Hadi Soesastro
Marcus Noland
Donald K. Emmerson
Shorenstein Reports on Contemporary East Asia
Number 3
January 1995
In November 1994, APEC (Asia Pacific Economic Cooperation) held its Sixth Annual Ministerial Meeting in Jakarta, Indonesia. Two days later, following a precedent set in Seattle in 1993, the APEC heads of state and representatives from the People's Republic of China, Hong Kong, and Taiwan met in Bogor, Indonesia (a resort near Jakarta). The Bogor meeting produced the APEC Economic Leaders 'Declaration of Common Resolve, which set the goal of achieving "free and open trade and investment in the Pacific Rim by the year 2020."
On January 25, 1995, during a Shorenstein seminar entitled "The Jakarta-Bogor APEC Summit: A Vision for 2020," held at the Asia Foundation, San Francisco, three prestigious Asia scholars expressed their views on the outcome of the APEC meetings. Dr Hadi Soesastro, Executive Director of the Centre for Strategic and International Studies, Jakarta, spoke from an ASEAN perspective; Dr. Marcus Noland, Senior Fellow, Institute of International Economics, Washington, D.C., outlined U.S. attitudes; and Professor Donald Emmerson, University of Wisconsin, evaluated the political outcome. More than eighty Bay Area business leaders attended the event. This report summarizes the points raised by the three speakers.
Hadi Soesastro
Despite its informal character, the APEC Economic Leaders' Meeting (AELM) clearly overshadowed the meetings of APEC economic ministers in Jakarta. Formally the AELM is not a part of the APEC mechanism; however, since the first chiefs of state meeting at Blake Island in 1993, APEC's course is being charted by the leaders.
The prospect of a clear date for free and open trade across the APEC region will have important implications for future interactions both among the members and between APEC and non-APEC countries. Moreover, the increasing institutionalization of the leaders' meeting raises the stakes of the annual meetings. APEC political leaders will find, as have those in the Group of 7 (United States, Japan, Germany, Britain, France, Italy, and Canada) and SAARC (the South Asian Association for Regional Cooperation), that their increasing visibility at APEC meetings brings with it the political responsibility of returning home with positive and concrete results. Results will be forthcoming only if consultations among APEC members are intensified at all levels of the policy process.
The Bogor Declaration outlined seven major principles regarding the goal of trade and investment liberalization:
The Malaysian and Thai governments expressed some reservations and clarifications of their positions on the Bogor Declaration in separate statements issued immediately after the leaders' meeting. These statements shared three central points: first, that the goal is not to create an exclusive Asia Pacific free-trade area in the sense of the European Union or NAFTA; second, that the target dates of 2010 and 2020 are not binding commitments; and third, that the elimination of trade and investment barriers in the region will proceed gradually.
There is widespread agreement among the APEC leaders that the timetable is indeed nonbinding. While this raises the question of the value of the agreement, the leaders' political commitment is in fact an important confidence-building step that will give momentum to trade liberalization in both public and private sectors across the region.
Less agreement exists regarding Indonesian President Soeharto's proposal of an opt-out clause that would allow some member nations to excuse themselves from agreements where there is a consensus among most members. Such an "18 minus X" approach would depart from APEC's current unanimity approach to decision making. This issue will obviously return to the table shortly.
The central challenge for the Osaka APEC meeting in November 1995 will be for the leaders to agree on a "blueprint" for liberalizing trade and investment. The most basic question here is the meaning of "free and open trade." Non-tariff barriers to trade are already perhaps even more important than tariff barriers, and the question of how to handle these will surely be difficult. Another critical question is whether services and agricultural products will be included in the agreement. Finally, considerable discussion can be expected on the question of whether South Korea, China, and Malaysia will be expected to comply with the 2010 or the 2020 targets.
Three competing models of how liberalization should proceed are currently on the table. The first is unilateral liberalization, in which individual members simply drop barriers as quickly as they are able, regardless of the pace of reform in other member countries. The second and third are both versions of negotiated liberalization. Under open regionalism, liberalization might proceed on a sector-by-sector basis, with the elimination of barriers applying to both member and nonmember countries. Alternatively, and in opposition to the principles of the declaration, the members might restrict the benefits of liberalization to member countries and perhaps to nonmembers whose own trade rules are fully reciprocal. This last approach seems to be the one favored by the United States.
My own feeling is that APEC should in fact pursue the process of unilateral liberalization that is already well under way. Any negotiated settlement, particularly the negotiated approach, ends up treating trade liberalization as a bargaining tool rather than a move that is beneficial in and of itself.
Marcus Noland
My recent analysis and data projections of world income shares and shares of U.S. trade revealed a widespread consensus about rapid growth in Asia over the coming decade. Among the most interesting findings are that within a decade China's economy is likely to be at least fifty percent larger than Japan's and that by the year 2003 U.S. trade with Asia Pacific is likely to double that with Western Europe. During the coming decade, the Asia Pacific region is likely to increase its share of total world income from twenty-five percent to about thirty-three percent.
These changes will have a marked impact on U.S. economic policy. First, as growth rates in the rest of the Asia Pacific region continue to exceed those in Japan, battles for U.S. trade shares in Asia will move from discussions about market access in Japan to battles between the two giants in third-country markets. Second, increased trade will bring increased adjustment in the United States, particularly as U.S. light manufacturing industries become ever less competitive. Given the dominance of Chinese imports in this sector, we can expect intermittent if not persistent trade tensions between the United States and China for the foreseeable future.
Beyond Japan and China, increasing inter-Asian trade will inevitably decrease the U.S. share of total trade there. With this decline in market share will come a decline in the U.S. government's ability to make policy through unilateral pressure and bilateral negotiations. At the same time, the domestic political pressures created by the costs of adjustment in U.S. manufacturing will lead to increased U.S. demands for rapid and visible liberalization of Asian markets. Given the declining utility of bilateral negotiations, multilateral forums like APEC will be increasingly important if the United States is to successfully press its demands for liberalization.
Given these trends, the Bogor Declaration comes at a particularly auspicious moment. Computer models estimate that if the declaration principles were implemented, world output would increase by $50-$140 billion, with U.S. gross domestic product (GDP) probably increasing by one-half percent. Although implementation of the agreement will pose serious challenges, past experience indicates that private-sector enthusiasm for political commitments to liberalization often yields results years before the politicians' timetables. This was the case with the Treaty of Rome creating the European Community, the free trade zone created by Australia and New Zealand, and the U.S.-Canada free trade agreement. In the first two cases, twelve-year timetables were completed in only seven years.
The U.S. government goes forward from Bogor with a fair degree of consensus around five key points in its negotiating position:
In terms of implementation challenges facing the Bogor Declaration, I share Hadi Soesastro's concerns about China's timetable status and the coverage of agreements with respect to non-APEC members. In terms of product coverage, some countries may want to exclude specific sectors from liberalization. The Indonesians acquitted themselves well as hosts of Bogor by keeping discussion of such restrictions off the table in the final declaration. One way to get around this issue in the longer term would be to reduce tariffs to zero percent for sectors in which APEC countries so dominate world trade that the issue of "free-riding" by non-APEC members would be moot.
As we look forward to the Osaka Meeting next year, we will have to watch the Japanese stance toward those meetings carefully. The Japanese government may well view the Bogor emphasis on trade and investment as a threat to Japan's domestic economy. They may, as a result, take advantage of their position as host to shift the emphasis of the meeting away from trade and investment liberalization and toward development assistance, where Japan is stronger. Such an unfortunate development will be more likely if political weakness continues in Japan. In the current environment, the ever-cautious bureaucracy is particularly strong and may well get its way with the Osaka agenda.
Donald K. Emmerson
The introduction of the leaders' meeting has created a visible link between heads of state and APEC meetings. This innovation has had three major consequences: it has augmented APEC, a low-key network meant to cater to private entrepreneurs, with a high-key "summit" where political leaders take charge; it has raised the likelihood that cooperation will evolve through negotiated, binding, and reciprocal agreements along with unilateral action rather than by means of the latter alone; and it has, as Hadi Soesastro pointed out, raised the stakes for APEC so that tangible results are increasingly important.
As host of the next APEC meeting, the Japanese government is the most immediately affected by the increasingly high-level format of APEC. Japanese leadership at this moment is appropriate, given the country's economic importance to the region. But it is also ironic, given the Japanese government's foot-dragging on trade and investment liberalization at home and their tradition of low-key diplomacy.
As Marcus Noland noted, Japan is the subject of the longest chapter in the U.S. Trade Representative's 1994 report on foreign trade barriers. And while foreign direct investment from Japan reached $48.1 billion in 1990, FDI into Japan that year was less than four percent of this amount.
Japan's low-key approach to diplomacy was signaled by Prime Minister Maruyama's recent meeting with President Clinton, in which Maruyama managed to comment on APEC without even mentioning trade liberalization. At the same time however, Shojiro Imanishi, the Japanese diplomat heading the APEC secretariat in Singapore, outlined three priorities for APEC: implementing the Bogor Declaration; standardizing customs procedures; and cooperating on infrastructure and human resource development. Imanishi has also said that business leaders should have the final word on trade liberalization. This could be positive if it means that the government will follow the pro-liberalization views of the Pacific Business Forum; but it might also mean that official decisions will be deferred until widespread private-sector consensus is achieved.
Another critical challenge for APEC is the scarcity of domestic support for it in the United States. Imagine that the Bogor Declaration had called for a NAFTA-style agreement, to be reached by the year 2000 instead of 2020; such an agreement would almost certainly be defeated in the U.S. Congress. The reasons why provide a neat summary of the challenges to continued U.S. leadership of, and someday perhaps even participation in, an increasingly influential APEC.
First, many Americans are afraid that free trade and investment with Asia would drive wages here toward Chinese or Indonesian levels. Second, after twenty years of stagnant wage growth in the United States, economic nationalism is spreading. Third, experiences like the recent Mexican peso guarantees raise fears that further economic interdependence with developing economies makes the United States vulnerable to the domestic policy failures of potentially unstable states. Fourth, the fact that the two largest trade deficits run by the United States are with Japan and China limits Congressional willingness to cooperate with these countries until these imbalances are redressed. Finally, the opponents of "free trade" with Asia can stoke Congressional suspicions of APEC with evidence of human rights violations in several APEC member countries.
Given all these concerns, unilateral liberalization by individual APEC members is probably the most realistic way of implementing the Bogor Declaration. The crucial question is whether such an approach will result in tangible benefits fast enough to head off protectionist legislation from a Congress weary of promises.
