APEC s Trade and Investment Liberalization and Facilitation (TILF): Its Achievements and Tasks Ahead By Ippei Yamazawa 1

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1 APEC s Trade and Investment Liberalization and Facilitation (TILF): Its Achievements and Tasks Ahead By Ippei Yamazawa 1 1. Initiative for Liberalization in APEC APEC has become 18 years old this year and experienced both ebb and flow of its momentum. But I feel its experiences are not shared widely. I have been affiliated with APEC in a variety of capacities, PECC member, APEC/EPG member, APEC Study Center representative, and APEC consultant for these years. Since APEC is an official inter-governmental body, sufficient information has not been accessible to non-official observers. But because of these capacity and because I was not in the government, I could participate in APEC and discuss APEC throughout these years. I would like to have my experiences in APEC shared with young researchers and wish them to promote APEC further. This symposium provides me the best opportunity. Nowadays we hear often that there has been a paradigm shift from APEC to East Asia and APEC has finished its role. It is a pity that this argument is often made by those who are not aware of APEC s experiences for the past years. APEC has started with economic cooperation for the first few years. The APEC s First Ministerial Statement (1989) identified broad areas of cooperation and designated seven work projects. The Seoul Declaration (1991) set principles and objectives of its cooperation activities and added three cooperation projects (APEC Secretariat 1995, p.1, and pp.61-64). On the other hand, liberalization was a late-comer on the APEC s agenda. Liberalization was a late-comer on the APEC s agenda. It was stated explicitly in Leader s declaration for the first time at the Seattle APEC in Apparently it was affected by the Eminent Persons Group Report I submitted to APEC in August 1993 which elaborated the liberalization agenda in its vision of APEC s tasks in future. Then in 1994 the ambitious Bogor Declaration committed to achieving free and open trade in the region by 2010/ The Osaka Action Agenda (1995) provided the guideline for implementing the liberalization programs and all member economies submitted their individual action plans (IAPs) for liberalization by November 1996 (Manila Action Plans for APEC, MAPA), which were implemented actually on January 1, Expectation for APEC heightened for because of this prompt 1 President, International University of Japan 1

2 implementation of liberalization program. When the EPG s second report was presented to President Seohart in August 1994 with its explicit recommendation for implementing APEC s program of liberalization by 2000, some of its members wondered whether it would be too hasty to start it before the liberalization under the Uruguay agreement is not completed (APEC/EPG II 1994). Contrary to our anticipation, Pacific Business Forum (EPG s counterpart of business people) recommended that APEC should start its liberalization program immediately and a few members of the Leaders meeting endorsed the PBF s recommendation. President Seoharto accepted the latter recommendation and announced the ambitious Bogor Declaration. This story tells us how big the expectation was for APEC then. However, IAPs have not gone far beyond the Uruguay Round commitment and another liberalization program to supplement IAPs, Early Voluntary Sector Liberalization (EVSL), actually failed to be realized because of the conflict between major participants in Together with East Asian crisis which hit Southeast Asian economies, a leading group of high growth potential of APEC, the liberalization momentum has decreased, so has gone downward the expectation for APEC recently. However, pessimistic views about APEC which we hear occasionally today is overly affected by the fluctuation of expectation, ignoring the precise capability of APEC. The recent experience of APEC in liberalization has certainly revealed that APEC is not a negotiating body and cannot do much alone in liberalization area. However, APEC can still contribute to liberalization under WTO by acting as a catalyst. This paper aims at a brif overview of APEC s experiences in its main activity, TILF; first its unique IAP approach and its modest achievement (Section 2), and the EVSL s failure in a break through (Section 3). And then we will seek a way to link the APEC s liberalization programs under open regionalism with WTO (Section 4 and 5). Then we extend our overview to now mushrooming free trade agreements and other forms of sub-regional trading arrangements within APEC and our suggestion regarding how to reconcile them with APEC s open regionalism (Section 6). Last we examine the APEC s current efforts of Midterm Stocktake to meet the APEC s first deadline for the Bogor Goal. 2. TIL: Its Unique Modality and Achievement The Osaka Action Agenda for liberalization and facilitation started with eight general principles; comprehensiveness, WTO-consistency, comparability, non-discrimination, transparency, standstill, simultaneous start/ continuous process/ differentiated timetables, flexibility, and cooperation. 2

3 It had an extensive coverage of 15 areas; tariffs, non-tariff measures, services, investment, standard and conformance, customs procedures, intellectual property rights, competition policy, government procurement, deregulation, rules of origin, dispute mediation, mobility of business people, implementation of the Uruguay Round outcomes, information gathering and analysis. The Action Agenda suggested a menu of actions by individual member governments and concerted actions by all members in individual areas. Its new modality, the way to implement liberalization and facilitation programs, was the concerted unilateral liberalization (CUL). That is, individual member governments announced unilaterally their own liberalization and facilitation programs and implemented them in accordance with their domestic rules. However, individual APEC members watched closely each other's liberalization program and its implementation. They felt obliged to submit a liberalization programs as big as their neighbors. They got encouraged to implement as they have committed. We relied upon a peer pressure among APEC members to urge all members to join the liberalization. This was the essence of CUL. The Osaka ACTION Agenda was a guideline for individual members to draft individual action plans (IAPs). All member governments submitted their IAPs by September 1996 and the Philippine, the host of APEC of the year, packaged them together to adopt as Manila Action Plans for APEC (MAPA) in November. All members started to implement their IAPs on January 1 st, This modality was criticized as unasserted in comparison with the western approach of negotiating as in GATT and WTO a liberalization agreement which was legally binding so that the signatories would be punished and sanctioned if they failed to implement their commitments. At the initial stage this legalistic approach could not be accepted by Asian members. However, this should not be understood as Asian members hesitance to commit liberalization. Asian members have so far implemented trade and investment liberalization unilaterally and realize that their recent high growth has been based on their open economic policy and continued efforts for liberalizing their trade and investment was indispensable for further growth, which was reflected in their leaders commitment to the Bogor Declaration. This modality was based on the past experience and called upon the unilateral liberalization in a concerted manner within the Osaka Action Agenda. This was a practical way of promoting liberalization without losing the momentum for liberalization enhanced by the Bogor Declaration. The CUL modality has both merit and demerit. On the one hand it had provided a flexible framework for liberalizing within a short time. On the other, results were 3

4 difficult to measure; the plans differ considerably and they were structured so as to list accomplishments while omitting significant obstacles which remained. 2 The author organized a study team in PECC Japan Committee and made quantitative assessments of individual members action plans of as a way of objectively measuring progress toward APEC s free trade targets (2010 for developed members and 2020 for the rest of members). Although being handicapped by gaps in the available information, we tried to provide a fair and objective assessment of the IAPs. We examined carefully the Osaka Action Agenda and Chair s Common Format and selected check-points, with which their progress is assessed objectively and consistently. Although still handicapped by the lack of available information and a big room still remains to be improved, we have tried to provide a fair and objective assessment of the IAPs. 3 Our assessment conveyed a mixed result of small and big progress. Generally speaking, many economies committed to liberalization in concrete figures only for the short period and their commitment were characterized UR agreement plus small α, namely liberalization they had committed under UR agreement plus an additional unilateral liberalization meseaures. However, prospects in the area of facilitation were brighter, especially in respect of the collective action plans (CAPs), which details joint actions. These collective plans have been strengthened, thereby supporting the concerted implementation of members IAPs. The precise degree of progress in advancing collective action depended to a large extent on the degree of initiative exercised by convenors in charge of various APEC subcommittees and expert groups. How were the collective plans related to IAPs? APEC members participate in the CAP voluntarily and report on their involvement via their individual plans. Participation in collective plans is a very important means by which members can move towards APEC s goals, especially in the areas of trade and investment facilitation, and 2 Incidentally, PECC was commissioned by APEC to produce an independent review of the IAPs on condition that no reference should be made to individual economies (PECC/ Trade Policy Forum, 1995 and PECC et al 1996) The PECC team examined the IAPs and supplementary data of individual economies in order to give a meaningful review. Otherwise it would provide only a conventional report highlighting the liberalization commitments, not mentioning to remaining impediments. Yet it had to produce a concise review without mentioning specific names of economies but to impress readers with the objectiveness and consistency of their analysis. 3 Please refer for its methodology and detailed results to IAP Study Group (1997, and 1998) which was reproduced in Yamazawa and Urata (2000) 4

5 economic and technical cooperation. The encouragement offered by collective action plans is likely to mean that APEC s objectives will be achieved earlier than the 2010/2020 deadlines by both industrialized and developing economies. While APEC s trade and investment liberalization agenda has achieved some of its goals in some areas, it has proved unable to tackle certain difficult sectors. These were left to negotiation by the WTO. 3. Failure in Early Voluntary Sector Liberalization Early Voluntary Sector Liberalization (EVSL) was introduced as a break through the slow liberalization along the IAPs. EVSL is also a part of CAPs and jointly implemented by individual governments. The Osaka Action Agenda had already mentioned, in the CAPs for Tariffs (and NTMs), as APEC members will identify industries in which the progressive reduction of tariffs ( and non-tariff measures) may have positive impacts on trade and on economic growth in the Asia Pacific region or for which there is regional industry support for early liberalization (The Osaka Action Agenda, 1995, Section C, page 6-7) At the Subic meeting in 1996, President Clinton proposed the Information Technology Agreement (ITA) in which all tariffs and NTMs on semi-conductors and other parts and materials input to information technology equipment are reduced or eliminated by the year The ITA was adopted at the APEC Leaders Meeting and then forwarded to the WTO Ministerial Meeting in Singapore just two weeks later and was adopted as a WTO agreement. Fifteen APEC economies signed the agreement and implemented since April The ITA is not a voluntary liberalization but has become a legally binding treaty. Encouraged by the success of the ITA, the Canadian chair proposed to accelerate the implementation of EVSL by two years from sectors were suggested as candidates for EVSL in 1997 and the Vancouver APEC finally designated 15 sectors (9 sectors as higher priority, Table 1) and agreed to work out their implementation within Each had nominating economies and supporting economies but was not necessarily supported by all economies. Objectives of EVSL differed between sectors. 13 sectors aimed to eliminate tariffs and non-tariff measures but it was yet to be elaborated how they are implemented. In Environmental Goods and Services and Chemicals proposals stated explicitly that the liberalization would be brought to the WTO negotiation after a critical majority support is secured. In Medical Equipment, Civil Aircrafts and Oilseeds it also intended to bind with the WTO the liberalization achieved through EVSL. But no direct link with the 5

6 WTO was not mentioned for other sectors. The Food proposal stated that they would start with a study of impacts of liberalization. 4 Facilitation measures such as Standard and Conformance and Customs Procedures were also mentioned in the EVSL proposal of several sectors and they were the main objectives in Telecommunications and Automotive Products. Ecotech was mentioned in eight sectors, in which EVSL aimed to promote development and training of human resources necessary to implement facilitation measures as well as liberalization. What characterized the EVSL approach was that by incorporating both facilitation and Ecotech measures it could mitigate the adjustment cost of liberalization and even enhance the impacts of liberalization. This was a clear advantage of APEC over GATT/ WTO in promoting liberalization and would make a major value-added of APEC to the WTO. At the Vancouver APEC, leaders endorsed their ministers' agreement on EVSL and urged its early implementation as follows; "... action should be taken with respect to early voluntary liberalization in 15 sectors, with nine to be advanced throughout 1998 with a view to implementation beginning in We find this package to be mutually beneficial and to represent a balance of interests." 5 It was scheduled that the concrete plan for implementing EVSL would be agreed upon by trade ministers' meeting in June However, trade ministers failed to agree on the chair's proposal. The implementation plan stated as follows; "Participation in the 9 sectors and all three measures (trade liberalization, facilitation, and ecotech) in each sector will be essential to maintain the mutual benefits and balance of interests, which Leaders had established when selecting the sectors in Vancouver" "In order to enable finalization of the sector arrangements that would maximize participation, Ministers agreed that flexibility would be required to deal with product-specific concerns raised by individual economies in each sector. Such flexibility would generally be in the form of longer implementation periods. In principle developing economies should be allowed greater flexibility." 6 4 Based on APEC Sector Liberalization Nomination Forms on the 15 sectors compiled at the SOM in September to November "APEC Economic Leaders' Declaration: Connecting the APEC Community", Vancouver, Canada, November 25, 1997, paragraph 6. 6 "APEC Meeting of Ministers Responsible for Trade: Statement of the Chair", Kuching, Malaysia, June paragraphs 5 and 6. 6

7 The modality of liberalization changed to a package deal with less flexibility. The EVSL idea could supplement the IAP but this proposal of 'all 9 times 3 in a package' seemed to be too ambitious at the current stage of APEC process? EVSL was originally conceived to identify a few sectors to be agreed upon easier and implemented earlier in addition to the IAP, thereby maintaining momentum of liberalization within APEC. ITA was a good example and was regarded as a successful precedent. Some economists warned against the EVSL approach on the ground that it tended to lead to piecemeal liberalization of easier sectors leaving difficult sectors untouched. However, this criticism was not relevant to EVSL. EVSL neither aims at a full-scale package of sectoral negotiations vis a vis an across-the-board negotiation as in the Uruguay Round. Nor would it replace the IAPs as the principal mechanism of APEC s liberalization. It was only additional to the major tracks of IAPs and whatever liberalization achieved through EVSL will enhance the IAPs of individual economies and should be welcome. The modality of EVSL, as appeared in the Chair s Statement of the Trade Ministers meeting in June 1998, changed from the voluntary IAP to the ITA-type negotiation, although under the same title of early voluntary sectoral liberalization. The Joint Statement of Ministers at the Vancouver APEC clearly stated as; Recognizing the need for a balanced and mutually beneficial package, and recalling that the process of early liberalization is conducted on the basis of the APEC principle of voluntarism, whereby each economy remains free to determine the sectoral initiatives in which it will participate,.. We recommend that Leaders endorse members beginning immediately to complete the work on these proposals through finalizing the scope of coverage, flexible phasing, measures covered and implementation schedule, including choice of measures and instruments for implementation based on existing proposals in the following sector. 7 However, it became the package proposal of 9 sectors times 3 measures in the Chair s statement. The element of voluntarism weakened so that each economy must either say yes or no to this package proposal. The flexibility was yet to be elaborated but it would generally be in the form of longer implementation period as in the same chair s statement. A package deal of mutually beneficial and balance of interest was a typical formula of the GATT negotiation and departed far from the IAPs on voluntary 7 APEC/MM, Joint Statement by Ministers, Vancouver, Canada, November 22-23,

8 basis. Although only Japan objected to it explicitly, was this departure accepted by all other members? If so, they should have at least changed the title early voluntary liberalization. Did APEC quit its unique modality of voluntarism and become a stage for negotiation? Did the nine sector really reflect a balanced interest? It was explained that the nine sectors were adopted mainly on the basis of exporters interest and they were balanced in the sense that they included exporter s interest of all APEC economies. If you count economies nominating the nine sectors in Table 1, you will find that the United States nominated 7, Canada, Singapore, and Thailand nominated 3, while five economies nominated none. Alternatively we could select the initial package based on importers interest, which is consistent with the teaching of gains from trade. In reality of negotiation for liberalization, however, there always emerges resistance by domestic producers competing with imports and we always face political economy problems of how to persuade vested interest groups at home. We could select sectors of least resistance at home, which better fit the original idea of EVSL. Unfortunately we did not see an analysis of the EVSL sectors which told us how much export and import trade of individual economies were covered and how much impediments still remained in each sector. 8 Table 2 compares import tariff revenues from eight EVSL sectors for nine economies. Import and tariff figures were available for only the nine economies listed in the table from WTO/IDB and the tariff revenue were calculated by multiplying import values by trade weighted average tariffs. If multiplied further by price elasticity, it would give an estimate of possible increase of imports by eliminating tariffs, which was the first estimate of the impact of liberalization on a static assumption. Although with an incomplete coverage, Table 2 gives us an insight to a cross-economy comparison. Figures differ greatly between sectors and economies. The total figure of Japan (in the right end column) was never the largest, but its figures in fisheries and forest products were larger than those of other economies mainly because of its big current imports. And It was in these two sectors that Japan faced difficult political economy problems at home. They would inevitably be associated with the WTO negotiation over agricultural products which was scheduled to start in 2000 and it 8 Australia published a CGE study on the EVSL issue but on the point of view of Australian interests. Philippa Dee, Alexis Hardin, and Michael Schuele, APEC Early Voluntary Sectoral Liberalization, Productivity Commission, Australia, July

9 was difficult to negotiate them within APEC separately from the forthcoming WTO negotiation. The gradual liberalization of the Japanese agriculture was necessary but the year 1998 was not a good timing for it. Was it not possible to downsize the package by excluding a few sectors which met strong resistance by members? The passage of a single ITA was highlighted in Manila. Why not four to five EVSL in Kuala Lumpur? At the APEC ministerial meeting in Kuala Lumpur in 1998, Asian ministers supported the Japan's contention and decided to forward the tariff element of the nine sector EVSL to the WTO. Japan could avoid being isolated in APEC but some members may have got disappointed with the slow process of liberalization under the APEC modality. The hasty promotion of EVSL was partly responsible for their disappointment. While the tariff element of the nine sectors of EVSL was forwarded to the WTO, the implementation of their NTMs, facilitation, and Ecotech elements will proceed under the New Zealand s initiative (Summary Conclusion of the First SOM 1999). Facilitation and Ecotech form a WTO plus element in APEC. EVSL aimed to push them together with liberalization, that is, first achieve a critical mass agreement on a suitable package of liberalization, facilitation, and Ecotech within APEC and then forward the liberalization element to the WTO in order to bind with the WTO the liberalization commitments. With the tariff element separated from other two, the implementation of the latter may be more or less discouraged. The remaining six sectors include such a broadly defined one as Food, for which pragmatic approach is recommended for this year. The EVSL initiative continued in the form of surveys and sector seminars/ workshops to progress the work on NTMs, facilitation and Ecotech 9,but it has failed to break through the slow process of APEC s liberalization. 4. Catalyst Role in the WTO Liberalization The third disappointment about APEC was its failure in successfully preparing for launching the New Millenium Round negotiation of the WTO liberalization at the third WTO ministerial meeting in Seattle in November Indeed APEC leaders declared their support to the launching of the WTO negotiation at Auckland meeting in two months earlier and quite a few other reasons were cited as responsible for the failure in Seattle. However, APEC trade ministers could not reach an agreement on the agenda of the coming round in their June meeting. The same structure of conflict as one 9 Twelfth APEC Ministerial Meeting: Joint Statement, ditto. 9

10 over the EVSL initiative was observed on the agenda for agricultural liberalization among major APEC members. The United States did not concede to including the possible restriction of unilateral resort to anti-dumping measures on the WTO agenda. The conflict over the agenda was not resolved even at the official meeting immediately before and forwarded to the ministerial meeting for political settlement. Peter Petri pointed out four types of contribution APEC can make to the New Millenium round; 10 - Cheerleader for the round, by building consensus on round objectives and by offering compromise proposals on difficult issues, - Laboratory for testing new ideas, for example, by conducting discussions on standards for competition policy - Coalition for giving a more prominent voice to member economies and promoting positions on issues of common interest to all members, - Competitor to the round, offering an alternative venue for liberalization if the round s progress proves disappointing. In the preparatory stage its cheerleader role was effective. Unique fora of APEC could be utilized more to help WTO promote the New Millenium round. It is often told that informal chats in the green room have helped forming consensus at the WTO ministerial meeting. But with 150 participating members now, far more preparation will be needed to successfully form consensus on changing the status quo, which include exchanging information and views, identifying possible conflicts of interests, and seeking pragmatic solutions for these conflicts. With China s entry to WTO in 2001, APEC fora would provide superb opportunities for such preparatory discussions. Developing economy members of WTO were not very enthusiastic about launching the New Millenium round, but developing economy members of APEC were generally positive about meeting the globalization challenge and considered liberalization as an indispensable part of it. In November 2000 in Brunei, APEC leaders declared their wish to launch the New Millenium round within The Doha Development Agenda negotiation has started since January 2002 on a wide range of issues as well as the UR Built-in Agenda of agriculture and services. DDA could not be concluded in three years as originally scheduled and is now in the middle of its extended two years. However, we were not 10 Petri, Peter. APEC and the Millenium Round, in APEC: The Challenge and Tasks for the Twenty First Century, Summary and Recommendations of the 25 th PAFTAD Conference, July

11 informed of much significant efforts for resolving these conflicts. As regards agricultural negotiation Japan talked only to EU against the United States and Cairns Group members including many APEC members 11. On the anti-dumping rule Japan, Korea, and developing economy members looked to the new Bush administration expecting that the new administration would persuade the protectionist groups at home. APEC has started a new initiative for facilitating liberalization of its developing economy members, with a program that implements technical cooperation to trade-related capacity building. Developing economy members are often handicapped by their limited capacity to implement liberalization, which is often a major reason why they cannot actively join the multilateral trade negotiations. Japan proposed this program at the Trade Ministers Meeting in June 2000 and undertook a field survey of nine developing economy members about individual economies needs for such assistance. The APEC Ministerial Meeting in November 2000 accepted its report and adopted it as an APEC program of supporting developing members efforts for liberalization. A similar program was implemented by WTO as well. The WTO provides technical assistance in three modes: training in trade policy, technical missions and seminars, and provision of computer-based resource centers. The APEC s survey of nine economies showed us that economies at different stage s of development need different types of capacity building. The least developed economies, inexperienced in multilateral trade negotiation, needed to improve their knowledge about overall WTO affairs and preferred seminars and training courses of general education for their officials. The more experienced developing members of APEC requested expanding their knowledge about specific areas of the WTO agreements such as TRIPs, customs valuation and dispute settlement procedures. APEC s technical assistance program for trade-related capacity building met these specific needs of its members. This is indeed an advantage of regional cooperation to provide tailor-made assistance that meets local needs. The cost of all trade-related capacity building projects amounted to US$40-50 million. This is a clear example of catalyst roles APEC can play in promoting WTO liberalization. (Yamazawa, 2004) 11 Assigned by PECC Trade Forum, I organized a PECC Agriculture Study Team of six countries, China, Japan, Korea, New Zealand, Thailand, and the United States and produced jointly a PECC position paper on agriculture in search for a consensus package which could be accepted by all PECC members. (PECC/Trade Forum 2003) 11

12 5. Open regionalism as a good asset of APEC The catalyst role for the WTO liberalization is well consistent with open regionalism of APEC. Since its start in 1989, APEC has been associated with the term open regionalism in order to convey the APEC s philosophy of not becoming inward-looking. Indeed the philosophy has been widely accepted by almost all APEC members because most of the APEC members rely highly on trade and investment with outside of APEC. It has been a good asset of APEC, in comparison with European Community criticized as fortress Europe. However, it has not been clarified what the open regionalism means. The term itself is self-contradictory since regionalism conveys a closed grouping. It needs to be clarified in the context of the APEC liberalization. Firstly open regionalism does not mean free admission. Economists of non-member economies often object to the term because APEC does not admit countries applying for the APEC membership. The author does not deny the desirability of admitting any applicant who fulfills all the requirements for membership. However, any group needs to constrain its membership so that it maintains integrity and effective working of the group. Broadening and deepening need to be balanced as we witness in the history of European Union. More important than membership is the applicability of benefits which accrue from APEC. A good example is the application of the APEC liberalization to both members and non-members on the MFN basis, thereby resulting in non-discrimination at all. This was recommended for all APEC members since the APEC liberalization was delivered unilaterally. This perception was widely shared in the western Pacific. As a matter of fact the author once characterized its new modality as follows under the name of Open Economic Association (OEA);(Yamazawa 1992) -open in that its structure and policies do not lead to discrimination against trade and investment with the rest of the world -economic in its primary policy focus -a voluntary association in that its members do not cede sovereignty to any supranational regional institution. This provides a new type of regional integration different from free trade area which does not discriminate against non-members and is strengthened by facilitation and Ecotech. However, this perception of open regionalism was not shared by American economists who claimed that effective liberalization was not usually delivered unilaterally and on the MFN basis. As a matter of fact the United States has committed no liberalization beyond the Uruguay Round agreement in its IAP. They also 12

13 pointed out that such modality will encourage free-riding (that is, suspending own liberalization but benefiting from other s liberalization) and that it is constrained by the parlamentary procedure in the United States. This perceptional gap regarding the APEC liberalization has not been resolved between the two sides of the Pacific. But the revisions of the IAPs for the past years by all APEC members tell us that only a little liberalization has been delivered under the APEC modality of unilateral liberalization. Indeed we have witnessed that the liberalization in difficult sectors would never be delivered unilaterally and applied on the MFN basis. This is certainly a limit to the current modality of APEC liberalization. However, this APEC modality will be effective in implementing facilitation measures where are free from discriminatory impact on non-members (Yamazawa, 1996). Thus it would be too strict if we define the open regionalism as the MFN application of the liberalization. More practical definition of open regionalism will be delivered by rephrasing it as open regional cooperation, that is promoting regional cooperation consistently with the multilateral rules such as WTO, World Bank, and IMF. The catalyst role of APEC suggested in the previous section well fit this concept of open regionalism. It also fit the current state of Asia pacific economies. Because of their long-term interdependence on trade and investment links with outside the region, Asia Pacific economies have shown great interest in global trade liberalization and have participated actively in the Uruguay Round negotiations. The Osaka Action Agenda confirmed consistency with multilateral liberalization as one of its general principles. The open regional cooperation is the most workable concept of APEC s open regionalism. 6. How to incorporate sub-regional trading arrangements with APEC During the last decade we witnessed the prevalence of sub-regional grouping proposals within APEC region. The prevalence of FTAs has been a global tendency since the last decade. One hundred and twenty FTAs were reported to GATT/WTO by May 2000, more than a half of which were formed in the latter half of the 1990s. Two APEC members, Singapore and Mexico have been most active in proposing to form FTAs either with other APEC members (Singapore-New Zealand, Singapore-Japan, Singapore-the United States, and Mexico-Japan) or with non-apec members (Mexico-EU). Japan and Korea have started to seek FTA relationship with other APEC members such as Japan with Singapore, Mexico, Malaysia, Philippines, Thailand, and Korea, and Korea with Chile and Thailand. The two countries were late comers in the FTA initiatives. As a matter of fact it was only five East Asian economies, China, Hong 13

14 Kong, and Taiwan as well as Japan and Korea, which have not formed FTAs either bilaterally or multilaterally until In addition, there have recently emerged regional grouping proposal of a broader coverage in East Asia such as China-ASEAN, Japan-ASEAN, Korea-ASEAN, Japan-Korea-China, ASEAN plus Three s well as East Asian Free Trade Area (covering the whole East Asia). Some outside observers warn against its possible erosion of the APEC s fragile efforts for liberalization. They contend that new bilateral FTAs are inconsistent with the Bogor goal and will impede their liberalization efforts under WTO. East Asian Free Trade Bloc will become inward looking so that it will discriminate against non-east Asian members of APEC and thus stimulate similar regional grouping in the other region, especially in North and South America, and APEC will fall apart into Free Trade Area of America and East Asian FTA. The FTA initiatives are criticized against its inconsistency with the multilateral liberalization because it incurs trade diverting effects mainly to non-member countries. This is based on the negative static effects of the elimination of tariffs and non-tariff measures between members resulting from the formation of FTA but many economists admit it is likely to be more than offset by positive dynamic effects of intensified competition, economies of greater scale, promotion of investment and technology flow. Furthermore, the criticism is addressed to the conventional FTA defined by Article 24 of GATT. Nowadays many of the current FTA initiatives aim to include a greater coverage such as investment and services, rules of origin, harmonization of rules and standards, intellectual property rights, and dispute settlement mechanism as well as tariffs and NTM as has been given a new name of Comprehensive Economic Partnership (CEP) agreement aiming at pursuing the dynamic effects. The dynamic effects of a FTA is realized only through structural changes of status quo and inevitably meets strong resistance by vested interest groups at home. It succeeds only through breaking their resistance, which is common to the WTO liberalization. In this respect forming a FTA serves as a laboratory of breaking through domestic resistance and thus contribute to the preparation for liberalization under a greater coverage such as APEC and WTO. An FTA incurs a negative trade diversion effect to non-members and thus introduces discrimination within APEC. Critics of the new FTAs insist that, under the name of open regionalism, liberalization and other measures of the FTA should be applied to non-members on Most Favored Nations (MFN) basis so that there will result in no discrimination. Indeed, it is ideal for a sub-regional FTA to be applied to non-member APEC economies on MFN basis, which, however, does not take into 14

15 consideration the difficulty of breaking through the vested interest groups at home. Furthermore no existing FTAs, NAFTA, ANZCER, and AFTA, are applied on MFN basis. It is unfair if the stricter rule is applied only to late comers. Having recognized this difficulty in practicing the liberalization on MFN basis, the EPG Report III proposed Open Sub-Regionalism to be applied to SRTAs within APEC admitting both MFN treatment and reciprocal FTA treatment in applying the liberalization. The Bogor Declaration called on the EPG to review the interrelationships between APEC and the existing sub-regional arrangements (NAFTA, ANZCERTA, and AFTA) and to examine possible options to prevent obstacles to each other and to promote consistency in their relations. (APEC Leaders Declaration 1994) The Third EPG Report emphasizes that any SRTA acceleration or linkage must be fully consistent with the WTO (APEC/EPG 1995). It recommends that any new SRTA initiatives within APEC be promptly submitted to the WTO for confirmation that they meet this test and for surveillance of their performance in practice. It also recommends that any SRTA acceleration or linkage be extended to other APEC economies under the non-mutually exclusive four-part formula already proposed by the EPG for the extension of APEC liberalization itself to nonmembers of the broader grouping: ---SRTA members should implement their acceleration or linkage via unilateral (and hence MFN) liberalization to the maximum possible extent; ---each SRTA acceleration or linkage should be accompanied by a clear policy statement by the member economies that they intend to continue reducing their trade barriers to other APEC members as well as to other members of their SRTA; ---each SRTA acceleration or linkage should be accompanied by the respective group s indication of a willingness to extend its new liberalization to other APEC members on a reciprocal basis; ---any individual SRTA member can unilaterally extend its SRTA acceleration or linkage to other APEC economies n a conditional or unconditional basis. It would have to do so to all non-apec members as well if it were to proceed on an unconditional basis, however, because the WTO does not permit selective extension of preferences to nonmembers of an SRTA. The proposal for a FTA for APEC (FTAAP) made recently by some economists and businessmen seems to be along this line. In order to strengthen the weakened momentum in APEC for achieving the Bogor goal and to prevent the bi- and sub-regional FTAs prevalent among APEC members from distorting trade and investment and dividing the Asia-Pacific, they argue APEC should tackle a new attempt, 15

16 negotiation for FTAAP, departing from traditional non-binding and open regionalism approach. They detail the design of FTAAP. It seems to me that FTAAP is beyond the current capacity of APEC. I share with them the need for strengthening momentum for achieving the Bogor Goal and the concern about possible trade and investment distortion by the FTA moves among APEC members. But we witness severe conflicts of interest between APEC members. APEC trade ministers support the Doha Development Agenda (DDA) in general but have not been able to resolve the conflicts in difficult areas. I cannot see why APEC ministers can agree on major DDA issues within the FTAAP framework before they do in Geneva. I would like to see more catalyst efforts to resolve these conflicts within APEC in order to support the feasibility of FTAAP. After all, the FTAAP proposal seems to be a hasty approach and it may endanger the APEC framework itself. Rather I would like to take advantage of current momentum for bi- and sub-regional FTA moves among APEC members and cleverly guide them in the direction consistent with multilateral rules and serving as a laboratory for breaking through domestic resistance. That is along the line of Trade Forum Proposal for an APEC Common Understanding on FTAs (PECC Trade Forum 2003). APEC should remain a catalyst rather than playing a negotiator role itself. The momentum for East Asian regionalism has increased recently to the extent that a roadmap towards East Asia FTA or Economic Community is often mentioned. This reflects economic reality in the region. First it has resulted from increased economic interdependence in the region, which was strengthened through East Asian Miracle and continued over the Asian crisis in China s entry to WTO in 2001 has accelerated the integration of the Chinese economy to the region s business network. These will lead to the evolution of East Asian economic sphere, apart from a FTA. During the crisis East Asian economies realized the need for effective cooperation with neighbors so that the momentum for regional cooperation has emerged in the recovery process from the crisis. That is the reason why ASEAN plus Three initiated with currency swap agreement at the Chiang Mai Initiative May The cooperation will be extended to technical assistance to strengthening financial systems of individual economies, facilitation of trade and investment and capacity building. The elimination of tariffs and NTMs will come at a later stage to complete the East Asian FTA. The benefit of regional cooperation accrues from scale economy and its dynamic impacts and a better economic rationale exists for greater regional cooperation, Japan-ASEAN FTA than bilateral FTAs with Japan and individual ASEAN members. Since major Japanese firms have already established their production units in individual 16

17 ASEAN economies, bilateral FTAs are unlikely to stimulate additional investment by them. Once ASEAN member economies are integrated into a single ASEAN market under a Japan-ASEAN FTA, It will produce a variety of new business opportunity for those Japanese firms to invest in a more efficient network of division of labor across borders (JETRO/IDE 2003). Similarly, ASEAN plus Three will produce a greater economic effect than individual pairs of ASEAN plus one. However, East Asia FTA is still a remote goal. Neither ASEAN nor China are ready for going into a deeper integration of CEP type due to economic differences within themselves. In order to proceed to a deeper integration of CEP type, they have to implement facilitation measures and capacity building as well as liberalization, which they cannot provide sufficiently by themselves. ASEAN plus Three has so far implemented only currency swap agreement. Instead of developing their own framework for providing facilitation and capacity building, they can look to APEC and its ongoing task force activities for these measures. It will benefit non-east Asian APEC members from bringing APEC s open regionalism to East Asian sphere by responding those requests from ASEAN plus Three, rather than rejecting momentum of regionalism and killingdynamism in East Asia,. 7. Mid-term Stock-taking The IAP practice has continued with its CUL modality. APEC member governments have continued to submit revised versions of their IAPs annually, whose content has improved steadily. The CTI s (Commttee for Trade and Investment) project team prepared a Style Guide for Presentation of IAP Templates which encouraged all IAPs to follow the same broad tabular format; 12 - A brief overview statement of the economy s vision/policy approach to the area - A table which outlines improvements implemented over the preceding year, the current situation and planned further improvements against specified reporting criteria - A table providing base-year information for that area of the economy and cumulative improvements made towards Bogor goals against specified reporting criteria There still remains room for some member governments to follow this format thoroughly. As the IAPs are improved along this line, they will provide both 12 Prototype IAP Project: Development of Formats, CTI, 14 March

18 policymakers and business people with useful information about the trade and investment environment of individual APEC economies and give a clear indication of the progress being made toward the Bogor goals. The joint ministerial statement of 2000 commended the e-iap initiative ( IAPs in the prototype format on the APEC website) as an effective mean to make IAPs more transparent, specific and comprehensive. 13 Ministers agreed for all members to use the new e-iap system for their future IAP submission. A peer review process within SOM had started since 1999 in which individual member governments submit their IAPs for peer reviews at CTI meetings. In Shanghai APEC in 2001, the Midterm Stocktake started to prepare to meet the first deadline of the Bogor Goal in ten years. A small team was formed to review individual member s IAP, consisting of one senior official of different member, one consultant expert, and one from APEC Secretariat. The author participated in a team on Australia s IAP and experienced this practice. The review was mainly based on the detailed check of the most recent IAP report and hearing from the government offices, taking into account comments and questions on the IAP by other members. The report was submitted to a SOM and exposed to further comments and discussion. The drafting of the report differ between teams, some following the WTO s Trade Policy Review practice. While WTO s TPR indicates departures from WTO rules and urge the removal of the gaps, APEC s Peer Review identifies individual economy s domestic conditions impeding liberalization and facilitation to be understood by other members but does not request quick harmonization. Bogor Goal and OAA contain ambiguity and flexibility and not decide winners but encourage all economies continue achieving the goal. The SOM report on the Midterm Stocktake summarized, in less critical tone as; APEC economies have achieved significant liberalization and facilitation of trade and investment since Multilateral, regional, bilateral and unilateral initiatives all have contributed to a more open regional environment. Tariff and NTM have been removed in many cases and lowered in many others, though liberalization has clearly been more successful in some sectors than others. Foreign investment has been liberalized. Outcomes in a range of other areas designated by the OAA, such as services, competition policy, intellectual property rights and customs procedures have improved. Economic and technical cooperation activities have developed in parallel to the progress made on the liberalization and facilitation fronts. The rewards from these policy choices 13 Twelfth APEC Ministerial Meeting: Joint Statement, Bandar Seri Begawan, Brunei Darussalam November

19 have been substantial and have contributed to sustained economic growth and significant welfare improvements in the region. (APEC/SOM, 2005). It also made it clear that this achievement has resulted not only from APEC s efforts but also from evolving international trade environment. 8. Conclusions (1) APEC s liberalization initiative has met across impediment and failure while affected by too much expectation or hasty attempt to follow the WTO practice. We need to guide APEC in accordance to capacity and readiness of its members. (2) Constrained by its original modality of voluntarism, APEC cannot be a negotiating body but leave liberalization to WTO or FTA negotiations for binding liberalization. However, APEC can play a catalyst role to supplement WTO in promoting liberalization. (3) APEC has developed facilitation and assistance to capacity building as supplementary to liberalization in parallel with WTO, taking advantage of regional cooperation. APEC is expected to continue its contribution in these areas to the WTO regime. (4) Most members of East Asia participate in APEC and East Asia has served as an engine of dynamic development of the Asia Pacific region. The increased momentum for East Asian regionalism reflects the dynamism emerging in the region, but East Asian members still need technical assistance in implementing facilitation and capacity building measures. We wish non-east Asian members of APEC understand this reality correctly and participate in the East Asian development. (5) East Asian FTA is still a remote goal, constrained by economic differences within members and immatured market economies. APEC with its existing taskforces can help East Asian development by providing assistance to facilitation and capacity building, thereby guiding East Asian regionalism consistently with APEC s open regionalism. References APEC/CTI, 1996: APEC Committee on Trade and Investment, APEC Individual Action Plans: Format Guidelines APEC/CTI, 1997: APEC Committee on Trade and Investment, 1997 Annual Report to Ministers, Vancouver Canada, November Appendix Two: Convenor Summary 19