From Osaka to Subic: APEC s Challenges for 1996

247 PACIFIC ECONOMIC PAPERS NO. 255, MAY 1996 From Osaka to Subic: APEC s Challenges for 1996 Andrew Elek A USTRALIA JAPAN RESEARCH CENTRE

PACIFIC ECONOMIC PAPER NO. 255 MAY 1996 From Osaka to Subic: APEC s Challenges for 1996 Andrew Elek Australia Japan Research Centre Australian National University A USTRALIA JAPAN RESEARCH CENTRE

Australia Japan Research Centre 1996 This work is copyright. Apart from those uses which may be permitted under the Copyright Act 1968 as amended, no part may be reproduced by any process without written permission. Pacific Economic Papers are published under the direction of the Research Committee of the Australia Japan Research Centre. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the Centre. The Australia Japan Research Centre is part of the Economics Division of the Research School of Pacific and Asian Studies, The Australian National University, Canberra. ISSN 0 728 8409 ISBN 0 86413 192 5 Australia Japan Research Centre Research School of Pacific and Asian Studies The Australian National University Canberra ACT 0200 Telephone: (61 6) 249 3780 Facsimile: (61 6) 249 0767 email: ajrcgen@ajrc.anu.edu.au Edited by Gary Anson Typeset by Minni Reis ii

FOREWORD APEC has now gone through three successful outcomes from Meetings of Leaders at three different locales: Blake Island, Bogor and Osaka. A vision for an Asia Pacific economic community has been put forward. A political commitment to free and open trade and investment has been made, with definite ending dates of 2010 and 2020. And an action agenda has been adopted. The outcomes resulted from three different styles: abrasive openness at Blake Island; strong leadership from the top at Bogor; effective and efficient bureaucracy at Osaka. While there has been continuity in the APEC agenda, there have also been very marked contrasts in the manner of achieving results. The diversity of styles has enriched the APEC process and has contributed to levels of success which went much higher than if the same approach were taken each year. As the Philippines takes on the leadership chair of APEC in 1996, it is wise and prudent for us to look for our comparative advantage and contribute our peculiar strength to the diversity from which a successful outcome for APEC can be drawn. It would be unhelpful to even suggest that Subic be compared with Blake Island, Bogor or Osaka. It would not be smart to even try and imitate what the United States, Indonesia and Japan did. Further, we should all be working towards Subic contributing in its own distinctive fashion, based on the peculiar strength of the Philippines, towards substantiating the vision for making APEC a community of peaceful and progressive economies: engaged in free and open trade in the Asia Pacific region, and promoting more free and open trade under the WTO in the world economy. At Subic, each economy will submit its liberalisation plans which can then begin to be implemented a few weeks later, by 1 January 1997. Those plans need to be comprehensive: they must therefore encompass all sectors. They need to be broadly comparable. Ideally, they should represent best-effort commitments, which can start a competitive process of speeding all APEC economies unilaterally towards trade and investment liberalisation. A herculean task it is for each economy. A virtually impossible task it is for any chair to coordinate, and the responsibility for doing just that has fallen on the Philippines. It is difficult to devise a more sure-fire formula for potential failure. The Philippines must really believe in miracles to fail to be daunted by the enormity of the task ahead. iii

We must bear in mind, however, that in APEC and through APEC, all member economies are asked to go beyond their WTO commitments. We are all aiming at virtual free trade and investment in the Asia Pacific region by dates certain. Nineteen-ninety-six is the year, therefore, for all of us to think long term and with a different mind set. For each of our economies, we are bringing down and removing barriers to free and open trade and investment, at least in the region by 2010 and 2020. We are aiming to do so, not through give-and-take bargaining, nor through long, tedious negotiations with fine calculations of what to give away in exchange for gains we receive in return. Rather, we are all starting from the conviction that the more we open our economies to each other the more we all benefit. Furthermore, there is a widening consensus that those who liberalise first and fast shall gain the most. This is what concerted unilateral liberalisation implies: a voluntary commitment to do all we can, as fast as we can, to remove barriers to our trading and investment relationships with each other. Each of us starts with the shared vision, a shared, two-tiered timetable, and above all a shared commitment. APEC is all about good will, and therefore about the freedom to take unilateral actions towards our common goal. We march, not in martial lock-step, but in a wide diversity of free movement that enriches a multi-stepped choreography. At APEC, the pace is not to be set by the slowest. Indeed, the strategic question that each APEC economy will need to ask is: can we really afford to be left behind? If there is any economy that has had to grapple with this strategic question, it is the Philippines. By sheer weight of numbers and opportunities, although there is a distinction between economies with deadlines of 2010 and 2020, when more than three-quarters of trade in the Asia Pacific region shall be completely liberalised by 2010 at the latest, is it in the strategic interest of any developing APEC economy to shut itself off from the mainstream intensity of free trade? If free investment flows follow free trade, does any developing APEC economy that seeks to attract investments serve its development purpose by dragging its feet in pursuing its liberalisation strategy? Indeed, in today s modern economic world, is it to anyone s interest to bill itself as a developing economy? Ensuring that the liberalisation programs will be in concert with each other, indeed comparable with each other, may well be APEC s gift to the WTO. If APEC can promote and practice competitive liberalisation, then it will have shown a way, very different from GATT, to achieve effective and efficient results. The APEC chair cannot preside as though APEC were a new round of GATT negotiations: this would be unwise and imprudent. Rather, the APEC chair simply needs to focus the attention of everyone on how far and how fast each one s iv

liberalisation program can go in the light of new realities. Then there can be a ratcheting up and positive peer pressure. The Philippines shall have the burden of APEC leadership in 1996. It will have to bear this burden by example. It must then work closely with its ASEAN neighbours so others will follow. If we can get ASEAN to be forthcoming, then ASEAN will indeed put its leadership imprimatur, not only in the commitment made at Bogor, but also in the program implementation adopted at Subic. This is our opportunity to give flesh and substance to the dreams we put forward at Canberra in 1989: that APEC should be founded upon ASEAN s commitment and capacity for action. The Philippines can also steer APEC towards an open framework for development cooperation. If Jakarta was the site where ministers adopted a set of investment principles, Manila can be the site where ministers shall adopt the principles for development cooperation. It is here in Manila where the process of breaking the divide between donor and donee, between developed and developing in the wide and broad field of development cooperation should be initiated. Here in Manila, all APEC economies, drawing from their intensive and extensive experience in promoting genuine people development, should pledge to contribute to an open and all-inclusive framework for development. Here, governments shall proclaim that development work is not confined to a long list of programs in which only governments cooperate with each other; that work must now be broadened to invite the business sector, private organisations, non-governmental organisations, people s organisations to put in and share their resources and expertise for cooperation in development. All these principles have already been articulated by the Eminent Persons Group of APEC in its third and last report. The Philippines should assess them and then put them forward. The Philippines should also steer APEC towards substantiating the APEC claim that the business sector should be the engine of economic growth. As we welcome the APEC Business Advisory Council, we should begin to feature a business summit which can be staged at the main APEC Ministerial Meeting prior to the Meeting of Leaders. Indeed, the challenge to the private business sector of the Philippines is to showcase formal agreements some of its members may forge as the more substantive counterparts to the government-to government agreements that the President of the Philippines shall be signing with various governments in pursuit of development cooperation. In more specific terms, various agreements highlighting the different forms of BOT arrangements may well be announced in the days leading up to the Meeting of Leaders. v

The Philippines also has some comparative advantage in promoting people-to-people linkages. We believe in letting a thousand flowers bloom. We bank on the grassroots. We are very good in getting many people together in the different sectors and in different fields. Indeed, for each item included in APEC s agenda for development cooperation, private and nongovernmental organisations in the Philippines can be asked to assume the leadership of starting APEC-wide networks. Let the networks be set up. Let as many people in APEC begin to get together, know each other better and agree on a program of work which they can pursue together. This is a vital component of the community-building responsibility of APEC as a big family of economies that aim to become a free and open economic community. Finally, Subic and President Ramos. From a military and naval base to an industrial and commercial complex. From a military officer to an economic leader committed to the reform and development of Philippine economic society. Clearly, the image and the message must go forth that APEC as an economic community can sustain and promote prosperity in the Asia Pacific region if we all pledge to make it a region of peace. This is, after all, what ASEAN has tried to do: to stress economic cooperation so as to secure a zone of peace. Once again, ASEAN shares its experience and shows the way for APEC by tying together peace and prosperity irretrievably and responsibly. Remarks on the occasion of two APEC conferences in Manila on 28 and 29 November 1995 by Dr Jesus P. Estanislao, President of the University of Asia and the Pacific. Dr Estanislao represented the Philippines at APEC s Eminent Persons Group. vi

CONTENTS Foreword... iii Executive Summary... ix The Osaka meetings of APEC... 1 The Osaka Action Agenda... 1 General principles... 3 Free and open trade and investment... 5 The challenge of Subic... 6 The Asia Pacific in 2020... 7 An Asia Pacific model of cooperation... 11 Reducing uncertainties... 17 A strategy for global negotiations... 25 Development cooperation... 29 Notes... 32 References... 34 vii

viii

EXECUTIVE SUMMARY The positive outcome of the meetings of APEC ministers and economic leaders in Osaka is an important contribution to the future of the Asia Pacific region. The leaders joint declaration and the Osaka Action Agenda define how the Bogor vision is to be realised, while the substantial set of initial actions have confirmed the serious commitment of APEC governments to facilitate and liberalise trade and investment. The 2010 or 2020 targets for free and open trade and investment will be attained through a voluntary process. Reforms to facilitate and liberalise trade and investment, including commitments to future action, will be implemented by unilateral decisions of APEC governments. Asia Pacific governments will be encouraged to act collectively, but those willing to take initiatives ahead of others are free to do so. The endorsement of such a unique approach means that a new, Asia Pacific model of voluntary international economic cooperation, based on the guiding principles of openness, mutual respect and evolution, will be given a chance to work. The Osaka Action Agenda sets out a comprehensive range of actions to realise the Bogor vision, through both liberalisation and facilitation, which are recognised to be inseparable aspects of reforms to create a more integrated Asia Pacific economy. The Action Agenda also spells out the general principles to guide these reforms, which reaffirm the comprehensive nature of free and open trade and investment. While APEC governments are left to set their own priorities for the sequence of reforms needed to achieve free and open trade and investment, there are no provisions for exempting sensitive sectors from the agreed target dates. The principles of WTO-consistency, transparency and non-discrimination signal the region s commitment to open regionalism, confirming that the APEC process involves regionalism with global objectives. To sustain momentum towards the ambitious Bogor targets, consistent political leadership will be needed to overcome short-sighted opposition to proposals for cooperation by those who fear competition and have a vested interest in maintaining impediments to Asia Pacific economic integration. That, in turn, requires that the objectives, guidelines and proposed collective actions, currently set out in fifteen pages of technical detail, be translated into clear and specific targets which can capture and hold the attention of political decision-makers as well as the private sector, which stands to benefit from free and open trade and investment. (A set ix

of targets which would project an attractive and comprehensive vision of the Asia Pacific in 2020 is listed midway through this paper.) Political leadership will also be needed to reduce several serious uncertainties and underlying tensions in economic relations among APEC participants. To sustain progress towards free and open trade and investment it is essential to: Establish genuine confidence in pursuing a voluntary Asia Pacific model of cooperation. Create confidence, in China as well as among its trading partners, about the capacity and willingness to accommodate China in the world economy. Such confidence, in turn, requires an unequivocal guarantee of unconditional most-favoured-nation (MFN) treatment of China. Change the way disputes about trade policies are dealt with by Asia Pacific governments, particularly the US administration. Unless these issues are discussed frankly during 1996, then dealt with decisively in Subic, the cohesion of APEC, especially its ability to bridge the Pacific, will continue to be at risk. Up to now, the focus has been on promoting free and open trade and investment in the Asia Pacific, with considerable success. It is now time to move more purposefully towards cooperation among Asia Pacific governments to provide leadership in setting the global economic agenda. The first meeting of WTO ministers in Singapore, just after APEC s Subic meeting, presents APEC governments with an important opportunity to provide collective leadership. With effective preparations, especially by using the unique opportunity provided by the first Asia Europe summit in early 1996, it should be possible to launch a new Pacific Round of multilateral trade negotiations. APEC governments also need to find ways of promoting substantive economic and technical cooperation. This involves much more than pledging more money and identifying more projects. To be consistent with APEC s basic guiding principles of mutual respect and mutual benefit, it is essential to define a new vision of development cooperation which is radically different from traditional foreign aid, with its overtones of donor client relationships, policy conditionality or leverage. This is a formidable set of challenges, but as outlined in the paper, there are practical ways to make significant progress on each of these fronts in 1996, setting the stage for a successful and harmonious meeting of APEC leaders in Subic. x

FROM OSAKA TO SUBIC: APEC S CHALLENGES FOR 1996 The Osaka meetings of APEC The positive outcome of the meetings of APEC ministers and economic leaders in Osaka is an important contribution to the future of the Asia Pacific, consolidating the APEC process and giving it a clear sense of direction. The leaders joint declaration and the Osaka Action Agenda (APEC 1995) define how the Bogor vision is to be realised, while the substantial set of initial actions (or down-payments ) have confirmed the serious commitment of APEC governments to facilitate and liberalise trade and investment. The framework for implementing the Bogor Declaration makes it clear that free and open trade and investment will be attained through a voluntary process of cooperation. The 2010 or 2020 targets will be approached by means of unilateral actions of individual APEC governments. Reforms to facilitate and liberalise trade and investment, including commitments to future action, will be implemented by voluntary decisions of APEC governments. Consultations among APEC officials and political leaders will serve to coordinate, or concert, these actions. Each year, as in 1995, each APEC government is expected to continue to make unilateral down-payments in terms of both facilitation and liberalisation. At the 1996 meetings of APEC in the Philippines, each participant is to present a program of proposed reforms for the next several years in order to increase confidence that the 2010 and 2020 targets can be achieved. The Osaka Action Agenda The Osaka Action Agenda sets out the general directions of reforms to be implemented by APEC governments to dismantle impediments to all international economic transactions, including initiatives on: tariffs; non-tariff measures, such as quantitative export or import restrictions and export subsidies; trade in services, with detailed programs of reform of telecommunications, transport, energy and tourism; international investment; standards 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; and information gathering and analysis as a basis for future steps. The comprehensive nature of the Action Agenda confirms that the achievement of free and open trade and investment requires far more than the dismantling of border barriers such as tariffs and quantitative restrictions to trade in goods or services. It is recognised explicitly that liberalisation and facilitation are inseparable aspects of achieving the goal of free and open trade and investment. 1 Both liberalisation and facilitation of trade and investment are to be implemented through concerted unilateral decisions of APEC governments. It has been agreed that the liberalisation to eliminate traditional trade barriers can be achieved with each government setting its own pace and priorities, consistent with full liberalisation of all trade by the agreed target dates. For facilitation to be efficient, it is desirable for several governments to act collectively. Reforms such as the mutual recognition of product and process standards or the harmonisation of customs procedures need coordinated, sometimes simultaneous, actions by several governments to be effective. While the Osaka Action Agenda indicates that facilitation could be pursued most effectively through collective actions by all APEC participants, it also makes it clear that: APEC economies that are ready to initiate and implement cooperative arrangements may proceed to do so while those that are not yet ready to participate may join at a later date (p. 4). In other words, APEC governments are encouraged to act in concert, but there is no insistence on rigid uniformity where it is not essential. In the same spirit, the agenda has not sought to over-define the nature of individual action plans, with the details of the order and pace of facilitation and liberalisation being left to each government. Each Asia Pacific economy will benefit from trade liberalisation, so all APEC governments have a clear self-interest in meeting their agreed Bogor targets. In addition, APEC participants will be encouraged to move steadily towards the agreed objectives through a 2

process of peer pressure based on the review and evaluation of steps already taken as well as with firm commitments to future reform. General principles The general principles for facilitating and liberalising trade and investment, set out in Section A of the Osaka Action Agenda, are a valuable contribution to the APEC process. The clarification of all these important issues so quickly after the historic Bogor Declaration of November 1994 is a remarkable achievement, paving the way for realising the Bogor vision. The dismantling of all impediments to international economic transactions among Asia Pacific economies will be based on the principles of: comprehensiveness; WTO-consistency; comparability; non-discrimination; transparency; standstill; simultaneous start, continuous process and differentiated timetables; flexibility; and economic and technical cooperation. 2 The principles of transparency and non-discrimination, in particular, confirm APEC s global as well as regional objectives, as set out in the Seoul APEC Declaration: a) To sustain the growth and development of the region for the common good of its peoples and, in this way, to contribute to the growth and development of the world economy. b) To enhance the positive gains, both for the region and the world economy, resulting from increasing economic interdependence, including by encouraging the flow of goods, services, capital and technology. c) To develop and strengthen an open multilateral trading system in the interest of Asia Pacific and all other economies. d) To reduce barriers to trade in goods and services among participants in a manner consistent with GATT principles, where applicable, and without detriment to other economies. 3

The comprehensive nature of free and open trade and investment has been reaffirmed. While APEC governments are left to set their own priorities for the sequence of reforms needed to achieve free and open trade and investment, there are no provisions for exempting sensitive sectors from the agreed target dates. More importantly for the future, APEC governments will seek to dismantle all impediments to international economic transactions, not only obstacles imposed at borders but also those which arise from differences in domestic policies, regulatory systems or product standards as well as any lack of transparency. The Osaka Action Agenda states that all measures towards free and open trade and investment will be WTO-consistent and that [T]he outcome of trade and investment liberalisation in the Asia Pacific region will be the actual reduction of barriers not only among APEC economies but also between APEC economies and non-apec economies. This reaffirms the commitment of APEC participants to the fundamental guiding principle of open regionalism. Any unilateral liberalisation of trade in products covered by Article 1 of GATT/WTO has to apply to all members of the WTO on an MFN basis. This means that the Osaka downpayments and the commitment to further unilateral reductions of barriers to trade will not lead to the creation of an old-fashioned preferential trading arrangement or regional trading bloc. However, the principles of WTO-consistency and non-discrimination will need some further clarification. As they stand, they are not sufficient to ensure non-discriminatory treatment of economies which are not yet in the WTO, particularly China. A vital objective of the Subic meeting of APEC leaders will be to remove this uncertainty, so that APEC can become a truly effective vehicle for integrating China into the regional and the global economy. A more precise and operational guiding principle of non-discrimination will also be needed to avoid unintended discrimination against non-participants arising from reductions of impediments to international economic transactions which are not covered by the MFN principle of the GATT/WTO. Such transactions include investment, international movement of other factors of production, mutual recognition of standards and harmonisation of domestic commercial policies in practice, most aspects of trade and investment facilitation. Options for further clarification of the principle of non-discrimination to deal with all of these issues are set out below. The principles concerning comparability, standstill, simultaneous start, continuous process, differentiated timetables and flexibility reflect a recognition of political realities. While the dismantling of impediments to economic transactions among Asia Pacific economies is to be comprehensive, it must be expected that most governments will leave the reform of what 4

are perceived to be sensitive sectors to the latter stages of the transition to free and open trade and investment hence flexibility. At the same time, to be credible, it is essential that all APEC participants begin and sustain steady progress towards the agreed 2010 and 2020 targets; hence the principles of simultaneous start and standstill ; the latter ensuring that the dismantling of some obstacles to economic integration will not be accompanied by raising any others. The principle of comparability, if viewed positively, reflects the intention of each APEC government to use the evidence of liberalisation and facilitation by other Asia Pacific economies as additional arguments to counter vested domestic interests against reforms to increase competition. Such domestic political debates will be easier to win if governments can point out that all APEC governments are taking political decisions of comparable difficulty in their shared long-term interest in moving towards free and open trade and investment. There is, however, some risk that this principle could be used to divert scarce time and goodwill into debates about the comparability of the individual action plans to be developed during 1996. At worst, discussions among representatives of APEC governments could degenerate into GATT-style negotiations, where actions which would benefit each economy come to be regarded as costs. As elaborated below, if APEC is to succeed as a voluntary form of cooperation, it is essential that the reforms needed to achieve free and open trade and investment continue to be perceived as positive-sum games. It will be much more productive to assess progress and commitment to the APEC process by focusing reviews and evaluations on actions already taken rather than to compare statements of intent about future steps. Free and open trade and investment Section C of the Osaka Action Agenda sets out, in considerable detail, the proposed nature of concerted reforms in the fifteen specific areas listed above. These statements of intent set out, in operational terms, how free and open trade and investment is to be approached. This is an essential step to guide the design of coherent and mutually reinforcing action plans by all APEC governments. However, the pace of implementing the many necessary decisions by all APEC governments will be slow and hesitant unless APEC leaders continue to inject political momentum. Their political leadership will continue to be needed to overcome short-sighted opposition to 5

proposals for cooperation by those who fear competition and have a vested interest in maintaining impediments to Asia Pacific economic integration. Sustained leadership requires that the objectives, guidelines and proposed collective actions, currently set out in fifteen pages of technical detail, be translated into succinct and politically attractive language. This is essential to capture and hold the attention of political decision-makers as well as the private sector, which stands to benefit from free and open trade and investment. If the Bogor vision is to be realised within the agreed time limits, it is vital that clear, specific targets are endorsed explicitly by APEC leaders in 1996. The challenge of Subic To sustain support for achieving the ambitious objectives set in Bogor and Osaka, APEC s leaders now need to project a vision of a truly integrated Asia Pacific economy in terms which are meaningful to the people of the region. To retain the support of the private sector, it is essential to clarify that the APEC process will be concerned with all of their international economic transactions, not just trade in traditional products. To complement the ambitious, but at least easily defined, goal of getting rid of tariffs and quantitative restrictions to trade, APEC leaders need to set equally important long-term targets for dismantling all other significant impediments to international economic transactions. Political leadership will also be needed to reduce several serious uncertainties and underlying tensions in economic relations among APEC participants. To sustain progress towards free and open trade and investment it is essential to: Establish genuine confidence in pursuing a voluntary Asia Pacific model of cooperation. Create confidence, in China as well as among her trading partners, about the capacity and willingness to accommodate China in the world economy. Such confidence, in turn, requires an unequivocal guarantee of unconditional MFN treatment of China. Change the way disputes about trade policies are dealt with by Asia Pacific governments, particularly the US administration. Unless these issues are discussed frankly during 1996, then dealt with decisively in Subic, the cohesion of APEC, especially its ability to bridge the Pacific, will continue to be at risk. Just as importantly, a better balance is needed among APEC s multiple objectives. In Bogor, APEC leaders stated that the objectives of cooperation were to: 6

strengthen the open multilateral trading system; achieve free and open trade and investment in the Asia Pacific by a process of facilitation and liberalisation; and intensify development cooperation in the region. Up to now, the focus has been on the second of these objectives, with considerable success. Target dates for free and open trade and investment have been set, the principles of facilitation and liberalisation have been agreed upon and significant progress has been made with the initiatives announced in Osaka, which are worthwhile down-payments towards realising the Bogor vision. It is now time to move more purposefully towards cooperation among Asia Pacific governments to provide leadership in setting the global economic agenda. The first meeting of WTO ministers in Singapore, just after APEC s Subic meeting, can be an important opportunity for APEC governments to provide collective leadership. With effective preparations, especially by using the unique opportunity provided by the first Asia Europe summit in early 1996, it should be possible to launch a new Pacific Round of multilateral trade negotiations. 3 APEC governments also need to find ways of promoting substantive economic and technical cooperation. This involves much more than pledging more money and identifying lots of projects. To be consistent with APEC s basic guiding principles of mutual respect and mutual benefit, it is essential to define a vision of development cooperation which is radically different from traditional foreign aid, with its overtones of donor client relationships, policy conditionality or leverage. This is a formidable set of challenges, but there are practical ways to make significant progress on each of these fronts in 1996. The Asia Pacific in 2020 Implementing APEC s commitment to free and open trade and investment should make the Asia Pacific a truly integrated zone of remarkably efficient production. By 2020 the consistent increase in the productivity of all Asia Pacific economies can achieve a marked convergence towards high standards of living, contributing to self-confidence and regional security. The removal of impediments to all types of economic transactions in the region can lead to deep economic integration, with a high degree of specialisation made possible by the free region-wide flows of intra-firm and intra-industry trade as well as investment. The resulting gains in 7

efficiency can ensure that the Asia Pacific region remains the most competitive in what will be an essentially global market for goods and services. This, in essence, is the Bogor vision. It now needs to be translated into a more specific set of targets to be reached by no later than 2020. As acknowledged above, the fifteen pages of details of proposed actions in fifteen specific areas provide an immensely valuable contour-map of the terrain to be traversed. But to capture the energy and sustained enthusiasm of political and private sector leaders, it is also essential to have a clear vision of some enticing mountain peaks to be conquered. And to make the arduous effort worthwhile, there needs to be a tempting prospect of the view which can be expected from the heights of 2020. The view from the peaks 4 Following the dismantling of all significant penalties and obstacles to trade imposed at customs barriers, there should be no quotas; no Asia Pacific economy will impose tariffs on goods and services crossing border posts. That would mean a degree of economic integration in the Asia Pacific which had been achieved by the European Economic Community in the late 1960s. Subsequently, European governments came to realise that an old-fashioned free-trade area fell far short of an effectively integrated market or zone of production. Therefore, many more peaks will need to be climbed to offer the prospect of really free and open commerce. These will open up a vista where not just goods and services but capital, information, expertise and information flow freely around the Asia Pacific region and, hopefully, more widely. By 2020 international investment from all over the world should flow freely into and around the region once in line with their commitment to free and open trade and investment APEC governments eliminate all needless distinctions in the treatment of producers on the basis of ownership. Extensive harmonisation of commercial legislation, ranging from competition policy, standards of disclosure and auditing, approaches to taxation and fiscal incentives and the complete elimination of exchange controls can do away with most of the current uncertainties and policy-imposed transaction costs on international commerce in the Asia Pacific. For example, anti-dumping actions should become unnecessary among Asia Pacific economies by 2020, at the latest, if APEC governments commit themselves to a sensible harmonisation of approaches to competition policy. At present, many goods and services are non-tradeables, not just because of tariffs or high transport costs but due to the incompatibility or absence of product standards. If APEC 8

governments implement a far-sighted program of technical cooperation during the next ten years, then all APEC participants will have clearly documented domestic standards backed by effective legislation and cost-efficient administration. This should allow the mutual recognition of a very wide range of quality, safety and other standards. Economic cooperation will reduce the cost of international trade in many other ways. The exchange of better data and joint forecasts of trends in trade and investment will make it possible to anticipate where investment is needed in infrastructure, especially transport and telecommunications, allowing the private sector as well as development agencies such as the World Bank to channel capital towards these commercially attractive prospects. The efficiency of infrastructure will also be enhanced by policy coordination. Exchanges of information and the region-wide pooling of technology and expertise can do away with many of the current delays and administrative costs. Regional telecommunications systems can be made fully compatible, with no discrimination among users from any economy in terms of access to domestic networks. Electronic exchange of customs data and harmonised clearance procedures should certainly be implemented by 2000. The use of smart card passports and visas, about to be introduced by Singapore and Australia, can become region-wide and the facility can be made available for travellers from any country using compatible technology. The extensive travel needed for efficient investment and to complement trade in many services will become easier if APEC governments eliminate immigration restrictions on business-related travel and work towards the mutual recognition of most relevant professional qualifications. The costs of both business travel and tourism can also be reduced by eliminating all policy restrictions (other than safety standards) on landing rights as well as by the increased efficiency and capacity of airport facilities. Free and open trade and investment implies there should be no artificial restrictions to competition in the region s fast growing shipping and aviation markets. The peaks to conquer: specific targets for facilitation and liberalisation Such a vision of a genuinely integrated and outward-looking community of Asia Pacific economies can be achieved provided APEC leaders in Subic spell out, in clear terms, a comprehensive set of specific targets which will need to be met to realise it. To project a comprehensive vision of genuine economic cooperation and integration APEC leaders in Subic will need to endorse a clear set of objectives along the following lines. 9

Trade in goods: Zero tariffs for all goods and removal of all quantitative restrictions. International investment: National treatment of all firms in all sectors of production (except for a short negative list; for example, some media). No limits on rights of establishment (except for sectors listed above). National treatment of international investors in terms of fiscal policy (taxation and/or subsidies). All APEC governments to accede to existing international conventions for the settlement of disputes relating to international investment. Trade in services: No limits on travel related to the provision of services for short-term visits. Trade policy dispute settlement: Adopt an APEC Code of Practice for dealing with government-to-government disputes concerning trade and all other international economic transactions. Competition policy: Following the adoption of an agreed code of minimum standards for competition policy, no APEC governments to take anti-dumping measures against imports from any other APEC participant. Administrative procedures: Full compatibility of customs documentation and clearance procedures, with electronic data interchange (EDI) of all information on commercial regulations and administrative procedures. Transport: Full harmonisation of air traffic control procedures and safety standards. No restrictions, other than for safety reasons, on landing rights for carriers with majority of shares owned by APEC nationals or by nationals of economies which impose no restrictions on landing rights to APEC-based carriers. 10

Telecommunications: Mutual recognition of all technical telecommunications standards. No restrictions to trans-border transmissions. National treatment for access to local common carrier networks. Tourism: Introduction of smart card passport and electronic processing of international passengers. Visa-free travel by residents of APEC participants within the region for stays of up to six months. Professional qualifications: For an agreed list of professional and vocational qualifications, set up procedures for APECwide recognition, based on accreditation of courses; or passing an accredited test. Other commercial legislation or regulation: Agreed minimum standards of disclosure and auditing of commercial entities above some minimum size. An APEC Code for the taxation of international income, based on common features of most double-taxation agreements. Standards (other than already mentioned): By 2005, APEC governments to have completed a program of mutual recognition or harmonisation with at least the same coverage as the EU achieved by the end of 1992. By 2020, APEC governments to have completed a program comparable to that of the EU at that time. The setting of such targets will require considerable political leadership, but to realise the vision of free and open trade and investment in the Asia Pacific, it is important to create a shared understanding that all of these challenges need to be faced and overcome by no later than 2020. An Asia Pacific model of cooperation In Osaka, it was agreed that the full liberalisation of tariffs and quantitative restrictions on trade and investment will be achieved by voluntary, unilateral decisions of individual APEC 11

governments; each setting their own priorities and timetables in order to meet the 2010, or 2020, deadlines. For the more comprehensive effort of facilitating free and open trade and investment, Asia Pacific governments will be encouraged to act collectively, but those willing to take initiatives ahead of others are free to do so. The endorsement of such a unique approach means that a new, Asia Pacific model of voluntary international economic cooperation will be given a chance to work. Such a coordinated, but entirely voluntary, process of cooperation has been adopted for practical reasons. It has been recognised that cooperation which suits the political reality of the dynamic but very diverse Asia Pacific region needs to be based on the guiding principles of openness, equality and evolution. As explained in PECC s 1995 Beijing Statement: Openness reflects the principle of open regionalism. This principle should guide decisions to achieve free trade and investment in the Asia Pacific; all these decisions should be transparent and avoid any discrimination. Equality implies that activities should be of mutual benefit to all participants, combined with respect for diversity within the region. Evolution reflects a gradual, pragmatic and sustained process of voluntary cooperation. Substantive cooperation will evolve through consensus-building. In particular, it has been recognised that APEC s evolution, from 1989 to 1995, could not have been as rapid if each step had relied on negotiating legally binding international agreements or treaties. It is also evident that in a process where there is no overarching treaty and where individual governments do not intend to cede sovereignty to any supra-national regional institution, there are no APEC decisions. All of the many decisions which will need to be made to achieve the ambitious Bogor vision will be unilateral decisions of individual Asia Pacific governments. The value added by APEC will be to encourage those decisions to be made more rapidly and in a more coordinated and mutually reinforcing manner. Hence the endorsement of a process of concerted unilateral decision-making. Voluntary economic cooperation, based on persuasion rather than compulsion, offers the prospect of rapid progress, without spending excessive time or effort on negotiating detailed international agreements and binding timetables. But this potential will only be achieved if all participants have confidence in a voluntary process. It will take some time to dispel the view that opening to the outside world, through deregulation, opening markets to international compe- 12

tition and convergence of domestic commercial policies to facilitate international economic transactions can occur only after negotiating binding international commitments. Nineteen-ninety-six is a crucial year for boosting confidence in the Asia Pacific model of voluntary international economic cooperation endorsed in Osaka. The challenge is to show that the process is working and will continue to work. To gather the evidence, it is essential to look at actual experience as well as the expected next steps. Opening to the outside world and economic self-interest The evidence of the past two decades provides good grounds for confidence in continued unilateral deregulation and market-opening, confirming that a widespread process of structural reforms to liberalise and facilitate international trade and investment is well under way. Two recent studies by the Trade Policy Forum of the Pacific Economic Cooperation Council set out the considerable progress already made towards reducing impediments to international economic transactions, especially by East Asian governments (PECC Trade Policy Forum 1995a, 1995b). These reforms have been implemented largely through unilateral decisions, taken on the basis of their perceptions of their own self-interest. Perhaps the most sweeping example has been China s opening to the outside world since the late 1970s a process initiated and shaped by China s own view of its priorities. This positive process has already transformed East Asia from deep poverty to the most dynamic part of the world economy, The significant Osaka down-payments towards the 2010 and 2020 targets by most APEC economies provide further confidence that these long-term targets can be achieved in the context of a voluntary process of economic cooperation, with all APEC participants making a series of unilateral reforms to boost the efficiency of their economies by opening all of their product and factor markets to competition. Confidence in the rapid continuation of reforms to reduce impediments to trade and investment has been boosted by the farsighted views expressed by senior representatives of the Philippines, responsible for next steps in the evolution of APEC. As Dr Jesus P. Estanislao, Philippines member of the APEC Eminent Persons Group, has put it in the foreword to this paper: Nineteen-ninety-six is the year for all of us to think long term For each of our economies, we are bringing down and removing barriers to free and open trade and investment, at least in the region by 2010 and 2020. We are aiming to do so, not 13

through give-and-take bargaining, nor through long, tedious negotiations with fine calculations of what to give away in exchange for gains we receive in return. Rather, we are all starting from the conviction that the more open our economies to each other the more we benefit. Furthermore, there is a widening consensus that those who liberalise first shall gain the most. This is what concerted unilateral liberalisation implies: a voluntary commitment to do all we can, as fast as we can, to remove barriers to our trading and investment relationships with each other. Each of us starts with the shared vision, a shared twotiered timetable, and above all a shared commitment. APEC is all about good will, and therefore about the freedom to take unilateral actions towards our common goal. We march not in martial lock-step, but in a wide diversity of free movement that enriches a multi-stepped choreography. At APEC, the pace is not to be set by the slowest. Indeed, the strategic question that each APEC economy will need to ask is: can we really afford to be left behind? These remarks confirm that voluntary cooperation to bring about free and open trade and investment through concerted unilateral decision-making is well suited to the political reality of the Asia Pacific. Moreover, it is also based on economic logic and the evidence of the benefit of past reductions in obstacles to trade and investment, accruing particularly to those implementing such reforms. The most effective way to boost confidence in this Asia Pacific model of voluntary international economic cooperation will be by the tabling of evidence, in Manila and Subic, of further reforms during 1996, combined with ambitious action plans for the next few years. As in 1995, the most significant commitments to deregulation and market-opening are likely to be made by East Asian economies. If this process can be continued, then it will begin to generate confidence in voluntary, concerted unilateral decision-making, including by the United States, which currently remains rather sceptical of this new model of cooperation. An ongoing part of the confidence-building task will be to commence objective assessments of progress. Monitoring the implementation of coordinated, but autonomous, decisions of participating governments and the review of the consequences of these decisions will serve to reinforce confidence in a process of cooperation based on persuasion rather than compulsion, by providing evidence of: 14

the consistent commitment of all participants to targets and guiding principles; and tangible economic benefits to all participants from the coordinated decisions already implemented to liberalise and facilitate trade and investment and to promote economic and technical cooperation. Regular review of progress towards the Bogor targets will also shape the nature of the Asia Pacific model of cooperation itself, leading to the evolution of new mechanisms and support structures for APEC, as and when needed, as well as to the evolution of further principles of cooperation to guide concerted unilateral decisions of participants to achieve shared objectives. These mechanisms are likely to include new national institutions to review and measure, objectively and independently, the nature, level and effects of impediments to international economic transactions. 5 Avoiding needless confrontations The 1996 outcome depends on the approach to the design of action plans during the year by APEC officials. If each government is left free to design its own next down-payment as well as future commitments, as they were in 1995, then a very positive and significant outcome is within reach. However, if the discussions become bogged down in haggling over whether the fine details of past actions or future plans are strictly comparable, then there is a greater risk of friction and lack of willingness to make voluntary commitments to reform. A very big challenge for 1996 is to avoid the conversion of APEC consultations into GATT/WTO-style negotiations about the relative worth of past or proposed reforms by various participants. The unavoidable weakness of data and modelling techniques implies that the net effects of reductions in tariffs or quantitative restrictions on various economies are very hard to measure accurately. There is even less scope for measuring and comparing the actual or potential effects of many important aspects of facilitating trade or investment. Attempts to negotiate comparable action programs would be largely divisive exercises which attempted to compare apples and oranges. There would also be a risk that such negotiations would also come to be based on the false premise that deregulation and market-opening are costs rather than benefits. As emphasised recently by former Australian Prime Minister Keating: The drag-out knock-down approach to trade negotiations has surely reached the end of its useful life in an environment where almost every country in the world, rather 15