Will APEC momentum last until Osaka?

Will APEC momentum last until Osaka?

By Frank Flatters

BANGKOK: Asia-Pacific Economic Cooperation, or APEC, has come
a long way in less than a decade, and the process appears to be
accelerating. The Blake Island meeting in 1993 brought most of
the APEC leaders together for the first time. Last year's meeting
in Bogor increased the momentum. In particular, the declaration
of APEC's goal of creating free and open trade in the Asia-
Pacific by 2020 (2010 for developed countries) is referred to as
the "Bogor Miracle."

The next APEC summit will be held in Osaka in November. Can
the momentum established at Blake Island and in Bogor be
sustained? If so, how? If not, would it matter?

What is APEC really about?

* APEC is not and will never be a free trade area. The
diversity of its membership, and the complexity of the issues
that would have to be resolved, together with the GATT/WTO
requirements that would have to be met, make this an
impossibility.

* One reason for the recent burst of APEC activities is the
weakening of multilateralism. This is argued to be due to the
increasingly arbitrary and non-multilateral behavior of the
United States. If so, is it wise to attack this problem through
a regional forum in which, by simple arithmetic, the U.S. plays a
proportionately greater role than in the GATT/WTO? Is this what
Malaysia's Prime Minister Mahathir Mohamed has been asking? Is he
not correct?

For it to be justified on these grounds, APEC must protect its
members from American arbitrariness. This has yet to be
demonstrated. The inclusion of a dispute settlement mechanism was
felt by Canadians to be one of the major accomplishments of the
North American Free Trade Area (NAFTA) accord. Whether it is
providing the hoped-for additional protection against U.S.
actions is the subject of lively debates in Canada.

* Another important reason for APEC is the rapid growth and
increased integration of the Asia-Pacific, and especially East
and Southeast Asia. This market-driven integration has brought
with it a perceived need for improved government-private sector-
regional cooperation. There can be no doubt that the spontaneous
development of such initiatives and mechanisms is important. But
what institutional arrangements are really required?

* A purpose of APEC that has been advocated by former prime
minister Anand Panyarachun, for instance, is to spearhead and
revitalize the GATT/WTO multilateral liberalization agenda.
According to this view, the importance of APEC does not lie in
any static effects of particular agreements to open up trade and
investment. Rather, its role in encouraging the process of global
liberalization is the one that merits attention.

Some go so far as to claim that Blake Island, by presenting
the EU with the threat of a credible coalition that could "go-it-
alone," was responsible for the conclusion of the Uruguay Round.
This simple explanation does not do justice to the complexity of
the forces and issues involved.

Another popular view is that the "Bogor Miracle" --
Indonesia's conversion to free trade as part its commitment to
APEC -- illustrates APEC's liberalizing influence. The fact is
that Indonesia embarked on a program to deregulate its economy in
the early 1980s as part of a successful strategy to sustain
growth and reduce dependence on oil and other natural resources.
This was not due to any regional or international commitments;
it was done because it is in Indonesia's self interest. Despite
growing domestic support for liberalization, however, some
opposition remains.

The Bogor summit permitted President Soeharto to gain
international prestige by reaffirming his support for the
principles of free and open trade and investment. APEC was not
the issue. Rather, APEC provided a set for a scene in an ongoing
Indonesian puppet drama.

As the Indonesian example illustrates, unilateral MFN (i.e.
non-discriminatory) liberalization is seen as the best strategy
for many APEC countries.

Are there any disadvantages to liberalizing in a concerted or
cooperative manner through APEC? A lesson of the Uruguay Round is
that concerted liberalization might force participants to the
pace of the "lowest common denominator" and delay achievement of
the ultimate goal. A reason for this is that the process promotes
the view of trade liberalization, not as providing benefits for
the liberalizing country, but as "granting concessions" to one's
trading partners.

The principal beneficiary of trade liberalization by any small
country is the country itself. Misunderstandings of this simple
point lead to needless concern about the "free-rider" problem,
whereby non-liberalizing countries allegedly "free-ride" on the
"concessions" granted by others.

The free-rider issue and the tendency to be governed by the
lowest common denominator often slow the pace of liberalization.
Such thinking led Thailand in the Uruguay Round negotiations, for
instance, to commit itself to tariff levels in excess of those
already unilaterally declared by the time the agreement took
effect. The Thai team was apparently very proud that it had not
made any unnecessary concessions during the negotiations.

There is no consensus on whether or under what conditions
concerted liberalization is more successful than go-it-alone
liberalization. And there is even less agreement on whether
concerted liberalization is best achieved at a regional level,
globally or through some combination of the two.

What is clear, however, is that rapid liberalization of trade
and investment in Southeast Asia will continue, regardless of
what happens in Osaka. This process is well under way, especially
in ASEAN. In the sphere of trade policy, many of the early
reforms were aimed at freeing exporters from the high costs of
import substitution policies. While initially successful, these
"export-oriented protectionist" regimes have begun to meet their
natural limits. This has led Malaysia, Thailand and Indonesia to
more fully embrace the principles of genuine openness. As these
three countries race to get ahead of each other, others will not
be far behind.

APEC will not interfere with this process. Maybe it can help
to push laggard members more rapidly in the direction of the
"leaders." And it might also be simply irrelevant.

What will happen in Osaka?

Blake Island and Bogor provided statements of "vision". Beyond
that, there is precious little agreement, on even some of the
broadest principles, let alone the many details that will have to
be worked out if the vision is to be realized. Issues to be
resolved include the following:

* Will trade and investment "concessions" be discriminatory,
and if so on what basis?

* Will trade liberalization be broadly-based or sectoral? Will
certain sectors (e.g. agriculture) be excluded?

* Will there be a dispute resolution mechanism? If so, what
sorts of multilateral (WTO) and/or bilateral issues will be
excluded?

* What will be the criteria and conditions for new membership?

* Will there be any attempt to harmonize competition and/or
environmental polices within APEC?

* What issues will be dealt with by APEC rather than being
left to WTO, and why?

This list illustrates the magnitude of the issues that could
be faced, and stimulates a few general observations about the
Osaka agenda.

First, the agenda could be as broad as the WTO's. APEC's
diversity ensures that it will have no greater success than the
WTO in dealing with these issues in the short run. Second, the
administrative and coordinating costs of trying to do so are
considerable.

The momentum of APEC will not be sustained in Osaka by working
through the details of any grand agenda. If a "grand gesture" is
needed, then, in the tradition of Bogor, it should come from the
host. One could imagine a public commitment to the principles of
a free rice market and increased competition in Japan's non-
tradable distribution sector. But in light of Japan's recent
history and her current political situation, one would need a
vivid imagination.

Dr. Frank Flatters is Professor of Economics at Queen's
University in Canada, and is a CIDA-funded research advisor at
the Thailand Development Research Institute.

-- The Nation