Report

Time to Reinvent APEC

Edward J. Lincoln and Kenneth Flamm

APEC, the Asia-Pacific Economic Cooperation forum, provides an opportunity for 18 countries with strong trade and investment ties to discuss a wide range of economic issues. APEC has scored two tangible achievements to date: a sweeping but vaguely worded 1994 pledge by its member states to open up to free trade and investment by 2010 and 2020, and a central role in the negotiation of the 1996 Information Technology Agreement (ITA). However, APEC is in danger of fading. When this year’s summit begins on November 19, the United States must push for major reform of the APEC bargaining process if the organization is to have any chance of realizing its ambitious trade reform targets.

POLICY BRIEF #26

The Asia Pacific Economic Cooperation (APEC) forumbrings together member nations to discuss trade and investment issues. Membership is diverse, ranging from wealthy economies like the United States, Japan, and Australia, at one end of the economic spectrum, to the much poorer China, Indonesia, the Philippines, and Papua New Guinea at the other, and the fast-track tiger economies of Southeast Asia, Mexico, and Chile in between. In 1995, the 18 nations of APEC accounted for 55 percent of world GDP, about half of global trade, and 38 percent of the world’s population [see figure below]. Peru and Vietnam will most likely soon be admitted, while another nine countries (Russia, India, Pakistan, Sri Lanka, Macao, Mongolia, Panama, Colombia, and Ecuador) are currently on the waiting list.

Established in 1989 as an inclusive regional discussion forum for common economic interests, the initial APEC meetings were low-key annual networking sessions for national trade and foreign ministers. By establishing a broadly inclusive organization rather than a narrowly defined pan-Asian forum to discuss economic issues, it firmly connected the United States to its growing economic interests in the region. However, in 1993, President Clinton, in scheduling an overdue visit with Asian leaders, elevated APEC gatherings to summit status. With its new cachet and top-level political participation, APEC surprised most observers with a string of tangible accomplishments, especially a sweeping (though vague) pledge at the 1994 summit in Bogor, Indonesia to completely open all APEC economies to free trade and investment, by 2010 for the developed members of the group, and by 2020 for the developing members. As a first step toward accomplishing the Bogor Declaration goals, an action agenda and a working-level structure emerged from the 1995 meeting in Osaka. The 1996 Manila APEC meeting then produced the initial responses to the action agenda, and proposed a global Information Technology Agreement (ITA) that was later adopted by the World Trade Organization (WTO). When implemented, the ITA will do away with tariffs in most industrial electronics and computer products by the year 2000. Through the ITA proposal, APEC has provided a significant new source of momentum toward an open global trading system.

These initial accomplishments notwithstanding, APEC is in grave danger of sinking into irrelevance as a serious forum. On its current trajectory, APEC will almost surely fail to deliver on its bold promises for 2010/2020. APEC now needs to rethink its fundamental organizational premises if it is to deliver on its ambitious mandate.

APEC’s Promise and Problems

During the 1970s and 1980s, deep political and historical divisions blocked formation of a forum that could include both communist and non-communist economies (principally China and Taiwan) or Asian and non-Asian nations. Just to have created APEC as an inclusive regional forum to discuss common economic interests, therefore, was a useful accomplishment in 1989. It brought together a large and unusually diverse subset of major trading economies in the world’s fastest growing region, one driven by rapidly expanding intraregional trade and investment flows.

Given the rapidly emerging position of China in global trade and investment, inclusion of China as a full APEC member was a particularly important accomplishment. APEC is now one of the few multilateral economic organizations that actively embraces China as a committed partner in the global trade and investment dialogue. Furthermore, since the conclusion of the Uruguay Round and the creation of the WTO, APEC has become a key venue for discussing international economic integration, including so-called new issues—competition policy, investment policy, intellectual property rights, free trade in services. These important issues are not yet covered by the WTO in any thorough way.

But APEC also has some distinct disadvantages as a forum for serious trade talk. APEC is not a mini-WTO in which serious bargaining leads to compromises and agreements at the negotiating table. Endeavoring to avoid contentious negotiations, APEC has adopted a more non-confrontational process with serious drawbacks.

First, trade liberalization within APEC is organized around the notion of open regionalism, meaning that members offer any reductions in their trade barriers to all other countries in a nondiscriminatory way, whether members of APEC or not. While perhaps an appealing notion to economists committed to free trade, the APEC approach creates political obstacles to liberalization, since free riders outside APEC do not have to dismantle their own trade barriers to benefit from APEC openness.

For at least a few areas, APEC members may constitute such a large share of global exports of a product that APEC liberalization will mostly benefit its own members—even if others outside ultimately choose not to reciprocate. Information technology is one such area, and APEC’s success with the ITA validates the idea of APEC as a launching pad for some global sectoral liberalization initiatives. Consumer electronics, trucks, bicycles, and some industrial chemicals pass a similar test, with 70 percent or more of world trade accounted for by APEC members. But product areas that would pass such a test are not many, and it would appear that with the ITA, the lowest hanging fruit has already been plucked. And in areas where APEC members do not overwhelmingly dominate global trade, it is difficult to see why non-members would be likely to accept a trade deal negotiated by a self-appointed APEC executive committee for the global economy, as was the case with the ITA.

A second feature of APEC has been the adoption of the principle of concerted unilateralism as its primary mechanism for liberalizing trade. This process means that proposals are not formally negotiated. Each member brings to the annual APEC summit an internally generated offer of trade and investment liberalizing measures, known as an Individual Action Plan (IAP), which is not subject to any serious bargaining. Nor must members agree to one another’s plans for lowering trade barriers. Touted as an Asian approach, accentuating the positive and avoiding debilitating disagreements or debates over concessions, this procedure is almost certain not to produce substantive movement toward APEC’s goal of complete removal of all barriers to trade and investment by 2010 and 2020. Even in the WTO, where nations do not commit to identical degrees of openness, each nation must be satisfied with the package of tariff and other concessions offered by others at the bargaining table before signing the final agreement.

Any reduction in trade barriers put forward by a nation under the APEC process becomes a unilateral gift to other members (and the rest of the world, given open regionalism). Other APEC members’ liberalization proposals are not conditional on any nation’s own offer, so members have an incentive to offer little while hoping for a lot from others.

Even in the United States, with its longstanding commitment to open markets, it is hard to see how further reductions in already low trade barriers can gain domestic political support without APEC members promising to make tangible reductions. And if this is hard to visualize happening gradually over the next few years, it is doubly difficult to see it happening as a big bang in 2010, without some ironclad guarantee that the rest of APEC, and probably Europe, will ultimately reciprocate.

If the APEC membership were to magically resolve these structural and procedural difficulties, there remains the unspoken problem of non-tariff (and often informal or invisible) barriers to trade designed to favor domestic producers. In some Asian countries, protectionist government policies have historically been opaque, informal, and often officially deniable. Such policies were an effective means of abiding with the formality of binding tariff, quota, and subsidy concessions while protecting or promoting domestic industries and firms. APEC has been able to move beyond the traditional focus of the WTO on tariffs, quotas, and subsidies, and put some of the new issues on its agenda. But little serious discussion or negotiation has occurred yet in these areas. As long as Japan, South Korea, China, and others believe that the government should play a broad and active role in favoring the home team at the microeconomic level, and face no serious international bargaining on these issues, these countries will continue to resort to problematic informal or invisible barriers. Political support for a unilateral dismantling of remaining trade barriers in the United States will not be forthcoming unless these issues are addressed.

The initial round of IAPs for further liberalization submitted at the 1996 APEC meeting illustrate how these structural problems have caused APEC to lose its momentum. Every member submitted its unilaterally generated plan, but not surprisingly, they contained little of substance beyond what members had already offered in the WTO, through bilateral negotiations, or as a result of domestic reforms unrelated to APEC. Even the process itself was cumbersome, producing long and tedious documents that are impossible to compare internationally or assess analytically. Establishing some initial benchmarks, and then monitoring and grading the IAPs on an annual basis, should be the minimal requirement to justify the continued investment of time and resources. Even this would make the IAPs only a modestly useful annual snapshot of the state of openness within the various APEC economies, rather than a process likely to move the liberalization agenda forward substantially.

Optimists within our government point to the flurry of activities in working groups and lower level consultations as the real heart of what APEC is doing and downplay the 2010/2020 pledges as impractical, rhetorical excess. By this view, the real benefit of APEC will be dozens, if not hundreds, of small but tangible reductions in the costs of doing business within APEC member economies. These will result from working groups engaged in a process more akin to real bargaining, developing voluntary codes or procedures on issues ranging from the handling of air express packages at customs to sharing technical data for standards. Yet all of this working level activity—which absorbs significant amounts of time, energy, and resources from both government and the private sector—has yet to produce many serious beneficial nuggets in the three years since the Bogor declaration. Furthermore, the history of successful negotiations over trade liberalization suggest that it is high level, broad packages of reforms, negotiated wholesale, not retail, and pushed by top political leaders that actually open markets. Unfortunately, placing much faith in the current APEC process is bound to create disappointment in the future, and perhaps ultimately subvert APEC’s noble objectives.

Tough Love for APEC

To invigorate APEC and create a more realistic chance for serious and substantial progress in opening markets in coming decades, some fundamental changes in APEC’s principles of operation are needed. The aim would be to transform APEC from a feel-good chat forum into one where significant steps toward greater trade and investment openness become reality. The changes are likely to be unwelcome by some member governments, and by more than a few of the officials kept busy traveling to a mushrooming phalanx of committee and working group meetings. But a little tough love for APEC now is needed if we are to avoid a painful and disappointing failure in the next century. Here are some changes that will help:

  • Most APEC discussion groups should abandon the idea of concerted unilateralism. Instead, APEC should adopt a principle of open reciprocal regionalism. Rather than relying on the unilateral IAPs, this approach involves real negotiations over trade-opening measures. The original bargaining will occur among APEC members, with regional agreements that bind only those members willing to sign on to specific commitments. Only those willing and able to bargain in good faith need participate on any given initiative, and the benefits of the agreement will apply only to the signatories. Such regional APEC agreements would be open to additional membership both within and outside APEC. That would hopefully attract additional signatories once they recognize the benefits which accrue to participants. APEC provides some advantage over the WTO for beginning agreements in particular sectors because of its more limited membership and the potential reach into new issues beyond tariffs and quotas. Reciprocity becomes the means of eliminating the free rider problem, and extension to others willing to accept the same responsibilities preserves the critical idea of open regionalism.

    There is some evidence that this principle is already acceptable to APEC members. The working group on standards and testing for telecommunications equipment is close to adopting just this type of pact—binding, benefitting only APEC members who voluntarily sign on. Other APEC working groups have invited non-APEC participation, so the building blocks are in place for an open reciprocal principle which could make significant initiatives in specific new sectors much more likely.

  • APEC needs to address non-tariff issues in a vigorous manner. APEC has a head start on the WTO: the generally broader APEC agenda has already explicitly endorsed the notion of dealing with non-tariff barriers, and APEC has developed an ongoing discussion process, in contrast to infrequent WTO rounds. APEC discussions could be the germ of major new WTO initiatives (a là ITA), or they could result in regional agreements on these issues conforming to the open reciprocal regionalism principle just described. Given the determination of some APEC members to favor domestic industrial interests over foreign rivals, willingness of all members to sign and abide by robust rules extending beyond traditional trade barriers is doubtful. But action by at least a subset of APEC members on non-tariff barriers would nudge the rest of APEC and the broader WTO, and provide by example a demonstration of potential benefits.

    The recent ITA presents an example of both what can be accomplished and what remains to be done. Agreement among APEC members to press for complete elimination of tariffs on information technology products was quickly passed up to the WTO and adopted in December 1996. However, it is entirely predictable that trade frictions in information technology, rather than vanishing, will now shift to a new plane: the ability of governments to use investment policy, procurement, standards, subsidized loans, administrative guidance, and other national policy tools to provide preferences for their domestic industries after tariffs are removed. APEC provides an appropriate and potentially successful forum in which to begin discussing such impediments.

  • APEC can focus on improving the physical and administrative infrastructure to support increased trade and investment. To date, efforts have been fairly minimal, focused mainly on assembly, codification, and publication of various kinds of trade-related information for member countries. This is activity masquerading as progress. The contribution on competition policy, for example, consists of little more than assembling information on existing rules in each member country. The working groups will undoubtedly produce some useful changes, such as accelerating region-wide movement toward paperless electronic-based customs procedures. But APEC needs to tackle more difficult and significant issues as well, including vigorous pursuit of transparency in government administrative processes, improvement of trade-related physical infrastructure (harbor facilities, bonded warehouses, and others), and even international control of piracy.

  • Regional development banks need to be brought into the framework. The Asian Development Bank and the Inter-American Development Bank could become part of an active APEC initiative to promote trade and investment infrastructure development. Loans contingent upon conformity with APEC codes of government transparency, or to finance construction of APEC-standard customs warehouse facilities, are among the many possibilities for collaboration. A potential synergy exists with both the World Bank and the International Monetary Fund, as well, and should be explored. The seeds for this have already been planted in several modest working group activities, but the scope of multilateral bank involvement should be expanded.

  • APEC could take on some regional issues, where problems relate primarily to conditions within APEC, and for which it would be a highly appropriate body for negotiation. The recurring problem of smoke and air pollution in Southeast Asia is one example. If the Association of Southeast Asian Nations (ASEAN), with its determination to avoid the confrontational requirements of real negotiation, is unable to resolve problems of international transmission of pollution, APEC might provide an alternative forum for beginning work on these issues. The same is true of pollution issues related to China, which have the potential of spreading environmental degradation through a large part of the region.

    Finally, APEC should be viewed as an important vehicle for engagement with China. Whether or not China enters the WTO in the near future, close and continuous interchange on a wide range of economic issues is critical if China is to be absorbed into the global economic system without serious disruption. China is unlikely to want to deal with APEC on any issue currently being negotiated with the WTO. But if APEC does indeed become a serious player in the new areas, including some (like intellectual property rights) that are particularly important to China and its APEC trade partners, there will be an incentive for China to participate. Furthermore, as the only major international economic forum which includes both China and Taiwan, APEC is a living, breathing testbed for managing the challenges posed by the complex politics of China and Taiwan.

Conclusion

It was only a few years ago that APEC was born. Nonetheless, it has quickly emerged as the core international economic organization for the Asia-Pacific region. But the early momentum generated by APEC’s creation, its almost accidental elevation to the summit level, and its breathtaking leap to a bold and imaginative long-term goal are now in real danger of dissipating. APEC could end up a forum with a great deal of discussion and little action. Networking and improved communications among governments and business do bring some benefits, and the APEC committees, administrative infrastructure, and business advisory groups provide the only such organized contacts which span the entire Asia-Pacific area. APEC is particularly important in making the region focus on issues from a trans-Pacific perspective, with America as a key player, rather than a more exclusionary Asian viewpoint which leaves the United States outside. Nevertheless, the current course could lead to conspicuous failure to meet the lofty goals set for 2010/2020.

With the recent financial tumult in several Southeast Asian economies, it is inevitable that some of the discussion at the upcoming Vancouver summit will shift to finance and rescue packages for the region, as it should. Adding large new issues to an already expansive APEC trade and investment agenda, however, will further diffuse effort and focus, and further worsen the already murky prospects for its current goals. Furthermore, it is unclear why an organization that conspicuously excludes Europe is better equipped than other, more inclusive alternatives to manage the resources needed for recovery from financial crises in Southeast Asia. Instead, the original trade and liberalization agenda should be reinforced as a central element of the long-term solution to the current crisis, promoting the trade and investment flows that are going to be critical in restoring sick economies to full financial health.

Beyond the immediate financial problems, what should the United States be doing to make sure that APEC makes progress on its original agenda? APEC remains a delicate political construct, and the United States must tread carefully in exercising a leadership position. Nevertheless, opportunities exist for the U.S. government to press directly, or to quietly persuade others, to support APEC’s reshaping. The economic benefits could be substantial.

The United States should strongly promote the idea of open reciprocal regionalism as the centerpiece around which new rounds of sectoral, or issue-specific, liberalization efforts are organized. Some countries will have reservations about rushing headlong into an excessively ambitious liberalization agenda. But given the outward economic orientation of all APEC members, even nations with activist national development strategies are ultimately likely to support a process which generally promotes trade (yet permits an escape hatch for cherished industrial promotion policies).

The IAPs, rather than being the centerpiece for voluntary and insubstantial unilateral liberalization efforts, should be retooled into something more useful—a common set of analytical reporting requirements—providing a realistic and comparable annual review on progress toward liberalization. In addition, APEC should look at ways to improve the basic physical and administrative infrastructure for trade, forge closer links with multilateral development banks, and take up regional environmental issues that are otherwise not likely to be addressed.

APEC has considerable potential for both enhancing regional economic integration and opening global markets. But if the current drift continues, it faces a real possibility of ending up with few tangible results. With careful and constructive leadership, however, the United States can play a critical role in revitalizing APEC, and producing significant new momentum toward an open global trading system for the twenty-first century.