The U.S., APEC, and East Asian Integration: Policy trends and options

Vinod K. AGGARWAL
The WTO tends to use the term "regionalism" when referring to any kind of preferential trade agreement. This is an inaccurate use of the term. Sectoral, bilateral and minilateral agreements, among others, are all cited by the WTO as examples of regionalism, which is problematic because many different and various types of free trade agreements (FTAs) are lumped into the same category. The dependent variable, the type of trade arrangement, must be differentiated in order to come up with a causal explanation of where trade policy comes from and where it is headed. This requires a more systematic categorization of trade agreements.

Trade agreements can be split up into four groups: unilateral, which involve only one actor; bilateral, which involve two actors; minilateral, which involve a handful of actors; and multilateral, which involve many actors. Another dimension looks at the products or issues that are dealt with in the agreements. Agreements that focus on only a certain group of products are generally in violation of Article 24 of the General Agreement on Tariffs and Trade (GATT), as they do not cover "substantially all" trade between the contracting parties. Thus, the European Coal and Steel Community (ECSC), the precursor to the European Union, was in violation of GATT. When a complaint was raised by Czechoslovakia, the United States supported the ECSC and petitioned for a five-year waiver to allow time for the Europeans to meet the GATT criteria.

The term regionalism should be reserved for an agreement that affects only actors in a certain geographical region. While there may be disputes as to what constitutes a region, in many cases it is obvious when a certain actor does not belong to a particular region. For example, the U.S. and Israel clearly do not lie in the same region, thus making the U.S.-Israel FTA trans-regional.

This approach is one way of categorizing a large variety of trade agreements in a simple scheme. The important question then might be the one asked by Jagdish Bhagwati: Are regional agreements building block or stumbling blocks? Other questions may include whether bilateral agreements can somehow become minilateral agreements, and whether or not that process supports the WTO. There is mixed evidence supporting the answers to both of those questions.

U.S. trade policy after World War II was initially focused on GATT. However, under pressure from certain sectors like textiles, steel, electronics and autos, over time a number of voluntary export restraints were negotiated. By and large, the Cold War period was one of pragmatism in terms of trade protection. While no wide-ranging protectionist measures were instigated , sectors that applied pressure on the government were protected, but those protections expired after their complaints died down.

This policy changed in 1989 when the North American Free Trade Agreement (NAFTA) was negotiated. What followed were open sectoral agreements under the Clinton Administration and a large number of bilateral trade agreements in the first and second Bush Administration that were coordinated by then-U.S. Trade Representative Robert Zoellick. The combined value of all exports covered by all ratified bilateral trade agreements amounts to about 9.5% of U.S. exports and indicates that in terms of its attempt at displacing the WTO with a series of bilateral agreements, the Bush strategy has not proven effective.

The explanation for this evolution in U.S. trade policy is a mix of political and economic reasoning. During the Cold War, it was easier to resist protectionist pressure as opposition to communism was cited when turning down pleas for protection. This strategy was used by both Republicans and Democrats. With the end of the Cold War, the security-nested context changed and protectionist groups gained strength. As other regions and nations such as the EU, India, and China rose to prominence in the post-Cold War world, the global free trade paradigm became less advantageous for the U.S. This led to market-protecting agreements like the Doha Round of the WTO, and voluntary export restraints like those levied against Japanese automobiles in the 1990s.

Certain sectors that were politically important domestically gained greater protective measures after the end of the Cold War. While President Clinton was able to secure NAFTA, he did so with Republican support. His promise to revise NAFTA activated non-governmental organizations (NGOs) and trade partisanship. Labor and environmental activist groups came to the forefront and lobbied politicians to sign trade-restricting agreements.

Theories on trade and politics also played a role in the evolution of U.S. trade policy. John Ruggie's "embedded liberal compromise" argued that in the early post-World War II period, globalism was tempered by domestic compensation mechanisms. Yet although the welfare and trade adjustment assistance mechanisms were not very effective, as long as U.S. industries maintained a strong competitive position, broad scale liberalization was not challenged. However, the continuing trend towards liberalization and globalization more generally has not been matched by efforts to sustain the embedded liberal compromise. Also, there are now changing beliefs on the desirability of free trade. This leads to changing institutional nested concerns. While most economists were focused on the WTO, the slow pace of negotiations has now led them to favor both minilateral and bilateral agreements.

In 1988, the U.S. moved away from its prior strong commitment to multilateralism, when prominent government figures like Treasury Secretary James Baker began signaling that the U.S. may begin moving away from the worldwide negotiating rounds under GATT. EU concerns over agricultural subsidies prolonged GATT negotiations and motivated the U.S. to initiate negotiations with Canada and then, surprisingly, Mexico on NAFTA. By 2001, the Business Roundtable, had begun arguing that the U.S. needed to be more competitive with its more active trading partners, namely the EU. Shortly thereafter, U.S. Trade Representative Robert Zoellick began negotiations on a wide range of bilateral trade agreements.

Competitive liberalization was seen by some as a good thing. Fred Bergsten believed that bilateral agreements fit the bicycle theory, which holds that if trade liberalization, by any means, does not continuously move forward, it will falter because of protectionist pressures. On the other hand, Jagdish Bhagwati has been looking at bilateral trade agreements in the international context and has been highly critical of them.

When this shift in policy occurred, a number of new agreements emerged. The IT, telecom, and financial services sectors managed to secure agreements to promote liberalization through multilateral open sectoral agreements such as the Information Technology Agreement (ITA), Basic Telecom Agrement (BTA), and Financial Services Agreement (FSA). Initially, these agreements seemed advantageous, but the coalition for free trade started to erode as individual interests began focusing on their own sectors at the expense of WTO globalism. Basically, the problem is that multilateral open sectoral agreements buy off the winners, whose support for other broader trade agreements erodes once they get the sectoral agreement they want.

There are approximately 350 bilateral trade agreements at this point. The advantages of bilateral agreements include the ease of starting up negotiations, quick political payoffs, and the ability to use bilateral agreements to respond to agreements signed by other states. Negative aspects include trade and investment diversion, challenges for firms, particularly small and medium-sized enterprises (SMEs) due to complicated patchwork bilateral trade arrangements, and pressure on smaller countries to make concessions.

One other concern is lobbying. Contrary to common belief, diverse lobbying efforts in multilateral trade agreements like the WTO are a good thing. With the advent of multilateral open sectoral agreements, lobbying efforts directed at the WTO from globally competitive sectors has died down, causing WTO negotiations to revolve around agriculture and other protectionist groups.

Moving on to the prospects for the Asia-Pacific, the traditional Asian economic order had an organizational gap with no agreement between Japan, South Korea and China; and ASEAN has been only partially effective in liberalizing regional trade; and South Asia lies outside the San Francisco System. In much of East Asia, a bilateral-multilateral mix was in place. Access to U.S. markets was granted in exchange for security alliances such as those in effect in South Korea and Japan. The U.S. encouraged countries like South Korea to join the GATT, and informal regionalism has been present in East Asia in the form of the Japanese keiretsu and Chinese ethnic networks.

This Asian order was weakened by the triple shocks. The first shock was caused by the end of the Cold War, which brought about changes in strategic and economic realties as exemplified by the rise of China. The second shock was manifested in the Asian financial crisis when U.S. and IMF opposition to the Asian Monetary Fund led to a lack of trust and unwillingness by the West to help Asia, which resulted in bringing Asian economies closer together. Finally, the events of 9/11 altered U.S. perceptions and strategic alliances in East Asia and led to new political dynamics in South Asia. The result was a bevy of trade agreements signed by Asian nations. Many covered wide geographical areas, like those with Peru, Chile and New Zealand.

Five different scenarios exist for possible future trade arrangements in Asia-Pacific: First, the Doha Round of the WTO can be revived and completed; second, a free trade area may be negotiated in the greater Asia-Pacific; third, an ASEAN Plus Three or ASEAN Plus Six arrangement might come about; fourth, a free trade area might be established in Northeast Asia; and fifth, we might see a proliferation of bilateral preferential agreements.

The Doha Development Agenda (DDA) has several obstacles blocking its completion. Disputes exist between developed and developing countries on agricultural tariffs and subsidies, industrial tariffs, and contention over low actual tariff rates versus bound tariff rates that are creating bargaining problems. There has been little progress on services and the pursuit of bilateral and minilateral alternatives makes it difficult for countries to make key concessions.

A free trade area for Asia-Pacific (FTAAP) has been promoted by Dr. Fred Bergsten, among others. He holds that such an accord will control preferential trade agreements, prevent the development of East Asian exclusivity arrangements, mitigate the U.S.-China conflict, bolster APEC and enhance the prospects for the DDA. On the other hand, this is an ironic view, since it was competitive liberalization that generated preferential trade agreements in the first place. An FTAAP is also unlikely due to the following factors: East Asians are still skeptical about a free trade area among one another, free trade with China will almost certainly not receive U.S. domestic support, APEC is institutionally weak, and FTAAP has the potential to undermine what hope still remains for the DDA.

Other alternatives include expansion of ASEAN, a Northeast Asia free trade area, and the proliferation of bilateral agreements. ASEAN integration has been a slow process. Also, ASEAN Plus Six is opposed by China because it would dilute its dominance of the group. This alternative comes down to the fact that development of any broad arrangement in Asia will be a long process.

A Northeast Asian free trade area has made some forward progress. South Korea has shown itself very willing to create bilateral agreements, but Japan-China tensions counter this enthusiasm for cooperation on South Korea's part. One possibility with a Northeast Asian free trade area is that it would fit better with the ASEAN Plus system, especially in terms of interregional trade.

As for bilateral trade agreements, several actors are already pursuing them. For this reason, bilateral agreements are the most likely scenario for the future of the Asian free trade regime. The only country that is currently unable to negotiate bilateral trade agreements is the U.S., whose president does not have trade negotiation authority and President-elect Obama does not seem likely to pursue free trade as a major policy initiative.

There are several steps to take in the future: the DDA must be promoted, the trend toward bilateral preferential trade agreements must be resisted, and APEC should work toward realistic goals with clear targets. Additionally, politicians must work domestically to rebuild political coalitions for globalization and free trade.

URATA Shujiro
A free trade regime in Asia-Pacific is difficult to conceptualize given realities in the world today. While the goal of the trading system is to achieve global trade liberalization, the question is how to get there from here.

Bilateral agreements beg further discussion. In their favor, the WTO covers trade, trading services and some FDI, but many other economic activities take place between nations. For this reason, many policymakers turn to FTAs. Also, although FTAs can act as obstacles in multilateral negotiations, FTAs can also promote multilateral negotiations. On this point, negotiating FTAs can reduce opposition from protectionist circles. A third point on FTAs is that as the number of FTAs goes up, more policymakers will think about the importance of the WTO. Finally, FTAs are used as political tools as well as for economic gain, and the noneconomic factors have to be discussed in assessing the merits or demerits of an FTA.

The challenges of bilateral trade agreements can also be further explored. As discussed, SMEs are in a much worse position to use FTAs as compared to larger companies. Many policymakers are focusing on lowering the costs of using FTAs. Also, there has been little discussion on exactly how to integrate multilateral FTAs with the WTO so that separate free trade regions do not remain floating independently from one another.

Regarding Obama's policies, he apparently is not interested in pursuing FTAs and is instead in favor of renegotiating some existing trade agreements like NAFTA and KORUS (Korea-U.S. free trade agreement). Such actions on his part may undermine the credibility of the U.S. as these agreements have already been signed and some already put into force. Finally, the U.S. will be hosting APEC in 2011, but at this point its policy goals for that meeting remain unclear.

Vinod K. AGGARWAL
It is true that all preferential trade agreements are not created the same. It is not necessarily a good thing that each country pursues each agreement with its own set of individual provisions because this leads to complications and increased transaction costs. If individual countries have strong alternatives, those options reduce their interest in the DDA process. It is backwards logic to argue that preferential bilateral trade agreements must be pursued because of the lack of progress being made by the DDA, because the preferential trade agreements themselves are reducing the viability of the DDA. I would agree that decreasing the amount of opposition from protectionist circles is a positive development, and if these agreements are responsible for breaking down trade barriers - an act that would normally occur under the WTO - then that is also a good thing. However, preferential trade agreements generally end up having more excluded products than do agreements negotiated through the WTO.

As for noneconomic issues affecting FTAs, the U.S. has hinged its willingness to negotiate agreements on support for the Iraq War, which is not prudent trade policy. Similar to the financial crisis argument, it is believed that policymakers will be motivated to act more productively and in unison if the number of preferential trade agreements grows so large that it threatens to destroy the global trade regime. Only when situations deteriorate severely are people usually motivated to act. This strategy seems dangerous, so efforts need to be made in the DDA, bilateral preferential trade agreement negotiations need to be curtailed, and if results are not seen within six months, I agree that we will have to think about pursuing preferential trade agreements through the WTO.

While it is still up for speculation as to what Obama is planning in terms of trade, he has made statements recognizing and supporting globalization. This may point to a trade policy that facilitates globalization through the embedded liberal compromise. If his other social welfare goals can be met, it is possible that this may be successful.

There are a number of business facilitation opportunities that can be undertaken by the U.S. and Singapore as they gear up to host subsequent APEC summits. Moreover, it will be beneficial to keep moving forward on investment facilitation, Asia-Pacific free trade talks, and high quality preferential trade agreements.

Q: You mentioned that a U.S.-China FTA is not possible in the next 10 years. Could you elaborate on this further? As for the three shocks, what effect does the fourth shock, the current financial turmoil, have on the international free trade regime?

Vinod K. AGGARWAL
U.S.-China free trade is tied to the issue of the financial crisis. Historically, it is difficult to negotiate FTAs of any kind during a recessionary period. The auto industry bailout has shown that allowing further imports of foreign automobiles from China and Korea (under KORUS) will not be politically popular. This does not bode well for free trade.

Q: There seems to be a clash of philosophies that can be seen when negotiating FTAs in the Asia-Pacific region. What do you think about the U.S. strategy to fill the gap between U.S. standard FTAs and ASEAN standard FTAs?

Vinod K. AGGARWAL
The U.S.'s intellectual property philosophy does put pressure on countries like China and Thailand. This includes reinterpreting WTO agreements in a way that is more suitable to the U.S. These are games that big countries, unfortunately, play with little countries. These bilateral agreements that undo what has been accomplished through multilateral frameworks are not desirable. Many economists seem too focused on how relatively stronger states can use trade agreements to gain leverage over weaker states, in a kind of power play that does not seem beneficial in the long term. For this reason, it is in the interests of smaller countries to support the WTO as it provides a more even-handed negotiating platform than bilateral agreements.

Q: While the WTO is more desirable as a rulemaking body for free trade, do you think the U.S. would be opposed to the idea of ASEAN Plus Six or more? Or an Asia-Pacific free trade area?

Vinod K. AGGARWAL
The U.S. did oppose ASEAN Plus Three before it started, though now it is not saying much about that or ASEAN Plus Six. This is a good strategy as ASEAN Plus Six will not happen overnight, and being quiet about ASEAN Plus Three and ASEAN Plus Six will work in the U.S.'s favor. Although the U.S. has a huge USAID (U.S. Agency for International Development) program for ASEAN integration, the U.S.'s opposition to ASEAN Plus Three belies these initiatives. It seems that different parts of the government have different views of Asian integration, and there needs to be greater cohesiveness of U.S. policy in this regard. Decoupling will not help matters as long as Chinese exports continue to flow into the U.S., and it will be a long time before China develops the domestic demand to make up for the huge export surplus it is running. That said, Asian economies do not want to lose their connections to the U.S. market, so the U.S. need not worry about Asian integration somehow curtailing trade with the U.S.

Q: Who do you have in mind to support a restructuring of global free trade? For example, SMEs might be supporters of DDA due to the difficulties they face with the proliferation of bilateral trade agreements. Are there any other examples of this kind of strategy that you can think of?

Vinod K. AGGARWAL
SMEs are a good group to form a basis of support on, but by their nature they are weak. When making trade policy it is more useful to threaten big companies with an end to sectoral agreements if they do not lend their support to the DDA. Even though large companies realize that the DDA will be better for them, the benefits from sectoral agreements keep them from putting more effort into lobbying for the DDA.

Another way to build coalitions for free trade is to implement the measures that Obama has been putting forward, including better pension and healthcare programs. If the government takes care of these costs, it takes the burden off of corporations who struggle to compete under increasing legacy costs for retired workers.

Q: The width and depth of the institution must be considered when deciding on the future of APEC. Over the decade, many policymakers have tried to expand the coverage of APEC to include national security issues, export controls, and human movement issues. Many trials are underway on the APEC agenda. Do you think it is a good idea to expand APEC's agenda beyond trade and investment liberalization?

In Japan, many believe that APEC is valuable because it is not legally binding, which allows it to have greater flexibility. It seems that trade institutions have to be legally binding to be effective and this leads some to see APEC as useless as it cannot produce anything. To which argument do you subscribe?

Vinod K. AGGARWAL
Institutions like APEC need to be further institutionalized. I do not subscribe to the "Asian way" argument. This argument becomes a convenient excuse not to take any meaningful action in terms of APEC. The lack of legally binding arrangements is one of the reasons APEC has been effective. What is misunderstood about the Asian way is that there are, in fact, many legally binding rules and very strong behavioral norms that take the place of legal rules. Also, Asians have been very successful using the WTO dispute settlement procedures, which is a highly legalistic body, so their opposition to binding rules in APEC seems odd.

I would agree, however, that the lack of legally binding status does not render APEC useless; the ability to bring 21 world leaders together and meet where they otherwise would not is productive in itself. But the institution should be somewhat focused and more institutionalized. APEC needs a bureaucracy and an analytical capacity in order to be effective.

Q: While the EU has been prolific in its signings of preferential trade agreements, Japan and its private sector in particular has been the most averse to signing such an agreement with the EU. What are the prospects for a free trade agreement between the EU and Japan? Also, compared to the U.S. and the EU, what is Japan's standing in terms of FTAs?

Vinod K. AGGARWAL
It is somewhat disappointing that the EU has chosen to move away from what might have been a very interesting approach to inter-regionalism--that is, negotiating between regions. This negotiating between customs unions seemed very promising, but did not work with Mercosur or Lomé, and the EU is now worried that the inter-regional approach is not working in Asia either. There are still, however, those in the EC who favor negotiating in this way, even though the trend seems to be moving back toward negotiating with individual nations.

As for EU and U.S. agreements versus Japanese economic partnership agreements, there are three separate approaches: Japan has always shown the most flexibility; the EU less so, but still remains flexible; while the U.S. generally attempts to dictate its own specific terms in agreements.