Executive Summary

Growth in the Asia-Pacific this year is expected to increase slightly to 3.7 percent from last year’s 3.5 percent. Looking ahead to 2013, growth will be much the same at 3.9 percent. However, these forecasts, based on the IMF’s World Economic Outlook are based on some assumptions: that financial conditions on the Eurozone will ease; expansionary policies in emerging markets will gain traction; and the United States will find a solution to the fiscal dilemma it faces at the end of the year. In short, the downside risks to the forecast are enormous and uncertainty remains abundant.

Problems in the Eurozone weigh heavily on the outlook for the region. Europe imports around a fifth of all of the region’s exports and European investors hold around a third of the region’s financial assets. Exports from the region to Europe have already been slowing in the first of this year, although the fall off in demand does not look as deep as it was in the 2009.

How developed economies respond to events is of critical interest to policy-makers in emerging markets. A new round of quantitative easing poses a number of challenges the region’s central bankers and monetary authorities. While the hope is that quantitative easing would boost growth in developed economies, there are some specific policy risks for emerging markets: hot money flows into the region may lead to asset bubbles and inflation.

Concerns over Emerging Markets

While the growth rate for the region has remained largely stable, the drivers of growth have shifted. From 2009 through to 2011, emerging economies have been responsible for most of the region’s growth contributing around two-thirds of the Asia-Pacific total growth. As a group, emerging Asia-Pacific economies growth in recent years has been around 8 percent, largely driven by China, from 2012 onwards, they are expected to grow at above 6 percent. This moderation in growth for emerging economies is reflected in this year’s State of the Region survey. Around 50 percent of regional opinion-leaders are expecting growth in China and India, the world’s two biggest emerging economies to slow over the next 12 months. Indeed, in terms of risks to growth, regional opinionleaders were more worried the impact of slowdown in China than they were for slowdowns in Europe and the United, albeit by a slight margin. Other risks that should be noted are concerns over rising protectionism and income inequality. At the height of the crisis, APEC and G20 leaders committed to refraining from protectionism and avoiding a 1930s descent into beggar-thy-neighbor policies. Protectionist measures are on the rise and now cover around 3 percent of global trade, according to the WTO.

Pathways to a Free Trade Area of the Asia-Pacific

The economies of the Asia-Pacific continue to experiment with various pathways to achieve the goal of a Free Trade Asia of the Asia-Pacific. On the whole, opinion leaders were most positive about the success of the ASEAN Economic Community and least about the prospects for the WTO Doha Development Round. There is a great deal of uncertainty about the broader ASEAN Plus track (whether plus 3, plus 6, or plus X – EAFTA, CEPEA and RCEP) and the Trans-Pacific Partnership Even though the TPP is well advanced - now into its 13th round of negotiations - only a plurality of respondents thought it was likely to succeed (34 percent); subtracting those respondents who think it is not likely to succeed, there is a net positive of less than 4 percent. While the EAFTA, which is yet to begin formal negotiations, has a slightly larger plurality of close to 38 percent who think it will succeed.

Explanations of the Contrasting Pathways

Much has been made of this difference, but it seems to be a pragmatic accommodation of current economic and political realities. The economic logic of the Free Trade Area of the Asia- Pacific is that global income gains from its achievement could approach $2 trillion per year. One seeming challenge is how to ensure that the pathways ultimately lead to the same destination. Understanding the differences between the approaches is critical. To a large extent, the proposed templates reflect the contrasting sectoral advantages of emerging Asian economies and the U.S. and other developed economies. The Asian track is focused on reducing impediments to goods trade, mainly in manufacturing industries, while the TPP track is also focused on rules for services trade, investment and intellectual property rights.

This analysis of the agreements is supported by PECC’s survey. Developed economy respondents assigned a higher priority to intellectual property, services market access, and investment access than their colleagues in emerging market economies. In turn, emerging market respondents assigned a higher priority to goods market access (for manufacturing and agriculture), to cooperation, and the movement of persons.

Interestingly, both groups of respondents saw “new issues” as important. For example, the transparency of regulations was rated as a high priority by 43 percent of developed-economy respondents (the highest among all issues) and by 40 percent of emergingmarket respondents. Investment access, services market access and regulatory coherence were also seen as important by both groups. New issues generally had higher priority than “old issues” such as market access in goods and product standards. They also had higher priority than labor, cooperation, and the movement of persons. In other words, while developed and emerging-market respondents differed somewhat on specific issues, they agreed generally on the importance of the behind-the-border issues.

Income Inequality an Impediment to Integration

The index shows that over the past 20 years, incomes in the region have been diverging rather than converging, although the divergence has flattened out somewhat during the economic crisis period. If the region is to succeed in its goal of economic integration, then addressing this critical issue should be of highest importance.

Priorities for Regional Cooperation

The top 5 priorities selected by survey respondents for APEC leaders to discuss were:

• Regional economic integration (including the TPP and the ASEAN Plus agreements among others)
• The region’s response to the Eurozone crisis and lessons from the crisis for Asia-Pacific regional integration
• The APEC growth strategy
• Regulatory impediments to business
• Regional cooperation to foster innovative growth

For the first time since PECC started the survey in 2006, the WTO DDA did not feature in the list of priorities for APEC leaders to discuss. This lack of prioritization of the DDA was most pronounced amongst business respondents who ranked it 21st out of a list of 27 issues.

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