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Photo 1State of the Region 2014-2015 report was released on the 7th November 2014 during the APEC Leaders' Week in Beijing through a press conference. The briefing was given by: Mr. Eduardo Pedrosa, Secretary General of PECC and Coordinator of the Report; Mr. Jusuf Wanandi (Indonesia), co-chair of PECC; and Ambassador Don Campbell (Canada), co-chair of PECC.

The State of the Region report is the flagship annual publication of PECC. It includes a survey of opinion-leaders on the priorities for Asia-Pacific cooperation and this year, 602 participated in the survey. A special chapter was dedicated to study the different pathways underway towards the creation of an FTAAP (Free Trade Area of the Asia-Pacific) including the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP), and their relationship to APEC membership.

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State of the Region 2014-2015

SOTR 2014-2015 cover

Executive Summary

The Asia-Pacific region is forecast to grow at around 3.8 percent over the next two years before moderating to around 3.5 percent in 2018-2019. While far from the heady rates of above 5 percent growth during the pre-Global Economic Crisis period it represents a steady if unremarkable recovery from the depths of dark days of the 2008-2009.

The challenge ahead is whether the region can do better. While growth has become more balanced in the region, it has also become slower. Moreover, some of the growth remains supported by extraordinary stimulus that cannot be sustained over the medium term.

Regional economies will need to identify alternative growth engines if they are to achieve the objective of sustainable high quality growth. Two areas hold promise in this regard –innovation and middle class consumption. Providing an environment that facilitates their growth should be a priority.

According to PECC’s annual survey of opinion-leaders from the policy community, the top five issues that APEC Leaders should discuss are:

1. Progress towards a Free Trade Area of the Asia-Pacific (FTAAP)
2. Innovative development, economic reform and growth
3. The APEC Growth Strategy
4. Reducing the income inequality in the region
5. Attaining the Bogor Goals of free and open trade and investment

Of concern should be the fact that opinion-leaders selected a lack of political leadership as the second highest risk to growth. It stands as a stark observation if not a rebuke to politicians at a time when leadership is badly needed. The third highest risk, possible failure to implement structural reforms, also suggests considerable anxiety about the political ability of leaders to address an important domestic and regional agenda.

Out of a list of 10 possible drivers of growth, technological innovation was ranked as the most important followed by policy reform and then exports to emerging markets.

In 2010 APEC member economies adopted a new growth strategy; however, tangible results from the strategy are difficult to see. The adoption of clear targets focused on innovation – especially skills development will help to focus efforts in this area.

While respondents did not rank trade liberalization as a top factor for growth in their individual economies, it was the second most important factor for growth in the region as a whole. Indeed, progress on the FTAAP was ranked as the most important issue for APEC Leaders to discuss in Beijing.

As the region and the world struggle with slower growth, the estimated economic benefits of Asia-Pacific wide integration are large at 2.3 percent of world GDP in 2025 or US$2.4 trillion. But even the current negotiations on the Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP) would generate substantial gains.

Potential gains increase sharply with the scale of integration—for example, expanding the TPP with 12 members to an FTAAP with 17 members would triple global benefits from $223.4 billion to $1,908.0 billion in 2025. The benefits would grow further to $2,358.5 billion if Hong Kong (China), Chinese Taipei, Papua New Guinea, and most importantly, Russia were added based on APEC membership, and still larger benefits could be achieved if India, Cambodia, Laos, and Myanmar were added to form FTAAP-25.

While the RCEP and the TPP are critical—and arguably indispensable—steps toward FTAAP, they will not guarantee its realization. They will promote economic integration among members, but neither will offer comprehensive regional coverage or, at first, broadly acceptable rules. At worst, they could establish conflicting standards that are difficult to reconcile and would make the “noodle bowl” of overlapping trade agreements more intractable. A clear vision of FTAAP will minimize the possibility of adverse outcomes. Hence the time is right for analyzing how an FTAAP might be structured and how the current regional negotiations could become, as economists hope, stepping stones rather than stumbling blocks on the path toward it.

Opinion-leaders showed no clear-cut preference for either route – the TPP or the RCEP - and prefer the more agreeable but nebulous concept of building on various agreements including the TPP, RCEP and the Pacific Alliance.

An umbrella agreement will be needed if neither RCEP nor TPP can attract FTAAP-wide membership. This agreement will then have to be separate from RCEP and the TPP, although it should be shaped by their provisions. Since the two smaller agreements will differ, FTAAP will need to formulate positions on issues that are absent from at least one of the agreements as well as harmonize provisions that are included in both.

Under the FTAAP umbrella, members could converge to higher standards. Precedents for an evolutionary approach to standards are offered by ASEAN’s upgrading of the ASEAN Free Trade Area and some ASEAN-plus-one partnerships. NAFTA is itself an umbrella agreement built around the Canada-US free trade agreement and has been upgraded over time. The TPP is also envisioned to be a “living agreement” to be adjusted in the future.

RCEP and the TPP provide way-stations for experimenting with and adjusting to deeper integration. This is important for the large trade flows that connect the United States, China and Japan with each other and other partners. Asian and trans-Pacific regional negotiations are moving forward, despite business cycles, elections, geopolitics, and political controversy.

Deeper economic integration in the Asia-Pacific is likely to produce large economic gains and could help minimize dangerous geopolitical tensions. Yet agreements that foster integration will be very difficult. Lengthy and complex negotiations are required and much opposition is bound to emerge from special interests throughout the region. Asia-Pacific integration will depend on exceptional, collaborative leadership, not least from the region’s largest economies.

The economic integration of the Asia-Pacific region has rebounded since the Global Financial Crisis according to PECC’s index of regional economic integration. The index measures the degree of integration taking place in the Asia-Pacific region based on intra-regional flows of: goods; investment; and tourists and five measures of convergence: GDP per capita; share of non-agriculture to GDP; the urban resident ratio; life expectancy; and share of education expenditure. While the region has become more integrated through increased flows of goods, people and capital, the index shows that there is a long way to go in terms of closing development gaps. Integration is not an end in itself but a means to ensuring that all citizens can achieve their potential.