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