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The Free Trade Area of the Asia Pacific Is the Next Step Forward for APEC (and for the World Trading System)

by C. Fred Bergsten, Peterson Institute for International Economics

November 2006


The Case for a Free Trade Area of the Asia Pacific

There are four powerful reasons for APEC to begin seriously considering a Free Trade Area of the Asia Pacific (FTAAP). This leaders' meeting in Hanoi should launch such an effort by commissioning a comprehensive study of the idea's pros and cons, and how it might be pursued, as recommended for the past three years by APEC's own Business Advisory Council (ABAC).

First the suspension of the Doha Round of multilateral trade negotiations in the World Trade Organization seems likely to continue indefinitely. This would represent the first failure of a global trade initiative since the 1930s.1 In the absence of a revival of Doha, or the launch of a promising “Plan B” for world trade, there is virtually no chance that the US Congress will extend the President's Trade Promotion Authority after it expires in July 2007. Hence the United States would be unable to participate in, let alone lead, any major trade initiative (including Doha itself), and further global liberalization will be impossible.

As a result, the “bicycle” of trade-liberalizing momentum will topple. Protectionism and new forms of mercantilism (see more on this below) inevitably will fill the vacuum, as is already the case to some degree, and is extremely disturbing in light of the strength of the world economy. These risks are compounded by the world's large and growing trade and current account imbalances, most notably within APEC with the deficits of the United States mirrored largely by the surpluses of China, Japan, and other East Asian countries.2 The world, and especially the trade-dependent APEC region, would suffer large economic and indeed security costs from a reversal of the liberalization trend of the past 50 years.

Second without a comprehensive Asia–Pacific free trade initiative, the failure of Doha (and implicitly of the entire multilateral system) will spawn a further explosion of bilateral and subregional trade agreements. The Asia–Pacific regional, as well as global, trading systems will disintegrate further. The APEC's fathers' dreams and its Bogor goals to forge “free and open trade and investment in the region” will be shattered, perhaps irrevocably.

Third the irregular but steady evolution toward an East Asia Free Trade Area—whether accomplished via 10 + 3, 10 + 6 per the recent Japanese proposal, or 10 +1 +1 + 1 architecture—threatens to “draw a line down the middle of the Pacific.” The present course will lead to substantial trade discrimination by Asia against the United States (and the rest of the world), intensifying the prospect of new protectionist reactions in both the United States and the European Union with inevitable spillovers into security relationships as well. The result would be disintegration rather than integration of the Asia Pacific region, as intended by APEC from its outset. The economic integration of Pacific Asia must be imbedded in the broader Asia Pacific.3

Fourth APEC as an institution is foundering badly. It enjoyed considerable success in pursuing trade liberalization after the declaration of the Bogor Goals in 1994, through negotiating the Information Technology Agreement (ITA) in 1996 and then agreeing on an agenda for Early Voluntary Sectoral Liberalization (EVSL) in 1997.4 It has simply become a cheerleader for the WTO and has recorded no major achievements on its own since that time, however, and it has not even had any impact on the global talks; former WTO Director–General Supachai has commented that there was no evidence whatsoever of any “APEC caucus” in Geneva. APEC is the only trans-Pacific institution that exists and, at this time of substantial trans-Pacific economic and political strains. Its revitalization is of crucial importance to all countries on both sides of the ocean.


The Free Trade Area of the Asia Pacific to the Rescue

An APEC launch of serious consideration of a FTAAP is the only available initiative that can respond effectively to all four of these concerns.

First a launch of a FTAAP effort would simultaneously provide the best prospect for restarting the Doha Round and a highly attractive “Plan B” if that preferred course still did not prevail.5 The last successful global trade negotiation, the Uruguay Round, succeeded in December 1993 after a three-year hiatus only because the European Union was sufficiently shocked by the initial APEC summit in Seattle, with its declaration of intent to achieve free trade in the region, to drop its opposition to the needed liberalization of its Common Agricultural Policy.

The leverage of a FTAAP to revive the multilateral system would be even greater today, because the main resistance to a successful Doha outcome comes from India and Brazil, as well as the European Union, all of which are outside APEC. None of these countries could afford to run the risk that the Asia–Pacific region would develop a new preferential compact that excluded them. Hence they would be compelled to make the necessary concessions, with full reciprocity from APEC members themselves of course, to bring Doha to a successful conclusion. Their alternative would be to pursue their own “bilateral” agreements with East Asia, but they would be starting far behind the APEC process, would probably have to make even greater concessions than would be required to revive Doha, and would intensify the proliferation of preferential accords that would further weaken the global system if successful.

If those countries were still unwilling to permit Doha to succeed, the FTAAP offers the best possible alternative for restarting the “bicycle” of trade liberalization. APEC encompasses about half the world economy and world trade. Achievement of truly free trade in the Asia–Pacific region, even with its inevitable exclusions and rules of origin, would in fact accomplish a much greater reduction in global barriers—with the bulk of the gains, as well as the adjustment requirements, of course accruing to the APEC members themselves—than the most ambitious possible outcome of Doha. A study prepared for ABAC in 2004 shows that every APEC economy gains more from a FTAAP than from nondiscriminatory liberalization by APEC, the only other route to achievement of the Bogor goals, and that almost all East Asian economies (including China, Japan, and Korea) gain more from a FTAAP than from an “ASEAN plus 3” FTA.6

Second a FTAAP could shelter the 40 or so bilateral and subregional preferential trade agreements (PTAs) that are already underway in the region and the scores of additional agreements that would undoubtedly ensue in its absence. The most likely alternative to a FTAAP is in fact a series of further trans-Pacific PTAs, most importantly an agreement between the United States and Japan as soon as success of the United States–Korea Free Trade Agreement (FTA) is assured (along with conclusion of other pending US FTAs with Malaysia, Thailand, and probably then Indonesia), which would represent a “hub and spoke” system centered on the United States that surely would be inferior for all Asian countries. Hence a FTAAP could sharply limit the discrimination that increasingly pervades the region and will otherwise proliferate further, at a minimum eliminating the plethora of conflicting tariff preferences that will otherwise increasingly plague all member economies. It could also roll together the conflicting rules of origin that are becoming so costly to business and trade throughout the region.

Third a FTAAP would foster integration rather than disintegration of the Asia Pacific. This would be particularly valuable with respect to relations between China and the United States, which face a very uncertain future in both their economic and security dimensions.7 It would also especially be helpful for Japan and Korea, and ASEAN countries as well, by reducing the risk that they would have to “choose between China and the United States” in pursuing their interests in both East Asia and across the Pacific. Increased US engagement in Asia via a FTAAP would also seem to be of considerable value to most Asian countries by contributing to the “hedging strategies” they are seeking to adopt against the risk of rising domination by China. It would be very risky for the Asians to construct their own regional arrangements first, viewing an Asia–Pacific accord only as a later step, because of the very large uncertainties and long time lag involved in ever getting to the final agreement.

Fourth a launch of a FTAAP would revitalize APEC itself. APEC has had no serious trade agenda of its own since 1998 and, despite all its useful work in numerous areas, has thus been largely discounted both within the region and around the world. It has looked on helplessly as its member economies pursue their own FTAs without reference to (or even notice of) their “APEC commitments,” and it even has been unable to seriously monitor those agreements let alone (despite good intentions by some) set standards and benchmarks for them. A vital APEC is sorely needed, for broad security as well as economic reasons, and a launch of a FTAAP is the only available instrument to this end. Those who fear that pursuing a FTAAP, or even studying the idea, would weaken (or even destroy) rather than strengthen APEC are simply revealing their lack of confidence in the institution and offering a counsel of despair and defeatism for the entire Asia–Pacific idea.


How to Proceed?

There are four distinct stages through which APEC pursuit of a FTAAP would have to proceed:

  • Completion of a comprehensive study of its design features, its impact on individual member economies and the region (and the world) as a whole, its advantages and disadvantages, and the modalities for pursuing it;
  • preliminary discussion and preparatory talks within APEC itself;
  • formal negotiations; and
  • actual implementation, with a phase-in period over a number of years as with all new trade agreements.

For the reasons indicated above, I believe there is a powerful case for launching the first, and perhaps also the second, stage in the immediate future. If the leaders' commission a study here at Hanoi, thus signaling their interest in considering the FTAAP idea, preliminary conversations and preparatory talks could transpire under the chairmanship of Australia over the next year. The study of a FTAAP could proceed in parallel with the studies already underway of the 10 + 3 and 10 + 6 options; all these analyses could consider the comparative advantages of the different approaches, and the interactions and sequencing among them if more than one of the initiatives were to be pursued simultaneously. Such a phase of “competitive studies” would be a natural complement to the strategy of “competitive liberalization” that has characterized the trade policy of the United States and a number of other countries in recent years.

Depending on the outcome of the study and the preliminary talks, and critically on whether the Doha Round gets back on track, a decision could be made at next year's summit whether to launch negotiations and pursue actual implementation of the FTAAP idea. The goal could then be to conclude the negotiations by 2010, the original Bogor date for actually achieving free trade among the more advanced member economies of APEC, which could then be reset for 2015 or even the original 2020 target for the implementation of completely free trade throughout the entire region.

One compelling reason for APEC to start pursuing a FTAAP now, especially with its likely positive effect in restarting Doha, is that it would provide the US administration with a strong rationale for obtaining congressional approval of continued negotiating authority. The current administration has played a constructive leadership role on Doha and is clearly disposed toward “competitive trade liberalization” at all levels, megaregional as well as global and bilateral.8 Its top officials have been considering the FTAAP idea and encouraging private Americans to develop it. It would be tragic for the administration to become incapable of participating in efforts to restart the “bicycle” of reducing barriers, especially with the uncertainties that surround the prospects for trade policy under the next US administration, which will occur if the Trade Promotion Authority (TPA) is permitted to expire.

Prior to the initial APEC summits, in Seattle in 1993 and Bogor in 1994, very few observers believed it would be possible or even conceivable for the APEC leaders to endorse the concept of “free and open trade and investment in the region,” let alone by specified dates. Many member economies were particularly skeptical of the willingness and ability of the United States to take part in such an initiative, let alone lead it. The leaders did adopt the Bogor goals, however, and the United States played a central role in that process. They did so for many of the same reasons that seem so compellingly in favor of reviving the Bogor strategy via a FTAAP today.

The APEC leaders have of course already discussed the FTAAP idea informally. They should now take the next logical steps of developing the key elements of the idea and how it might work in practice and initiating discussion of it within the member economies. I hope that the Hanoi Summit will begin the process of pursuing these critical goals.

1. A comprehensive statement of the costs of failure of the Doha Round, as well as a proposal for getting it back on track, can be found in Jeffrey J. Schott's “Completing the Doha Round,” Policy Brief 06-7 (Washington DC: Peterson Institute for International Economics, October 2006).

2. C. Fred Bergsten, “Rescuing the Doha Round,” Foreign Affairs , December 2005.

3. C. Fred Bergsten, “Embedding Pacific Asia in the Asia Pacific: The Global Impact of an East Asian Community,” speech at the Japan National Press Club, Tokyo, September 2, 2005.

4. C. Fred Bergsten, “A New Strategy for APEC,” speech at The 16th General Meeting of the Pacific Economic Cooperation Council, Seoul, September 6, 2005.

5. C. Fred Bergsten, “Plan B for World Trade: Go Regional,” Financial Times, August 16, 2006.

6. “Preliminary Assessment of the Proposal for a Free Trade Area of the Asia Pacific (FTAAP),” an Issues Paper for the APEC Business Advisory Council (ABAC) prepared by Robert Scollay from the PECC Trade Forum, especially pp. 25-30 and Table 3.

7. C. Fred Bergsten, Bates Gill, Nicholas Lardy and Derek Mitchell, China The Balance Sheet: What the World Needs to Know Now about the Emerging Superpower, New York: Public Affairs Press, April 2006.

8. Simon T. Evenett and Michael Meier, “An Interim Assessment of the US Trade Policy of ‘Competitive Liberalization,'” July 2006.


RELATED LINKS

Speech: Should APEC Focus on Trade Liberalization? May 6, 2010

Speech: The Future of APEC and Its Core Agenda December 9, 2009

Paper: Submission to the USTR in Support of a Trans-Pacific Partnership Agreement January 25, 2010

Speech: Trade and the Global Economic Crisis: "If It's Not Part of the Solution, It's Part of the Problem" July 17, 2009

Policy Brief 09-16: Pacific Asia and the Asia Pacific: The Choices for APEC July 2009

Policy Brief 07-2: Toward a Free Trade Area of the Asia Pacific February 2007