advertised as a "high quality" agreement. In terms of U.S. security interests, the FTA would add a formal economic link to the security relationship with Singapore, and to engage the U.S. with the region as a whole.

ASEAN needs to formulate a strategy to involve FTAs as a group, like in the ASEAN-China agreement, signed in November 2002. The agreement explicitly aimed at the establishment of an ASEAN-China FTA within 10 years. It is the first agreement for ASEAN as a group as it is for China. This agreement is essentially politically motivated.

Implementing the agreement will be a major challenge for ASEAN and China. The negotiations to finalize the FTA component, to be concluded in July 2004, may turn out to be more difficult and time consuming than anticipated.

Japan has signed a broad agreement with ASEAN. In addition to the framework agreement, Japan wants to negotiate bilateral FTAs with selective ASEAN members. This is seen by many in ASEAN as threatening ASEAN's cohesion and credibility. Korea has finally stated an interest as well in developing a Korea-ASEAN bilateral agreement as it feels that it should not be left out. However, Korea's original interest, promoted by former President Kim Dae- jung, was to advance the vision of an East Asian Community, which will be pursued through the development of a region-wide East Asian FTA rather than a set of bilateral FTAs. However, this may be premature.

In the emerging regional trade structures in East Asia, ASEAN has practically been driven to become a hub. It needs to strengthen itself to be able to play that role effectively. It is in this light that the recent decision by ASEAN leaders to form an ASEAN Community should be seen.