Region sees waning economic interdependence

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.