APEC: Where to now?

Date April 22, 2010
Speaker Peter DRYSDALE(Emeritus Professor of Economics / Visiting Fellow, Crawford School of Economics and Government, Australian National University)
Moderator TAMURA Akihiko(Consulting Fellow, RIETI / Councilor for APEC, Trade Policy Bureau, METI)
Materials

Summary

Peter DRYSDALEPeter DRYSDALE
Asia-Pacific Economic Cooperation (APEC) has come a very long way. So the starting point is that we have a huge asset in place in APEC already. APEC was born around the rise of Japan and the intense economic relations that were between Japan and the United States and within East Asia as well. Australia and Japan played a critical role in the establishment of APEC, working closely together in the late 1980s. The first meeting of APEC was a Foreign and Trade Ministers' meeting in Canberra in November 1989. That was largely the joint product of purposeful initiative from Australia and Japan.

APEC was built on the premise that Japan's development, and that of the region as a whole, was reliant on successful integration into the global economy. The framework of GATT and its successor, the WTO, and the great post war institutions were critical to success in that process because they provided the confidence in international commerce that allowed Japan to resume its growth and achieve industrial success in the post war period. This was the basis on which the rest of East Asia could also achieve its ambition for economic development.

Asia's industrialization and success was fostered under the umbrella of that postwar international framework. A central element of trade and economic growth in the region revolved around strength of trans-Pacific ties. These ties are still important to robust growth in East Asia although in the coming years there will have to be some rebalancing of the structure of growth.

The enduring characteristic of the Asia Pacific region is that it is a region of continuing economic and political transformation. In our strategies toward regional cooperation, we must assume that this change will continue, that it is positive, and that choking it off will damage the prospect for property in our own economies and our own political, as well as economic, interests.

Hence, from the beginning of the APEC process, and in its approach to regional cooperation and the institutionalization of regional arrangements in the Asia Pacific region, we have focused on a strategy of inclusiveness which is born of the interest of continuing economic, political, and social transformation in East Asia. That is where the idea of open regionalism came from. It was important to regional cooperation in this part of the world that cooperation be open in terms of principles whereby economic policy strategy was formulated so that there could be continuing inclusion of new players in the process and that the process was not choked off by the exclusion of new players and new opportunities for regional growth, trade, and development.

Open regionalism became the cornerstone of the APEC process and it still is because the process of political, social, and economic transformation across the region has not finished and openness is important for its successful continuation. Developing arrangements that significantly excluded others would threaten political and economic stability and security in the region.

That is why APEC was a process that sought to reinforce national trade reform agendas. At the beginning, the emphasis was on trade and investment reform and liberalization. The trade reform agenda and the investment reform agenda had priority in the 1970s and 1980s when APEC was established, and in the early years of APEC, when it was the driving motivation for cooperation among the APEC economies.

That emphasis continued through the early days of APEC through the establishment of the Leaders' Meeting from 1993 onward and was embedded in the institution of the Bogor goals in 1994. Effective global integration of the East Asian economies was critical to successful industrialization, because without it, it was not possible to pretend to ambitions for growth of the kind that came to be seen through the process in the region.

Beyond the trade and investment liberalization goals, interest was focused on development of capacities to support growth through the APEC process. The Bogor goals were important in this strategy. They set out the aim of liberalization for the APEC member economies globally.

These goals delivered a certain set of objectives for APEC on trade and investment. While they still remain important, although much less so than they were in 1994, because so many member economies have moved forward with their own liberalization agendas unilaterally, through multilateral negotiation, and to some extent through regional negotiation. ASEAN in particular, in the latter process, always in the past had a strategy of regional negotiation which led to broader multilateral liberalization. In this particular case, the regional cooperation within ASEAN supported the global objectives that were set out in the Bogor goals.

Another important point about the Bogor goals is that they delivered coherence to the APEC process, and its trade and economic reform agenda. Because of its character, which is one of volunteerism, the APEC process brings regional economies together and through dialogue, encourages commitment to common policy priorities. There is no formal or legal sign-on to those policy priorities, so delivering on them requires independent national commitment. Having a sense of coherence and common order of policy priorities was one of the most important benefits that the whole process of regional cooperation through APEC delivered to all the economies that were involved.

Some say that without the institutionalization and legal supranational authority to ensure that member nations follow through on the objectives, APEC is nothing but talk. But when you look at the numbers and measure the effect of these commitments through APEC to trade and economic performance, the effect of APEC compares more than favorably with NAFTA or even the European Union, both of which are legally binding arrangements. Given the political and economic structure and transformation of the Asia Pacific region, effective regional cooperation requires a different style of regional cooperation and institutionalization from those in Europe or North America. And by most measures this strategy has worked best.

Since the mid 1990s, there has been a craving for stronger institutionalization in the region. There was, and still is, active pursuit of bilateral free trade agreements within the region. But the contribution of these strategies to regional integration and to economic growth and efficiency is very modest. Most of these free trade agreements have thus far been bilateral arrangements. The nature of these arrangements is limited in character. It is only a part of the APEC agenda of reform of the economies of the region for complete and effective integration into the international economy because the process involved does not stop with the negotiation of border measures which affect trade and investment. Full and effective integration involves deep reform of the institutions and regulatory systems that govern our economies and how they relate to the rest of the world.

While the Bogor goals are not yet completed, they are a job already well done. One of the elements of that job well done in particular is attributable to APEC. Post Osaka through Manila, APEC presciently identified the IT area as a new growth area of considerable importance to the region. Instead of trying to liberalize IT trade within the region under some limited regional agreement, APEC took the agenda of liberalizing IT trade to the WTO and garnered support within the WTO for global liberalization of trade in IT products. This was relatively easy to do at the time because it was a new area of trade and the barriers to trade in IT products were low. This was a huge success for APEC because a good part of subsequent trade growth in East Asia has in fact developed around that sector in recent years, driven by a framework that APEC encouraged and supported through a global process of negotiation.

One suggestion I have today is that APEC should go back to the basics in areas in which it has a strong and effective record. Can the WTO still be used as it has been by APEC in the past to prosecute trade and economic liberalization? There are problems in concluding the Doha round, but now it is not the time to give up on the WTO or the Round and the WTO. Instead, APEC should spearhead delivery on the Doha Round and re-invent the WTO as the anchor of an open global economic system.

Political circumstances later on this year will change, particularly in North America. It may look difficult to make progress now, but later this year there will be an important opportunity to push forward again on Doha and on the WTO. APEC needs also to relate to other global processes in carrying the trade reform agenda forward, including the G20. The G20 meeting in Seoul in November, just before the APEC Summit in Yokohama, provides a particular opportunity to link APEC's regional agenda to the global agenda on trade reform.

Among the issues that are important to APEC in the WTO are the disciplines (or lack of them) on preferential trade agreements. APEC can lead WTO reform on this issue. It will not achieve immediate results, but APEC can start the process moving. APEC is the natural vehicle for starting it. APEC's connection to the WTO through its guiding policy strategy and philosophy remains fundamentally important to a robust APEC agenda.

What are the alternatives? An FTA model or a series of model FTAs, such as the East Asia arrangements, ASEAN + 3, ASEAN + 6 arrangements, an APEC-wide FTAAP arrangement and the Trans-Pacific Partnership (TPP), are all ideas that are on the table. There is a great deal of interest in the TPP developing in Washington now.

The TPP is one of a range of instruments that are available that may or may not drive the APEC agenda. Whether the TPP idea drives the APEC agenda desirably will depend on who participates, on what terms, and how it is structured. If it is turned into a vehicle to try to redefine the partnership idea from the free trade idea to a broad economic partnership which really involves an agenda of structural reform beyond the borders, it should be of interest to APEC in driving its agenda. But there is no thinking about the TPP that is likely to lead in that direction any time soon.

The TPP is not going to be effective for APEC if it seeks to deliver immediate results. There is too much to do for, only some of which is regionally negotiable for TPP to provide a quick fix for the APEC agenda. We must be careful not to divert energies toward a TPP agenda that delivers very little. Australia is anxious to negotiate an FTA with Japan. If Japan is to progress in a way that manages its East Asian interests alongside its trans-Pacific and global interests, it must make hard choices on agriculture and come to terms with opening up to Australia, America, and others in the region. Until these hard choices are confronted putting faith in the TPP as a comprehensive Asia Pacific trade strategy is hardly likely to be productive. It would be leading APEC in the wrong direction and it would miss the core agenda of APEC and APEC's core comparative advantage in carrying that agenda forward.

The basics for APEC involve reinforcement of national reform agendas, the opportunity for dialogue among countries of different stages of the process who can learn from the experience of others in this process and can take initiatives year by year that confirm their commitment to the goal of trade and investment liberalization, and beyond that, structural reform that is supportive of the objectives and ambitions of the region for sustainable economic development and political and economic security in the region.

The bold and continuing goal for APEC is working towards the establishment of a single market, a single economy to all intents and purposes, in the Asia Pacific region. This goal is comparable with the single market agenda in Europe. However the European single market agenda had very specific and institutional boundaries to it. APEC needs to think beyond these boundaries as is goes beyond Bogor Goals. This is APEC's coherent goal for the longer term, - the agenda of trying to create a single market. This is a continuing process, without a defined chronological goal, with milestones that can be defined and met along the way. Milestones are necessary. That is what the annual the meetings will need to deliver on. The problem with APEC since the loss of the momentum of the Bogor goals has been a lack of coherence and narrative, a segmentation of the agenda around each annual meeting. The Bogor goals have provided long-term coherence to this point, and bringing back the vision is important. The longer term vision is the ongoing delivery of a single Asia Pacific market or economy by various means.

A single market agenda for long-term sustainable growth is what should be the core outcomes of every APEC Leaders' meeting and Ministers' meeting from here on . This year, the ideas on balanced growth that have been developing have come up in connection with the problems that were exposed during the global financial crisis. Balanced growth involves not only issues relevant to getting the balance right between the tradable goods sector and non-tradable goods sector via international accounts, but also of addressing equity issues and institutions that support equitable growth and distributional dimensions of growth.

Another issue is green growth. This is an idea amenable to the same treatment as the IT sector more than a decade ago. There is a huge opportunity here to open up a new agenda for liberalization of a whole range of goods and services which are critical to success in achieving sustainable growth on the environmental front. What I have in mind here is not a negotiation over these issues in APEC but an APEC initiative in the WTO that would see trade in green goods and services kept open to support sustainable growth.

The FDI regime is also an important priority for APEC. The principles are in place. APEC put them there. They are principles that we would want to apply globally. APEC countries independently went away in their own self-interest and signed onto these principles in their own approach to foreign investment policy because that was how to compete successfully for foreign investment and it delivered effective growth and trade through the process. The FDI regime is of new importance because we have a whole new range of issues emerging in respect of foreign direct investment in the region, around the growth of outward FDI from China and elsewhere. The APEC members can take the initiative in addressing these issues before they become a major problem.

There is also the question of infrastructure for development. It is related to the other agendas. The infrastructure issue is of continuing importance to the region. How can we deliver the huge infrastructural requirement we have in the region to achieve the potential and ambitions for development? Hopefully ideas, for example on Public Private Partnership (PPPs) in infrastructural investment, can be shared on this issue in the APEC framework.

There will be a Summit in Yokohama and a follow-up in Honolulu, and there is already interaction between the hosts in Japan and the United States. That interaction should intensify in order to develop the repositioning of APEC's long-term agenda along the lines I have outlined. The focus should be narrowed a little by focusing on the core issues and interests of member economies, rather than throwing too many items into an overcrowded agenda. We should abandon what I call ‘the Christmas tree approach’ in which trivial, little presents (agenda issues) are thrown in favor of more substantial, meaningful issues. APEC needs to deliver "the big present under the tree" to satisfy all its members and develop a coherent narrative and vision beyond the Bogor Goals.

There is also a question of membership. India and others who are standing on the sidelines. India is part of the East Asian process and it does not make sense to exclude it from APEC any longer.

Untidiness in regional architecture must also be sorted out. The East Asian process and the trans-Pacific Asia Pacific have big overlapping agendas but there are still some gaps in the framework of regional cooperation. A central interest which emerged post East Asian financial crisis was strengthening financial regional cooperation in East Asia. There is no question that this is consistent with the trans-Pacific process that is encouraged through APEC.

There are gaps on the political side which are becoming increasingly important. APEC was always as much a political initiative as it was an economic one. Prime Minister Rudd has been talking about an Asia Pacific Community (APC) and Prime Minister Hatoyama has presented the East Asia Community (EAC) initiative as a means to close these gaps.

It will be important to move on all fronts at once, while keeping a focus on the priorities. APEC will undoubtedly remain an important anchor in that process and it can be used as a vehicle to fill some of the gaps in regional economic and political cooperation. Informal leaders' meetings can be held alongside APEC that start the process of filling the gap in political security dialogue to which needs attention with the big change that is taking place in the regional balance of power.

APEC also has an important role to play in the evolution of global governance structures. While APEC will not solely or directly service the G20 process, APEC's relationship to the G20 is important for the legitimacy of the process. The G20 members from the Asia Pacific cannot presume anything on behalf of the broader membership of APEC, but there is a vehicle within APEC to discuss G20 matters and make sure there is effective dialogue on the Asia Pacific region's interests in global governance.

Questions and Answers

Q: In establishing a post Bogor goal or single market concept and trying to cover behind-the-border issues as well, non-Trade Ministries must be involved. I think it would be difficult to involve these domestic ministries in this context. In formulating a post Bogor goal on the trade agenda, how will we construct an effective regime to make sure of sound implementation? Additionally, how can we tackle behind-the-border issues and construct a review mechanism without undermining the non-binding characteristic of APEC? Also, faced with the reality that the chair economy is rotated every year, this seems to be a disturbance to the consistency of the policy for APEC. How should we handle this in terms of constructing the post Bogor regime?

Secondly, Japan intends to formulate a new vision for this year. The thought behind that proposal is our perception that we have a lot to deal with beyond the traditional trade agenda. Your basic thought is that APEC should get back to the basics and it should be focused on core issues. How do you find the reality that APEC faces in terms of the necessity of dealing with issues beyond the trade and investment agenda?

Q: Regarding green growth and an FDI regime, are you proposing a plurilateral-type agreement approach in the context of APEC? Secondly, are you thinking about a somewhat binding agreement? I was a negotiator for ITA, but after ITA there was the debacle of EVSL. How can we move ahead to realize the liberalization agenda?

Peter DRYSDALE
I would like to come back to the first set of questions at the end of the session. On the second question, there is a distinction between the ITA matter and the EVSL matter. APEC is not a negotiating forum; that is why EVSL was the wrong way to go. But APEC can use other negotiating forums. The ITA matter was taken to the WTO. An initiative from APEC on green goods should not involve negotiations within the APEC process but using the WTO to take the issue forward. There is an opportunity to take an initiative forward of this kind and get the momentum up within APEC which can carry an enormous amount of weight. This is an area in which we can move and there will be a great deal of interest to move more broadly in this direction and APEC can take the initiative in carrying it forward.

Q: How do you resolve your support for a single market agenda and on the membership issue, the question of India? India was perhaps not the biggest contributor to progress in the Doha development agenda. One of the advantages of APEC in pursuing a free trade and liberalization agenda is that it does not have as many people who might stop the progress. Would it not be destructive to bring India into this progress?

Peter DRYSDALE
In talking about a single market agenda, I am not talking about a European single market agenda, which is a sign-on to a particular set of institutional arrangements with respect to the governance of the market. The objective is the same but the way the instrument is used to get there will be different. A single market or single economy agenda in APEC would be a continuing process, in which there is no particular timeline for delivery in all members of APEC. Europe is misdirected if it thinks it has delivered a single market. It has not delivered anything like that. Delivering a single international market is a never-ending job. We want a single market agenda which is defined in those terms, not in European terms.

If India is a willing participant in the process of liberalization and reform and willing to measure up to milestones along the way, it should be a welcome participant in the process of joining on to a single market agenda for sustainable and development growth. I think there is enough evidence of commitment to the process of opening and liberalization in India for it to be welcomed into the APEC family.

Q: I have a question about the political dimension of regional architecture in the region, such as Prime Minister Rudd's Asia Pacific Community, Prime Minister Hatoyama's initiative, or ASEAN plus six or eight. In the long run, how do you see the relationship between the transformation of APEC and these other initiatives?

Peter DRYSDALE
That is a question for which we need a little more dialogue. Dialogue on that process is intensifying now. There are many ways in which this could evolve that are almost equally attractive. I am anxious to encourage these dialogues. Essentially, the ASEAN + 8 process or EAS + 2 is the kind of grouping that might work in terms of facilitating the sort of political security dialogue we need.

On whether that dialogue could relate to APEC, India would be a participant in that process, and at the moment, India is not a member of APEC. That is one reason in my thinking that Indian membership in APEC would be productive. However, you can use APEC as a vehicle for holding dialogue for EAS + 2 or ASEAN + 8 without it being formally incorporated in the APEC meeting. It could well be convenient to back-to-back such a meeting with the APEC Summit. These hinges need to be taken step by step, so the first thing to do would be to have an informal meeting over breakfast or lunch among relevant leaders at a convenient time and place. I hoped that there might be an opportunity to do that in November.

There are some American anxieties about engagement with Asia. These anxieties are well motivated, but to some extent, they are also motivated by the idea that what we are trying to do for East Asian integration will leave them out.

The best way for the United States to relate to a process like this is to relate to it informally first alongside a dialogue that are already takes place around an APEC meeting or an EAS leaders' meeting. Over time, the value of that sort of discussion would either prove itself or not prove itself. Despite all the difficulties, it is absolutely critical that we as a region start that kind of dialogue sooner rather than later, or it will be too late to start it in the right atmosphere. Political system divides are quite significant and will become a more pressing excuse for doing the wrong thing on economic policy unless we take the next step that is necessary in securing the political confidence that APEC secured earlier through the same kind of process.

Coming back to the first questions about how you developed a new vision and yet link it to the delivery of outcomes through the APEC process, my idea is fairly simple. You have to keep a coherent vision in place and Bogor, in its trade and investment dimension, provided that earlier on. That is still part of the vision, but we need a similar vision that takes us forward to where we want to go now, which involves the agendas that were put in place beyond Seoul, Hanoi, Sydney and Singapore on structural and beyond the border issues, but are actually difficult to solve politically.

That is why I came back to the single market or single economy idea. We do not want to be confused by the European concept, so perhaps we need to think more about the terminology, and single economy might be a better idea than single market. I have an open mind on that. However, what is clear is that it is a permanent and continuing objective that APEC would have. What we will also want to do in putting that vision and that objective in place is to articulate a few principles which would be important to measure outcomes from each APEC meeting. We need to do a little work on that. These principles would then help define the milestones along the way.

*This summary was compiled by RIETI Editorial staff.