Vinod AGGARWAL
Today we will discuss theoretical ideas about institutional design and how we can think about an institutional bargaining game for institutions in the Asia-Pacific. Then, we will talk about APEC and consider how APEC has evolved over time, before turning to some scenarios concerning institutional arrangements we might see in the Asia-Pacific. We will look at what APEC can do in a practical way and given Japan's vision for 2010 and beyond, how Japan might be able to help implement that vision through practical steps dealing with other kinds of actors.

Beginning on a more theoretical level, institutions change due to shocks or impetuses. These shocks, in the Asia-Pacific region, have included the end of the Cold War, the Asian Financial Crisis, and a third one - that transformed the role of APEC for some time - was the 9/11 attacks in New York and Washington, which led to more of a security focus for APEC. We also have long-run evolutionary transformations, such as the rise of China, or the new shock of the financial crisis that began in 2008. Once again, people are talking about new institutions and how the G20 will fit with institutions like APEC, ASEAN, etc. People are thinking about the fact that we have these existing institutions, but somehow they seem to be deficient. In a crisis, analysts and policymakers often argue that we need some kind of new institution or modification of institutions.

I do not like the current direction of Japanese, Korean, and - until last year - U.S. trade policy, which is the pursuit of private goods through bilateral trade agreements. We may call these free trade agreements, but they are actually preferential trade agreements. The agreements are actually hazardous and detrimental to the health of the WTO and APEC. Fifteen years ago, no one was talking about these bilateral trade agreements, and now they have become popular. Everybody says, "These are bad things." But then everybody pursues them. These are the kinds of changes we have seen.

To understand what countries want is quite fundamental - individual situations depend on countries' international capabilities. China, given its newfound strength as an emerging superpower, remains a puzzle. Many are still unsure about what it wants and is able to accomplish as a country. Secondly, in most countries there is now a growing aversion to free trade. People in rich countries feel that there are decreasing benefits from free trade. In the United States and other countries, the coalition that would support free trade is ironically being undermined by a kind of neo-mercantilist Chinese strategy. Because of the technology extraction policy on the part of the Chinese, Japanese firms are beginning to feel the same way. The third element looks at the cognitive beliefs and epistemic community. PECC was actually an effort to create an epistemic community, a tripartite grouping which was actually the leader in creating APEC. Once you have these questions regarding the existing institutions, countries' national situations, and the goods that countries are trying to capture or provide, one can ask whether it is actually beneficial to create new institutions. Many people have become disillusioned with APEC and have thus created various different institutions.

Regarding these free trade agreements, countries can make a variety of choices. They can decide how many accords they want to pursue. For example, Singapore is the leader in pursuing large numbers of trade accords. They can decide on the sequencing of their agreements - will they do trans-regional agreements first? Finally, they can look at a variety of other characteristics, including actor scope, geography, partner size, issue scope, trade orientation, and then, of course, the strength of institutionalization of the arrangement. The final issue concerns institutional reconciliation - whether the new institutions that are created will be nested within a broader institution or not. APEC was nested very well within GATT and now WTO. By being nested, I mean that APEC conforms to the basic tenets of the WTO. Of course, when you create a new institution, there are some deviations from the existing institution, but the idea of nesting is that you try to bring it into conformity with the broader institution. Sometimes this can be done for a substantive reason, or sometimes it is done because of power reasons.

As an example of a substantive horizontal connection, we can have a division of labor between two institutions. The IMF and the World Bank come to mind as good examples. The IMF is supposed to be engaged in short-term lending for balance of payments difficulties, and the World Bank is supposed to be engaged in long-term structural lending.

The way in which APEC, ASEAN+3, ASEAN+6, WTO, bilateral agreements, TPP, etc., will all fit together is a crucial issue. It's very easy to create institutions randomly, but how they fit together with existing institutions is very important. Government officials have to stop coming up with new proposals without carefully inventorying the kinds of agreements we have and how they will fit together. Sometimes you do not need any linkage between organizations, as in the case of the World Health Organization and the ITU, because the institutions deal with very distinct competencies.

APEC is very liberal, and it is quite broad. If you have a very liberal agreement that is very weakly institutionalized, you will not get much. I think it was nicely pointed out by Masahiro Kawai, Dean of the Asian Development Bank Institute (ADBI), when he said, "Voluntary liberalization is dead because countries are pursuing bilateral trade agreements." No one in their right mind would abandon their trade barriers, because they need them as bargaining chips in bilateral trade negotiations. We do see greater institutionalization in APEC, but as an institution it is very wide in scope and liberal.

Moving away from the theoretical to the practical scenario ideas, one must wonder what the institutional future of the Asia-Pacific will look like. Will we work through the WTO? APEC? ASEAN+3? ASEAN+6? While other options exist, here are four scenarios for trade agreements in the Asia-Pacific. First, there is the revival of the WTO Doha Round. Second, we can talk about Free Trade Area of the Asia-Pacific (FTAAP). Third, there is the Trans-Pacific Partnership (TPP). Lastly, we will briefly look at ASEAN+3, ASEAN+6 or ASEAN+8, which would include Russia and the United States.

APEC is trying to help the Doha Round, but there has been a rise in murky protectionism. Despite many claims that protectionism is not that bad, it is like a half-empty, half-full glass. In East Asia, because China did not sign the government procurement code, it is actually using the financial crisis as an excuse to promote industrial policy. That will further undermine the coalition for free trade, because U.S. multinational corporations increasingly see no benefit to a global trading system that is increasingly unlevel. It was never completely level, but the fact that the Chinese are using the financial crisis as an excuse to promote industrial policy and protection is of course problematic. There are various ways to promote increasing cooperation with the WTO, but by and large, the Doha Round is not going anywhere. The obvious thing to do is to have a moratorium on all preferential agreements for one year, and then let negotiators come back to the table. If this does not work, it should be declared a failure and they should start a new round. That would be a much more logical strategy than the current rhetoric of falsely claiming that competitive liberalization is a great strategy.

Looking at another effort, Fred Bergsten and the APEC Business Advisory Council (ABAC) has called for a free trade area of the Asia-Pacific through APEC. Bergsten argues that this will help control things like Preferential Trade Agreements (PTA), which I disagree with. Bergsten argues that this will prevent the creation of East Asian exclusive agreements. I think that the East Asians saw this, became angrier and decided to pursue ASEAN+3 and ASEAN+6 more aggressively, because they do not like the U.S. pushing its vision. This has also not helped to mitigate conflict with China. I do not think that APEC is a negotiating body, so I do not think that you can negotiate a pan-transpacific accord through APEC. In my view, the kind of approach of moving to the FTAAP in several years that was talked about by President Bush was simply not feasible. The new goal, just to summarize a few points, lacks adequate definition and cannot negotiate a binding agreement. APEC has done some things in trade but I do not think FTAAP is the best vehicle except in the very long run.

Turning to the more interesting issue of TPP, as you know, President Obama had said for some time that the U.S. would adopt a trade initiative, and we all waited. The one thing he did, in November of last year, was to endorse the TPP approach. If you are cynical, you might say that the TPP approach is the smallest thing you can do and still keep Ron Kirk as the U.S. Trade Representative, because otherwise he would go back and get more politically involved. I personally believe, however, that the TPP can become something. A bottom-up approach will be much more successful than the top-down approach promoted through the idea of FTAAP. What are the positives? Its voluntary membership increases the likelihood of strong agreements; it will bolster trade among APEC members; it will serve as a blueprint for a long-term strategy of a free trade area of the Asia-Pacific; and it has strong U.S. support. From a business perspective, this bottom-up approach of reining in bilateral trade agreements and bringing order to them is a good thing. Business likes certainty. It prefers a sound environment over an environment with many kinds of agreements with varying rules and origins.

What are some of the downsides of TPP? It might exclude non-negotiating members; it could undermine APEC's leadership role in the Asia-Pacific and add to the spaghetti bowl effect; it is not certain if other major economies would join (China, Japan, Korea, etc.); domestic political opposition could be a barrier, with many Washington interest groups voicing specific trade-oriented concerns; and there could be difficulties in reconciling the TPP with existing free trade agreements. To summarize, we should ask if APEC is at odds with the TPP. One view is that it will overshadow APEC and the U.S. will lose interest in APEC. The second view is that APEC can actually help TPP, which will help meet its Bogor Goals. I do believe, however, that the TPP currently is the most politically feasible mechanism. If you are not going to be able to get the Doha Round done, I think this is the next best thing.

In terms of ASEAN, integration is proceeding. It is making greater claims about its integration than you actually have, and it has problems with its being non-binding in some respects, and also not having dispute settlement mechanisms that function. The typical view we have is that Japan prefers ASEAN+6 because ASEAN+6 would provide some balance, but an EAC would exclude the Americas, so Latin Americans and the Americans don't like that. China prefers ASEAN+3, because that's the institution in which it can most exert its power. And then ASEAN+8 - which would bring in the U.S. and Russia - would ostracize Canada and Latin America. There's no simple solution to this array of institutions.

APEC will see a number of challenges. First, it sees competition from lots of trade institutions. It will be very difficult to implement the Bogor Goals, and the worldwide recession has in fact increased protection. There have not been overt violations of the WTO, but there have been many implicit violations. In terms of the future of the Bogor Goals, there seems to be very little interest in free trade, particularly in the United States. There has been a lot of discussion about the shortcomings of the Bogor Goals. Should APEC redefine the Bogor Goals? APEC is good as a facilitator. It can work with the current FTAs and make a more aggressive effort there. The marketplace of ideas and open discussion is not to be taken lightly. Even if they are non-binding, discussions can be very useful. We need to get more active participation from other stakeholders; nobody knows what APEC is beyond a small group of people, and that is quite negative.

In order to address these issues, one could expand APEC and ensure that it can maintain its relevance in the Asia-Pacific. But if you expand APEC too much, what will it do? Are you just going to say that APEC is dealing with all issues in the world? This, of course, is not a good idea. APEC could potentially focus on things like green technology and regional energy security.

ABAC, of course, would like to expand APEC and cover services and investment, but it still remains to be seen what the mechanism is. ABAC is a grouping that brings together three business leaders from each member. That is too narrow - you cannot have ABAC just having three members, appointed by national leaders, and expect ABAC to be truly representative of the business community. We must go beyond this narrow institutional approach.

Japan's agenda includes plans to promote regional economic integration; different kinds of growth; and human security. This is a broad agenda - what does it not include? If you have everything there, is it really possible for APEC to deal with so many issues? APEC has really not connected well with ABAC and the wider business community and a number of things should be done. First, channels of communication need to be increased between the APEC secretariat and the ABAC International Secretariat; ABAC Economy Secretariats need to be strengthened, including increasing their online presence; communication needs to be facilitated among ABAC Economy Representatives and APEC; business participation needs to be broadened in member economies; and there needs to be an institutionalized dialogue mechanism between institutions and these economies' governments. The domestic-international linkage of institutions that would strengthen APEC and its role within the business community is currently insufficient.

If Japan is really interested in promoting inclusive growth and these other agendas, they need to have participation by stakeholders. APEC could organize dialogue sessions between key stakeholders. APEC could establish advisory committees to engage with the day-to-day workings of APEC, perhaps creating an APEC stakeholders' council that would not only include business stakeholders but other stakeholders as well.

In terms of APEC's priorities for 2010 and beyond, I think that APEC needs to reassert its status as Asia-Pacific's leading trade institution. This should not only mean trade negotiations, but also trade facilitation, technical advisory in bilateral negotiations, and advisory of the TTP. APEC could serve as a think tank dealing with these issues, and then work towards some kind of FTAAP in the long-term. It needs to have less of a top-down approach than it has had. In the long-run, APEC could work to help facilitate discussion of other trade arrangements in order to organize a trade agreement for the whole Asia-Pacific.

APEC is not well, but it is alive. It cannot simply be another institution that is sitting idly with bureaucrats and not doing anything. Japan and the U.S. can help APEC recover so that it can play an active role in promoting cooperation between the Americas and Asia.

Q: I think that APEC should focus more on behind-the-border issues and encourage members to move forward with regards to liberalization and facilitation in a way that is welcomed by the business community, good for investment, and good for financial credibility. I would appreciate your comment on these points.

Vinod AGGARWAL
I agree with you. Many of the issues today are behind-the-border, and I think that is a way for APEC to show its relevance. I think that non-binding is useful as an initial approach, but business, at the end of the day, wants more binding agreements. Nobody is going to agree to potentially hazardous things for their companies without having binding agreements. For example, the fact that the Chinese have not signed the procurement code is giving their firms a competitive advantage. APEC needs to work in this area, and ultimately reach more binding agreements regarding what countries can and cannot do. Otherwise business will be very skeptical and feel like they are engaged in unilateral disarmament, which has never worked.

Q: Stakeholders, such as business, are getting binding agreements and investment agreements elsewhere. Why would they come to APEC?

Vinod AGGARWAL
The problem is that APEC has not carved out institutional space; it is getting squeezed in terms of its institutional mandate from private governance efforts and bilateral efforts. Some of these behind-the-border measures could be an area where APEC could take a role. You cannot really increase the stakeholder participation unless you increase the mandate of APEC to do something. The two things are tied hand-in-hand.

Q: In terms of the institutional legalization, if we look at the WTO, its dispute settling mechanism does not seem to be very effective in punishing bad action. I'm a little bit skeptical about that.

Vinod AGGARWAL
From a statistical standpoint, it is a sampling problem. Do you know how many firms decided not to engage in illegitimate activities because they were worried about going to the WTO? This data would be very hard to find. The dispute settlement mechanism is a deterrent to bad action; nobody wants to be caught up in a two year, or four year process. To say that the WTO dispute settling ability is only effective when rulings are enforced is not the right way to look at it.

Q: But the legal culture in the Asian Pacific is different from the European culture which originated the WTO. I am still skeptical about the legalistic idea behind the origin of the WTO.

Vinod AGGARWAL
I am very skeptical about this "Asian legal culture." If you've ever met a Singaporean lawyer, I am sure they have no trouble at all understanding legal efforts. We see cases all the time where countries use loopholes to get what they want because they do not want excessive binding. This idea that we should do things by consensus and not put things down in writing is mistaken.

Q: What is the situation in the U.S. regarding free trade, especially concerning the Asia-Pacific area?

Vinod AGGARWAL
In the U.S., three things have happened. One, we mistakenly negotiated sectoral agreements in IT, financial services, and telecom. It was a very bad decision to negotiate sector-specific agreements for industries that were pro-free trade, because they got what they wanted. Now they only care about their own sector-specific agreement and not about protectionism in general. The second mistake was to pursue bilateral agreements - the U.S. began obsessive trade negotiations with tiny powers. The third problem is that the Chinese have become heavy-riders in the global trading system. They have pursued industrial policy and have extracted technology from the Americans and the Japanese without signing the government procurement code.

Finally, if I were President Obama, I would not be discussing Doha. I would be taking care of the financial crisis, the Gulf of Mexico, the health crisis, etc. Frankly, if he had succeeded on Doha, he would not do better on the congressional bi-elections this year. No one would care.

Q: If you declare the failure of the Doha Rounds and start all over again, I am wondering how can you be more optimistic about agreeing on the next round of negotiations?

Vinod AGGARWAL
Some of the issues in the Doha Round have become trivial. I said that they should have a moratorium for one year, and then recommence Doha Round negotiations. If this fails, then they can start again. Negotiators from rich countries made a very big mistake in excluding the Singapore issues from the WTO. By excluding the Singapore issues on investment, they undermined interest in the United States and Europe for a successful WTO round. The problem with having a round that is narrowly focused is that you need to have cross-sectoral tradeoffs. The bigger the tradeoff, the better. This sounds odd but is actually perfectly logical politically. If you have a very big trade round with many issues, the prospect of having tradeoffs is much higher. By removing the Singapore issues, the possibility for tradeoffs among issues was undermined. Also, the Doha Round negotiations are ten years old. The model we are using is from 2001. We need a new agenda. For example, if you look at India's trade policy over the last five years, it has undergone a significant shift. In a number of important areas, given the role being played by Indian multinational corporations, they are becoming much more open trade.

Q: You talked about the conflict between the TPP and the bilateral agreements, and that this conflict will have to be harmonized at some point. Where do you see that going?

Vinod AGGARWAL
Frankly, nothing is going to happen until November of this year when the elections take place. Neither Democrats nor Republicans have any interest in TPP now. Depending on the results of the congressional elections, I think we may see some movement. The real issue is that there will be a lot of pressure to open up the agreement and improve its quality.

Q: I'm interested in your view about G20 and G8 framework in the context of trade liberalization. And second, I'm interested in your view regarding some policies adjacent to trade liberalization such as currency, or other incentives. Should it be discussed under the trade liberalization context in APEC or other forms?

Vinod AGGARWAL
There is a really good book that just came out called "Rebalancing the Global Economy" that features numerous economists and political scientists looking at this question of how rebalancing the global economy will affect national policies with respect to job creation. I have an article with Simon Evenett in this book where we look at the contradiction between job creation and trade liberalization. On the one hand you are bailing out GM and Chrysler, and other the hand you are negotiating agreements that will lead to an influx of Hyundais. I'm a big free trader, but clearly in the short-run there is a contradiction here. If we look at the rebalancing problem, we see that Germany is retrenching rather than following expansionary fiscal and monetary policy. The leader of the European market is not doing what needs to be done. On China, it is uncertain whether China will be able to rebalance rapidly enough as well. The idea that the U.S. will double its exports, create jobs, and liberalize trade is pretty hard to reconcile.

Q: Do you have any suggestions for how we should conduct public relations activities regarding APEC?

Vinod AGGARWAL
I think that engaging stakeholders is really important. APEC does a lot of important things. The working groups, the fact that leaders meet, the fact that it is a trans-pacific agreement, the APEC Study Centers - these are all important things. I think that engaging with stakeholders is the first thing that you need to do. There could also be some simple brochures for the press outlining what APEC has done. The press likes press releases with nice little answers that they can quote from, because most reporters are too lazy to write their own stories.