APEC: Beyond free trade to broader cooperation

Andrew Elek
Australian National University (ANU)

Some of the foundations of APEC were laid more than 40 years ago.  By 1989, the careful consensus building, based on the achievements of ASEAN and PECC made it possible to consider an inter-governmental forum.  In September of that year, I saw Asia Pacific Economic Cooperation spelled out on a hotel events sign for the very first time as I walked into the room to chair the inaugural meeting of APEC Senior Officials.

Thanks to excellent cooperation from the representatives of 12 economies, we were able to negotiate an annotated agenda at the dizzying speed (I calculated later) of only 3 minutes per word.  The road to the first ministerial-level meeting in Canberra was clear and APEC was launched.

PECC, a tripartite pre-cursor to APEC, had set out a rich agenda of issues to be considered by Asia Pacific governments, especially the region's strong shared interest in an open non-discriminatory international trading system.  Indeed, the first 25 years of the APEC process have been dominated by trade policy to attain the Bogor goal of free and open trade and investment.

A shared commitment to opening our economies has created an Asia Pacific region which is even more highly integrated by trade than the faltering European Union.  And that has happened without any formal APEC-wide trade agreement.  Even if the region could ever negotiate a Free Trade Area of the Asia Pacific, that would not fulfil the dream of free and open trade – and free and open trade and investment is not enough to assure the future development of the Asia Pacific region.

APEC governments should now turn their attention to improving the physical and financial integration among our economies to take advantage of the many new opportunities that have been created by 'opening to the outside world' and dramatic advances in transport, communications and information technology.  The time has come to think beyond 2020 and to broaden the APEC vision.

The continued intellectual input from PECC should help steer APEC leaders towards more efficient and rewarding opportunities for cooperation by identifying issues outside the negotiating square.

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Reducing policy barriers to international movement of goods, services, capital, skills and information is just one of the much wider effort needed to meet the overarching aim of regional economic integration – to help all Asia Pacific economies reach their full potential for improving the living standards of their people.  APEC can do far more to connect the region; helping economies take advantage of the opportunities that have been created by technology, as well as by trade policy, to become more productively engaged in international production networks.

The shocks of the East Asian and the global financial crises underlined the need to make economies more efficient and resilient. Sharing the rich sources of information, experience, expertise and technology available our diverse region can help improve the policy-making capacity needed to create and manage the transparent and contestable domestic markets all economies need to thrive in a competitive regional and global economic environment. The APEC Principles to Enhance Competition and Regulatory Reform, can serve as the unifying theme of this dimension of cooperation.

Yet another vital dimension of regional cooperation is to defend and strengthen the global environment necessary to sustain the remarkable recent rise in the living standards of Asia Pacific economies.  Right now, the most serious threats to the future of Asia Pacific economies are global problems which will need global solutions.  Asia Pacific governments need to take the lead in the G20 to achieve a robust recovery from the 2008 global financial crisis.  Only then will the world give sufficient attention to correcting the currently unsustainable trend of global warming.

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In 1994, Indonesian leadership set the Bogor goals for one of these ingredients of cooperation.  In 2013, Indonesia has pointed the way towards a 21st century strategy for cooperation – implementing APEC’s Framework on Connectivity will help APEC seize opportunities to cooperate along all the important dimensions of cooperation.

The potential benefits of better connectivity are huge.  A recent joint report by the World Economic Forum and the World Bank:

… examines supply chain barriers to international trade and concludes that they are far more significant impediments to trade than tariffs. In fact, reducing supply chain barriers could increase world GDP over six times more than removing all tariffs.

The private sector is well aware of this potential – they are telling governments that dealing with across-the-border problems of connectivity and behind-the-border problems caused by needless differences in economic regulations is more important and more urgent than further liberalisation of border barriers to trade or investment.  A well-planned effort to improve physical, institutional and people-to-people connectivity is now the most efficient way to deepen regional economic integration.

Transforming the Asia Pacific to a well-connected region will take a long time.  Meeting ambitious, measurable but realistic targets for reducing transaction costs by 2020, 2030 and 2040 will require planning, then implementing, massive investments in both software and hardware.  A significant share of investment will need to be financed from private savings.  Attracting adequate investment, especially private investment, into economic infrastructure projects with long lead times will need to overcome some important obstacles including work to:

•     improve capacity for planning an orderly sequence of sound projects;
•     reduce regulatory and administration
•     set cost recovery policies to translate economic to financial returns, and
•     improve capacity to design and negotiate parameters for public-private partnerships.

Asia Pacific governments, working with the private sector, can help each other meet these challenges by strengthening skills and institutional capacity.

A long-term policy development effort to improve the enabling environment for investment in better connectivity will be hard to sustain unless it is seen to generate significant mutual benefits from lower transport costs.  That means that APEC leaders need to commit themselves to some specific early initiatives, then work with each other and the private sector to overcome anticipated and unanticipated problems during implementation.  Once some examples are set, all can learn from lessons of experience.

China’s decision to establish the Asian Infrastructure Investment Bank (AIIB) makes it possible to begin implementing the APEC Framework on Connectivity.  The AIIB can be expected to accelerate investment in economic infrastructure.  Not simply by offering a new source of money – financing is not the binding constraint on improving economic infrastructure – but by being decisive.

As a new institution, the AIIB has a strong incentive to make its mark by early decisions to finance some significant projects which fit into a long-term plan and promise sound economic rates of return.  One opportunity is to work with Asia Pacific governments to upgrade the efficiency of major ports and airports to bring their performance closer to best practice.  The Asian Development Bank Institute (ADBI) has already prepared a detailed study of another significant opportunity – taking advantage of Myanmar’s recent decision to engage with the international economy to build high-capacity transport and communications links between East Asia and South Asia.  The new AIIB can use a tiny part of its likely capital base tocommission a full-scale feasibility studies of these opportunities to improve connections among some Asia Pacific economies.

Once APEC economies - accounting for well over half of the world economy -succeed in accelerating investment in better connectivity, it will make a valuable contribution to demand in a world economy performing well below potential.  That boost will help restore the confidence needed for a decisive recovery from the global financial crisis and demonstrate that the APEC process can lead the way towards solving problems by setting positive examples for the G20.