APEC: A superregional trading bloc
Kim, Suk H
Regional trading groups based primarily on economic cooperation have become the most debated topic in world trade. World leaders loudly assail regional trading blocs that serve as protectionist trade umbrellas. Nevertheless, they concede that trading blocs may be an unfortunate but emerging trend. For the first time, however, a group of countries under the name of Asian Pacific Asian Economic Cooperation (APEC) have come together by forming a trading bloc to promote global economic interests rather than defending their own narrow markets. In this article, we discuss major differences between APEC and other trading blocs.
Asia-Pacific Economic Cooperation (APEC), established in 1989 as a regional forum for economic cooperation, has expanded to 18 members: Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, the Philippines, Singapore, South Korea, Taiwan, Thailand, and the United States. “In spite of the tremendous diversity of our cultures, political systems and stages of development of our economies, we have been able to envision a community of Asia-Pacific economies based on a growing spirit of partnership,” President Suharto of Indonesia declared at the end of the 1994 APEC Summit. On November 16, 1994, leaders of the 18 Pacific Rim nations moved toward creating the largest trade zone by the year 2020. Developed nations such as the United States and Japan agreed to end trade barriers by 2010, and developing nations agreed to follow suit by 2020. APEC member countries represent more than half the world economic output. The APEC leaders agreed to meet in Osaka, Japan, in 1995 to hammer out details of how to reach the free trade goal.
APEC’s guidelines stipulate the following three principles: First, cooperation should be outward looking, building consensus on a broad range of economic issues. Second, participation is to be open ended, based on the strength of economic linkages. Third, regional liberalization is to be promoted, provided it is consistent with WTO principles, not to be to the detriment of other economies. These three principles make APEC a unique trading bloc because a group of countries came together for the first time to promote global economic interests. In this paper, we discuss the nature of trading blocs, the structure of APEC, major features of APEC, and the role of the Eminent Persons Group.
TRADING BLOCS: TYPES OF ECONOMIC COOPERATION
A trading bloc is a preferential economic arrangement between a group of countries that reduces intraregional barriers to trade in goods, services, investment, and capital. There are more than 50 such arrangements at the present time. There are five major forms of economic cooperation among countries: free trade area, customs union, common market, economic union, and political union.
The free trade-area type of cooperation requires member countries to remove all tariffs among themselves. However, the member nations are allowed to have their own tariff arrangements with non-member countries. The North American Free Trade Agreement illustrates the free trade-area type of agreement. Under the customs-union arrangement, member nations not only abolish internal tariffs among themselves but also establish common external tariffs. The Andean Pact (among Bolivia, Columbia, Ecuador, and Peru) constitutes a customs union. The aims of the Andean Pact are designed to establish free trade among member countries and to impose a common tariff of 5 to 20 percent on products imported from outside.
In a common market type of agreement, member countries abolish internal tariffs among themselves and levy common external tariffs. Moreover, they allow the free flow of all factors of production, such as capital, labor, and technology. The Central American Common Market exemplifies a common-market type of agreement. The European Union exemplified a common market type of agreement until the end of 1992.
The economic union combines common-market characteristics with harmonization of economic policy. Member nations are required to pursue common monetary and fiscal policies. This means that economic-union members have to synchronize taxes, money supply, interest rates, and regulation of capital markets. The current version of the European Union represents an economic union. The name of the European Community was officially changed to the European Union (EU) on November 1, 1993, when the Maastricht Treaty of the EC went into effect.
The political union combines economic-union characteristics with political harmony among the member countries. Essentially, countries merge with each other to create a new nation. Thus, it is the ultimate market agreement among nations. In the 1950s, Egypt, Syria, and Yemen formed a political union, but it did not last long. Thus, in its pure form, an example of the political union does not exist. However, a newly created commonwealth of 11 former Soviet republics could be considered a political union.
THE STRUCTURE OF APEC
The most prominent activity on the APEC calendar is its Ministerial Meeting. Held annually, its purpose is to allow the region’s ministers to review APEC’s progress, to set its direction for the coming year, and to review regional and world economic conditions.
Between Ministerial Meetings, APEC senior officials meet periodically to develop issues for ministerial consideration and to give guidance to the working groups. There are currently 10 working groups: trade and investment data review, trade promotion, investment and industrial science and technology, human resources development, regional energy cooperation, marine resources conservation, telecommunications, transpiration, tourism, and fisheries. Each of these working groups has one or more members called “shepherds,” who serve as coordinators. In addition, there are two ad hoc committees, one for regional trade liberalization and the other for economic trends and issues.
At the 1992 Bangkok Ministerial Meeting, APEC members agreed to establish a small, permanent Secretariat, located in Singapore, to provide logistical support for APEC meetings and the activities of its working groups. The APEC Secretariat began operating in January, and is staffed primarily by government personnel on loan from APEC member economies.
At the 1993 Seattle Summit, the leaders decided to hold annual summits. Indonesia offered to host a summit in 1994. Japan has publicly announced that it will hold one when it assumes the chair in 1995. This decision to hold annual summits assures that: (1) the leaders will continue to focus on APEC and to know each other better; (2) all APEC members will broaden their perspectives; and (3) government ministers and officials will be fully energized to carry out their leaders’ instructions from summits.
MAJOR FEATURES OF APEC
Rather than being a hinderance, APEC could be a building block because, unlike other trading blocs, it has several distinctive features. APEC is a superregional trade arrangement which includes several trading blocs: the North American Free Trade Area (the United States, Canada, and Mexican), the Australia-New Zealand Free Trade Area, and ASEAN Free Trade Area (Brunei, Indonesia, Malaysia, Thailand, Brunnei, Philippines, and Singapore). Thus, APEC through its collective voice may check the EU if the EU evolves into a so-called “fortress Europe.” And it may also lead NAFTA into broader Asia-Pacific cooperation, thus ruling out the possibility of discrimination against Asian economics. This development will encourage a new economic order–a bipolar system of the EU versus APEC, instead of a tripolar system of the EU, Asia, and North America. APEC’s role as a bridge between Asia and North America will be helpful in supporting a multilateral free trading system. In fact, in 1994 the United States and several other countries used APEC as a leverage to push reluctant Europeans toward concluding negotiations on global trade talks in Geneva before the December 15 deadline.
Historically, successful trading blocs have consisted of member countries with similar levels of per capita income, geographic proximity, compatible trading regimes, and political commitment to regional organization. APEC countries, however, have extensive diversity. Its development will be a fascinating, critical test of whether economic interdependence can override seemingly major national differences. Some critics ask, “what, apart from a Pacific shoreline, do the 18 countries have in common?” First, the citizens of Indonesia, Singapore, Malaysia, and China do not have the political liberties necessary for a free flow of information, a critical aspect of a market economy. Even freedom of the press is an elusive goal for some of these countries. Second, APEC members cover virtually the entire spectrum of economic development. Per capita income ranges from $500 to $30,000. Third, APEC includes countries from four continents. North America, South America, Oceania, and Asia. Finally, APEC may be the only trading zone which includes one nation currently existing as three countries: China, Taiwan, and Hong Kong.
APEC advocates “open regionalism,” characterized by non-exclusive and nondiscriminatory principles, which is consistent with the WTO (World Trade Organization) rules. It would avoid preferential treatment altogether on some issues, such as competition policy and new industrial standards. Individual APEC members could be permitted to extend their concessions to nonmembers, such as Mexico has done with some of its investment obligations under NAFTA. In general, however, the strategy under the concept of open regionalism would open APEC arrangements only to nonmember countries that undertake corresponding obligations. This will eliminate “free riding” by outsiders, including large trading entities such as EU. The elimination of free riders is important because nonmembers would have no incentive to negotiate multilaterally if they could simply sit back and receive the benefits of APEC liberalization without making concessions of their own. This open regionalism is unique. For the first time, a powerful regional group of economies has come together by forming a trading bloc to promote global economic interests rather than to defend their own narrower markets. APEC’s open regionalism is radically different from the discriminatory nature of an economic union such as EU or even a free trade area such as NAFTA.
APEC would play several important roles. First, unlike other trading blocs, APEC has continually expressed support for successful Uruguay Round negotiations. Second, regional trade liberalization within APEC could solve the trade conflict between the United States and Japan, a major cause for potential contraction in world trade. It could also reduce the tendency toward protectionism in the U.S. market and could help to alleviate difficulties in gaining access to the Japanese market. Third, it is possible to promote more open global trade through bilateral negotiations (APEC and EU) rather than through several regional negotiations.
THE ROLE OF THE EMINENT PERSONS GROUP
APEC established its Eminent Persons Group (EPG) at the Ministerial Meeting in 1992. The EPG consists of one prominent nongovernmental economics expert from each of 11 member economies. The EPG enunciates a longterm vision for economic relations in the AsiaPacific region to recommend–without bureaucratic constraints–ways in which APEC can move toward this vision.
In Bangkok, 1992, ministers asked the EPG to envision trade in the Asia-Pacific region in the year 2000. The 11-member group under the chair of Dr. Fred Bergsten of the United States ably met that objective. The EPG’s 1993 report called for eventual “free trade in the Pacific” to be achieved through multilateral liberalization. They urged regional efforts to “rancher up” the multilateral process, to expand trade facilitation and technical cooperation, and to take additional steps to make APEC a stronger institution. Furthermore, this report emphasized “two noes.” First, the EGP did not recommend an economic union or even a customs union, but rather a community in the generic sense, one which translates into “big family” in Chinese. Second, it did not propose a discriminatory free trade area, but rather “free trade in the area” achieved to the maximum extent possible through multilateral liberalization. In Seattle, 1993, APEC ministers agreed to implement the EPG’s recommendations.
In its report in August 1994, the EPG recommended two main ways in which APEC countries could move liberalization forward. The first was for heads of government to announce a timetable for realizing their vision of free trade. The group proposed that a commitment be made at the 1994 summit that APEC countries would start bringing down their barriers in 2000; that by 2010 the developed countries (The United States, Australia, New Zealand, and Japan) should have lifted all restrictions on intra-APEC trade and investment; that by 2015 the four newly industrialized countries (Korea, Taiwan, Singapore, and Hong Kong) should have done the same; and that by 2020 all APEC members should have scrapped all barriers.
Second, APEC should embark directly on specific measures to smooth trade among themselves. At the top of the list should be the adoption of a non-binding code on treatment of foreign direct investment; next should be a mediation service to resolve any trade disputes between APEC members which were not covered by the spat-settling system of the WTO; third, countries should make trade easier by agreeing to recognize one another’s product standards and testing procedures, thereby removing a commonly used non-tariff barrier.
Many Pacific Rim states sharply limit what foreigners can do on their turf, with strict rules that can distort or even prevent sound investment. These practices may shield local interest from unwanted competition but over time can harm whole economies as well as the outsiders concerned. The political impetus came in November 1993 when President Clinton hosted APEC leaders on an island near Seattle. These leaders instructed bureaucrats to develop an investment code–voluntary rather than mandatory–as a tangible accomplishments by APEC. This code is designed to establish members’ official investment rules into a single publication as a business guide. Just how far they can get remains uncertain because the restrictions aren’t there by accident.
Countries have formed a variety of trading blocs for many years because they recognized the advantages of working together. These trading blocs, however, have become stumbling blocks in the movement toward a global economy because they focused on preferential economic arrangement between a group of countries. Although APEC faces many challenges such as removal of trade-investment barriers, it has taken a different turn. Unlike other trading blocs, APEC may accelerate the movement toward the global economy because it pursues several unique goals such as “open regionalism.”
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Carig Forman, “APEC Nations Agree to Remove Trade Barriers Around Pacific Rim,” The Wall Street Journal, November 16, 1994, p. A23.
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Andrew Elek, “Trade Policy Options for the Asia-Pacific Region in the 1990s: The Potential of Open Regionalism,” American Economic Review, May 1992, pp. 74-78.
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Copyright College of Business Administration. University of Detroit Mercy Spring 1996
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