Asia Pacific Economic Cooperation (APEC)

Challenges and Tasks for the Twenty First Century

Ippei Yamazawa

• Publisher: Routledge
• Year: 2003
• ISBN:
  9781134537709
• Edition: 1
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

This book provides the most up-to-date and comprehensive account of the APEC (Asia Pacific Economic Cooperation) organisation and examines the challenges APEC now faces in the new century. Subjects covered include:
* the history of APEC
* APEC and the latest WTO round
* case-studies of countries in the region including China, Japan, Malaysia, Korea and Taiwan
* APECs approach to competition and deregulation policy
* assessment of APECs standing as an international institution
Featuring contributions from distinguished groups of international academic experts, this book is essential reading for all those interested in political and economic developments in the Asia-Pacific.

1
Introduction—APEC ideas and reality

History and prospects

Ross Garnaut

INTRODUCTION

The need for Asia Pacific Economic Cooperation (APEC) emerged from the reality of deepening economic integration of the East Asian, North American and Southwest Pacific economies during the period of sustained, rapid internationally oriented economic growth in East Asia. The increasing scale of Asia Pacific economic transactions and their expanding relative importance to all economies in the region generated awareness that national policy decisions taken in ignorance of their regional implications could damage a beneficent process of market integration. The success of economic integration in the Asia Pacific also generated awareness of the opportunity for further gains through the provision of a more certain and open environment for market exchange (Drysdale and Garnaut 1989, 1993; Yamazawa 1992; Garnaut 1996; Drysdale, Elek and Soesastro 1998).

More particularly, as the scale of the Japanese and later other East Asian economies and external transactions expanded, there was recognition of a need for an international framework to contain the inevitable trans-Pacific tensions from rapid structural change. A need was recognised for providing a secure regional trade environment within which large, new entrants to the international economy, particularly Indonesia and China, could confidently commit themselves to internationally oriented development strategies. There was also a need to provide a more open alternative to inward-looking sub-regional arrangements, which were given greater legitimacy through the 1980s. Within the Southwest Pacific, the interest in Asia Pacific Economic Cooperation derived partly from recognition that the alternatives to an open international economic framework in the Asia Pacific included the danger of exclusion from or invidious choice between inward-looking blocs in North America and East Asia.

Thus the motive for Asia Pacific Economic Cooperation was essentially conservative: to preserve and extend a process of market integration amongst rapidly growing economies and their major regional partners. Asia Pacific Economic Cooperation in its first decade has had some success from this perspective. Along the way to realisation of these conservative aims, APEC became more ambitious, even radical, with the Leaders’ commitment at Bogor in 1994 to free and open trade and investment in the Asia Pacific region by 2010 and 2020. The elevation of ambitions increased interest in and the energy levels of APEC activities. It has contributed significantly to trade liberalisation in a number of APEC member economies over the past half decade. It has also introduced tensions into Asia Pacific Economic Cooperation, and a risk of disillusionment and reaction against APEC and trade liberalisation. Doubts about whether APEC has the right membership, constitution and institutional structure to realise the radical ambitions have contributed to a sense of crisis in APEC in the two years following the onset of financial crisis in East Asia. The manner of resolution of the tensions in the radical APEC agenda will determine whether APEC continues to play a major role in regional affairs.

The APEC story is about the evolution of ideas to fit an Asia Pacific reality that was different from that which shaped regional economic cooperation in Western Europe and later North America. It is the story of institutions being developed to fit the ideas that have emerged in response to the different reality. The evolution of APEC has faced a special challenge from the strength in North America of ideas and political perceptions formed in a North Atlantic reality. The contemporary tensions in APEC have their origins partly in this challenge. The resolution of the tensions and therefore the future of APEC depends significantly on the ideas which have shaped APEC expanding their influence in the North American intellectual and political heartland.

The influence of the APEC ideas in North America is closely dependent on Western Pacific economies demonstrating that the unusual Asia Pacific approach to regional economic cooperation can deliver substantial trade and investment liberalisation. This has become more difficult in the aftermath of financial crisis in some East Asian economies, and in the current circumstances of economic stagnation and policy incoherence in Japan.

This chapter introduces the realities and the ideas that have shaped Asia Pacific Economic Cooperation, and evaluates their influence on economic policy and contribution to regional economic integration. Have the results justified the intellectual and political investment in APEC? Is it possible to build on APEC successes, and to correct APEC approaches productively in response to some undoubted failures? Or will the weaknesses in APEC lead to disillusionment, and eventually to failure in APEC’s most fundamental purposes? The chapter argues that much is at stake, because the successes of APEC have been considerable, and failure would signal the emergence of sub-regional economic cooperation in forms that would impose large costs on APEC members and the global economic system.

APEC boundaries and membership

APEC’s origin in regional integration through market processes defined membership naturally, according to the extent of countries’ integration into the Asia Pacific economy. The initial natural selection was embodied in the participation in the first Pacific Economic Community meeting (later Pacific Economic Cooperation Council—PECC) in Canberra in 1980, and also in the first APEC meeting in Canberra in 1989. It included the then market economies of East Asia (Korea, Japan, the member states of ASEAN) which had sovereign political status, Australia and New Zealand in the Southwest Pacific, and the United States and Canada in North America. These were economies that were committed to internationally oriented growth and which conducted a high proportion of their trade with other Asia Pacific economies.

On these criteria, China (in the years of central planning until the new strategy of 1978 took hold and began to transform the economy and its international relations through the 1980s), Vietnam (until the collapse of COMECON in 1991), and the Democratic People’s Republic of Korea (DPRK) (still today) were initially excluded by the weakness of commitment to integration into the international economy.

While Hong Kong and Taiwan both qualified from the beginning on the economic criteria, there was an obvious difficulty until China was a member, given the international recognition of Chinese sovereignty. These issues were resolved with Chinese membership of APEC in 1991, importantly in a way that allowed full participation of China, Taiwan and Hong Kong.

The South Asian economies and the Soviet Union and its successors were not committed to deep integration into the international economy until the early 1990s, and have never yet conducted the major part of their external trade with Asia Pacific economies.

The small island economies of the Southwest Pacific were strongly internationally oriented in economic structure and conducted the large majority of their foreign economic relations with other Asia Pacific economies. But in their case, size and its implications for political and administrative capacity were an issue. At the first PECC meeting in 1980 the island economies were represented by the South Pacific Forum, and subsequently Papua New Guinea (by far the most populous, with around five million people) alone was admitted to APEC membership.

The boundaries were difficult to draw in Pacific Latin America, where international orientation was sometimes equivocal and where Asia Pacific orientation was overwhelming with a single APEC member, the United States. The formation of the North American Free Trade Agreement (NAFTA) settled the issue for Mexico. Chile was straightforward on the original criteria; Peru less so.

The recent admission of Russia adds new complexity. It raises special complications because of the embryonic nature of market reforms and the fact that Russian external economic relations remain strongly weighted towards Europe.

APEC has now placed a moratorium on membership.

The original membership of APEC, while gaining coherence from commitment to internationally oriented growth and Asia Pacific concentration of foreign economic relations, was highly diverse in scale, levels of development, political culture and institutions, domestic economic structure, and openness to the international economy. This diversity carried large implications for regional economic cooperation. Amongst other things, it required a framework of international pluralism that allowed differences in domestic political and economic structure to sit comfortably alongside far-reaching economic integration.

The expansion of membership to China was necessary for APEC to achieve its fundamental objectives. An inevitable consequence of Chinese participation was to reinforce the original conception that APEC could not be a vehicle for formal regional cooperation on strategic and defence matters.

THE ASIA PACIFIC REALITY

Sustained, rapid internationally oriented growth in East Asia created the beginnings of an Asia Pacific community, and prompted the early discussion of Asia Pacific economic cooperation. The phenomenon emerged first in Japan, Hong Kong and Taiwan in the early 1950s. Openness to foreign trade and payments, at first partial and halting except in Hong Kong, allowed large and rapid gains from specialisation in production of labour-intensive goods for export. This was facilitated by the openness of the United States economy, reinforced then by the US strategic commitment to the success of noncommunist Northeast Asia. Maintenance of reasonably stable macroeconomic conditions encouraged high rates of savings and investment once growth momentum was established. Strong societal commitment to the primacy of the growth objective overcame the inevitable resistance to the structural effects of sustained, internationally oriented growth. High levels of public investment in education, health and infrastructure—more effectively in Northeast Asia than later in Southeast Asia—removed bottlenecks to growth, and helped to maintain political support for growth by dispersing its benefits widely.

Economic success in Japan, Hong Kong and Taiwan provided models and opportunities for others. By the early 1960s, coinciding with reforms in Taiwan and Korea to increase international orientation and growth, labour scarcity and rising costs in Japan were corroding competitiveness in simple labour-intensive exports and strengthening comparative advantage in more capital-intensive industry. Hong Kong, Taiwan and Korea took over part of Japan’s share in labour-intensive imports into North America and Europe. Japanese direct investment began to strengthen growth in labour-intensive manufacturing industries in developing Northeast Asia.

Singapore’s separation from Malaysia in 1965 marked the first unequivocal commitment of a Southeast Asian economy to export-oriented growth. Singapore was joined by Malaysia and Thailand from the early 1970s, with exports and direct foreign investment then being enhanced by rising costs and structural change in Taiwan and Korea as well as Japan. Continued structural change in Japan towards more technologically sophisticated production created new opportunities for investment in and exports from standard technology capital-intensive manufacturing industries in Taiwan and Korea.

The Philippines made its first attempts at trade and payments liberalisation to support an internationally oriented growth strategy in the early 1970s, but political economy constraints prevented clear success until the 1990s.

Indonesia had abolished exchange controls as part of its macroeconomic stabilisation program in the late 1960s but, unlike any of the Northeast Asian economies, and more strongly than Malaysia, its comparative advantage in the early years of opening to the international economy was in natural resource-based products, especially oil. In the oil boom from late 1973 to the early 1980s, it responded to ‘Dutch Disease’ effects on the competitiveness of manufacturing industry by increasing protection. It was not until the large falls in the oil price in the mid-1980s, supported by trade liberalisation and regulatory reform, that Indonesia joined the East Asian pattern of growth supported initially by rapid expansion of labour-intensive manufactured exports.

China’s engagement in internationally oriented growth was initiated in December 1978, when the Communist Party’s Central Committee adopted Deng Xiaoping’s approach to reform and opening to the international economy. The reflection of strategy in detailed policy, institutional development and regulatory reform was slow, with important landmarks in 1984 (industrial economy and trade reform), in 1987 (the commitment to a ‘planned socialist market economy’), in 1988 (the ‘coastal economic strategy’) and in 1997 (radical reform of the public sector and state-owned enterprises). China’s economy responded quickly to reform, with export specialisation in line with comparative advantage being reflected in rapid expansion of labour-intensive manufactured exports from the mid-1980s. At first, international orientation and rapid growth were concentrated in the coastal provinces, but regulatory reform and investment in transport and communications infrastructure supported the gradual extension inland in the second half of the 1990s.

Vietnam’s entry into the Asia Pacific economy was held back by central planning and membership of COMECON until the collapse of the Soviet Union. Since then, there has been rapid growth in output and foreign trade, but market reforms have been tentative and state-owned enterprises continue to dominate external transactions. Vietnam’s foreign trade and investment is overwhelmingly with APEC members, but equivocation on reform, reinforced by the East Asian financial crisis since mid-1997, limits its scale.

For the past quarter-century, the preponderance of the increase in East Asian external trade and investment transactions was with other East Asian economies and North America. From the mid-1980s until the eve of the financial crisis, the majority of export growth was to other East Asian economies. Access to the United States market had underwritten the beginnings of export-oriented growth, and the absolute size of the North American market remained substantial. From 1997, the United States temporarily resumed its role as the prime destination for export growth.

The United States was always closely linked to East Asian growth, as a market and as a source of financial services, direct foreign investment and ideas and institutional models for economic and business management. As East Asian production and trade expanded through the 1980s and 1990s, the United States became linked to the region’s fortunes in other ways, with trans-Pacific exceeding trans-Atlantic trade in the mid-1980s and continuing to grow more rapidly.

The Southwest Pacific was closely integrated into East Asian trade expansion from the beginning, as a result of proximity and exceptional complementarity in resource endowments. The East Asian trade and investment opportunity was an encouragement to trade liberalisation in Australia, which became more oriented towards East Asia in its export patterns than any economy in East Asia itself.

The deepening integration of Asia Pacific economies required as a starting point reasonably open trade and payments, and liberalisation was important to the initiation of internationally oriented growth in each new entrant. In China, the hangover of political constraints and uncertainties from the civil war and Cold War limited trade and investment with Hong Kong prior to the Sino-British Agreement in 1984, and with Taiwan and Korea until the late 1980s.

Deepening economic integration, the demonstration effect of successful trade liberalisation, and competition for direct foreign investment encouraged unilateral trade and investment liberalisation. This was important throughout the Western Pacific region in the decade from the mid-1980s, when there were major unilateral reductions in trade barriers in Japan, Korea and Taiwan (each mainly in relation to manufacturing), China, Indonesia, Malaysia, the Philippines, Thailand, Vietnam, Australia and New Zealand. Trade liberalisation in the major higher-income East Asian economies, Japan, Taiwan and Korea, encouraged the transfer of manufacturing capacity in labour-intensive activities into China and Southeast Asia.

Unilateral trade and payments liberalisation for reasons of development strategy provided the opportunity, and market forces delivered the deepening integration. Market processes generated progressively lower transaction costs, expanding trade as surely as reductions in protection. This was especially important to the explosion of trade and investment ties between mainland China and its neighbours, and across the Chinese business communities of East Asia.

There has been debate through the 1990s about the extent to which liberalisation in the Western Pacific was unilateral, as an instrument of development strategy, rather than in response to conditions from aid donors, pressures from trading partners or negotiated outcomes of multilateral negotiations. Multiple causes reinforced each other. Generally the East Asian macro-economies were strong, allowing governments to implement development strategies independently of conditions from bilateral donors and international agencies. But aid-linked external pressures were important in the early 1960s in Taiwan and Korea, in the stabilisation period of the late 1960s in Indonesia, in Papua New Guinea through the 1990s, and in Indonesia, Thailand and Korea after the onset of financial crisis. US political pressures connected to bilateral trade imbalances played some role in the liberalisation of the mid-and late-1980s in Japan, Taiwan and Korea. While most APEC countries were members of GATT (General Agreement on Tariffs and Trade), participation in multilateral negotiations prior to the Uruguay Round was important to liberalisation decisions only for Japan. Amongst Western Pacific economies, Uruguay Round commitments went beyond the momentum of unilateral liberalisation only in Japan ...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• FIGURES
• TABLES
• CONTRIBUTORS
• PREFACE
• ABBREVIATIONS
• 1 INTRODUCTION—APEC IDEAS AND REALITY
• 2 MACROECONOMIC INTERDEPENDENCE IN THE APEC REGION
• 3 TRADE AND INVESTMENT LIBERALISATION AND FACILITATION
• 4 APEC AND THE MILLENNIUM ROUND
• 5 APEC’S RELATIONSHIP WITH ITS SUB-REGIONAL TRADING ARRANGEMENTS
• 6 LIBERALISATION OF MANUFACTURING SECTORS
• 7 MALAYSIA’s TELECOMMUNICATIONS SERVICES
• 8 LIBERALISATION OF THE RICE SECTOR IN JAPAN, KOREA AND TAIWAN
• 9 ECOTECH AT THE HEART OF APEC
• 10 COMPETITION AND DEREGULATION POLICY AREAS IN APEC
• 11 APPLICATION OF CGE MODELLING TO ANALYSIS OF ENVIRONMENTAL MEASURES IN APEC
• 12 APEC AS AN INTERNATIONAL INSTITUTION
• 13 SUMMARY AND RECOMMENDATIONS