Scollay, 2001

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The Changing Outlook for
Asia-Pacific Regionalism
Robert Scollay
1. INTRODUCTION
I N the mid-1990s the Asia-Pacific region appeared to have achieved anexceptional degree of congruence between the regional and multilateral
approaches to trade liberalisation. APEC and the newly-established WTO
purported to have effectively answered, at least as far as the region was
concerned, the challenge of regionalism. This challenge had earlier appeared in
the form of proliferating proposals for preferential trading agreements (PTAs),
and in the emergence as a possible alternative to the multilateral trading system
of a world trading system organised around three giant preferential trading blocs,
with the prospect that the European Union would be joined in the western
hemisphere by NAFTA and perhaps later even by a hemisphere-wide trading
bloc,1 and in East Asia by the East Asian Economic Grouping proposed by
Malaysia’s Dr Mahathir.2
By the turn of the century, however, the effectiveness of the answer provided
by the WTO and APEC was open to question. Both institutions faced challenges
to their credibility, proposals for new PTAs were proliferating in the Asia-Pacific
region, and the prospect of a ‘tripolar’ world trading system had begun to loom
once more. Disturbing signs had emerged that major economic powers in the
region might begin to aggressively seek support within the framework of regional
arrangements for trade policy stances that had already proved divisive in the
multilateral arena.
ß Blackwell Publishers Ltd 2001, 108 Cowley Road, Oxford OX4 1JF, UK
and 350 Main Street, Malden, MA 02148, USA. 1135
ROBERT SCOLLAY is Director of the APEC Study Centre and a member of the Economics
Department at the University of Auckland, New Zealand.
1 The Enterprise of the Americas Initiative (EAI) proposed in 1991 by the Bush Administration
called for establishment of a zone of free trade stretching from Alaska to Tierra del Fuego. The
1994 Summit of the Americas in Miami adopted in principle a proposal for the creation of a Free
Trade Area of the Americas (FTAA).
2 Dr Mahathir proposed an East Asian economic bloc which would exclude both North America
and Australasia, both of whom had been regular participants in earlier ‘Pacific Rim’ economic
cooperation initiatives.
This paper will first review the unique approach adopted within the region in
the mid-1990s towards reconciling the well-known contradictions between
regionalism and multilateralism. It will then trace how that benign framework
began to be undermined in the last years of the decade, as new challenges
emerged first in APEC and then in the WTO. The final section of the paper will
analyse the new wave of preferential trading proposals now sweeping over the
region, and discuss its implications both for the multilateral trading system and
for APEC’s ambitions to simultaneously promote both regional integration and
the multilateral agenda.
2. MID-1990s: THE APPARENT ASCENDANCY OF ‘OPEN REGIONALISM’
The successful conclusion of the Uruguay Round and the establishment of the
WTO marked an apparently decisive reassertion of the primacy of the multilateral
trading system. This coincided with the adoption by APEC of a unique approach to
regional economic integration, designed to eliminate the contradiction between
multilateralism and regionalism. In the Bogor Declaration of 1994 APEC’s
members committed themselves to the establishment of free trade and investment
in the Asia-Pacific region3 through a voluntary process based on ‘open
regionalism’. The emphasis on voluntarism and the non-binding nature of
commitments envisaged within APEC was adopted in deference to the strong
preferences of East Asian members of APEC, particularly the ASEAN economies.
‘Open regionalism’ came to be understood within APEC to mean the gradual
reduction of trade barriers by APEC members on a non-discriminatory basis. APEC
was thus explicitly designed not to be a preferential trading arrangement.4 In this
way APEC’s ‘open regionalism’ was designed to provide unambiguous support for
the WTO-based multilateral approach to liberalisation.
A voluntary liberalisation process of the kind envisaged by APEC can be
regarded as equivalent to unilateral liberalisation by each participating economy,
and so the term ‘concerted unilateralism’ was coined to describe the APEC
approach to regional liberalisation. While it is always open to individual
economies acting in isolation to secure for themselves the benefits of unilateral
liberalisation, the ‘concerted’ aspect of APEC’s approach recognised that if the
3 The Bogor Declaration states that the goal is to be achieved by 2010 in the case of developed
economy members of APEC, and by 2020 in the case of developing economy members. No
definition of ‘developed’ or ‘developing’ economy status has been adopted within APEC.
4 An ambiguity left conveniently unresolved in the concept of ‘open regionalism’ allowed
differing interpretations among the APEC membership to be accommodated. The United States has
consistently maintained that it can undertake non-discriminatory liberalisation only if this
liberalisation is reciprocated by both members and non-members of APEC. The majority of APEC
members on the other hand have interpreted ‘open regionalism’ as implying unconditional non-
discrimination, without any requirement for reciprocity.
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group liberalises together each member will benefit more than if it liberalises in
isolation, and that concerns over the political sustainability of liberalisation will
also be reduced since the benefits will be spread more widely within each
member economy.
A second key feature of the APEC approach to regional integration is that it
unites both sides of the Pacific, embracing East Asia, Australasia, North America,
and the Pacific seaboard of Latin America. In so doing APEC captures the
important trans-Pacific dimension in regional trade patterns, in addition to the
high level of trade interdependence that has developed on the western side of the
Pacific. Table 1 shows that this trans-Pacific dimension is particularly significant
for the United States, which conducts a higher proportion of its total trade with
the western Pacific than with its NAFTA partners. Trans-Pacific trade is also
important to the western Pacific economies, especially Japan, even though the
share of their trade conducted within the western Pacific itself is substantially
larger. By including both sides of the Pacific Rim, APEC encompasses between
two-thirds and three-quarters of the total trade of the majority of its members.
The framework for implementation of APEC’s Bogor vision was set out in the
Osaka Action Agenda (OAA), agreed by APEC’s leaders at their 1995 meetings in
Japan. The OAA set out nine ‘guiding principles’5 for APEC’s TILF (trade and
5 The nine principles are: comprehensiveness; WTO consistency; comparability; non-
discrimination; transparency; standstill; simultaneous start, continuous progress and differentiated
timetable; flexibility; and cooperation.
TABLE 1
Trade Among APEC Economies 1996–98
Region Percentage of Total Trade Conducted with:
East Western South
Asia Pacific USA NAFTA APEC America
Northeast Asia 47 50 21 23 74 2
among which Japan 38 41 26 29 72 2
Southeast Asia 54 57 17 18 75 1
Australasia 43 52 15 17 70 1
NAFTA 26 27 44 72 4
among which USA 32 34 30 65 5
Chile 23 24 20 25 50 20
Peru 14 16 29 34 54 17
Notes:
Northeast Asia: China, Hong Kong China, Japan, Korea, Taiwan.
Southeast Asia: Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam.
Australasia: Australia, New Zealand.
Western Pacific: Northeast Asia, Southeast Asia, Australasia.
NAFTA: Canada, Mexico, USA.
Source: IMF Direction of Trade Statistics.
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investment liberalisation and facilitation) agenda and established objectives in
each of 15 ‘action areas’,6 to be achieved by a combination of individual actions,
involving liberalisation initiatives by the individual member economies, and
collective actions, involving the building of capacity for liberalisation through the
pooling of expertise and the development of shared understandings. The process
for putting the OAA into action was set out in the Manila Action Plan for APEC
(MAPA), adopted at the 1996 APEC leaders’ meeting. MAPA included both
collective action plans (CAPs) setting out joint work programmes in each of the 15
‘action areas’ as well as individual action plans (IAPs) for each APEC member,
intended to progressively record the commitments designed to ultimately achieve
APEC’s objectives in each area. It was envisaged that the sharing of experiences
through the CAPs and the monitoring of progress of individual members as
recorded in their IAPs would help to generate momentum towards achievement of
APEC’s agenda through the building of confidence and the exertion of ‘peer
pressure’.
Among the OAA guiding principles the potentially routine principle of ‘WTO-
consistency’7 was reinforced by the principles of ‘non-discrimination’, clearly
underlining the intention that APEC should not develop as a preferential trading
bloc, and ‘standstill’, emphasising the commitment not to raise barriers in future.
The 15 ‘action areas’ of the OAA complemented WTO agreements and
disciplines in a variety of ways. A number of areas directly echoed corresponding
elements in the multilateral agenda. In some of these areas, such as tariffs, non-
tariff barriers, and services, the obvious approach for APEC members was to seek
to move further and faster than required by their WTO obligations. In the case of
dispute mediation APEC sought to complement the WTO’s government-to-
government dispute settlement mechanism by exploring approaches to the more
efficient resolution of disputes between private entities, and between private
entities and government.
APEC’s intellectual property agenda largely consisted of support for
implementation of the WTO’s TRIPs agreement, while its approach to rules of
origin likewise involved support for existing actions initiated in the WTO. The
inclusion of government procurement in the OAA made this an issue for all
APEC members, not merely those who had signed the WTO’s plurilateral
6 The 15 areas are: tariffs; non-tariff measures; services; investment; standards and conformance;
customs procedures; competition policy; government procurement; deregulation; intellectual
property; rules of origin; dispute mediation; mobility of business persons; Uruguay Round
implementation; and information gathering and analysis.
7 Proponents of regional trading arrangements invariably claim that the proposed arrangements
will be ‘WTO consistent’. The exact meaning of such claims is unclear, given that WTO members
have been unable to agree on a large number of questions of interpretation of GATT Article XXIV
governing regional trade arrangements (see WTO, 2000a).
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Agreement on Government Procurement.8 By placing investment on the OAA as
an issue in its own right APEC addressed this issue more directly than had been
possible within the WTO, where investment is covered in piecemeal fashion
through agreements such as the GATS and TRIMs agreements. Likewise,
mobility of business persons was highlighted in the OAA as an issue of general
relevance to the encouragement of more open trade and investment flows, rather
than being addressed within the more narrow confines of the GATS, as in the
WTO. APEC’s approach to standards and conformance and customs procedures
was to complement the relevant WTO disciplines by encouraging the adoption of
measures and procedures designed to facilitate the smooth conduct of trade, for
example mutual recognition agreements in the case of standards and conformance
and electronic data interchange in the case of customs procedures. In two areas,
competition policy and deregulation, the OAA addressed issues which have not
yet been formally placed on the WTO agenda. Finally, the inclusion of Uruguay
Round implementation as an item on the OAA emphasised both APEC’s support
for the WTO and the importance attached to the acceptance and implementation
of WTO obligations as an important step towards the achievement of APEC’s
own liberalisation objectives.
There were also some noteworthy omissions from the OAA of issues covered
by WTO agreements and disciplines, such as anti-dumping, subsidies and
countervailing duties. The USA was firmly opposed to the inclusion of these
issues on APEC’s agenda, and was known to be nervous also about the inclusion
of competition policy as an item on the OAA, given the growing interest
internationally in addressing anti-dumping issues within a competition policy
framework. The WTO sectoral agreements on agriculture and on textiles and
clothing had no counterpart in the OAA. The question of sectoral coverage
proved a contentious issue for the APEC membership. A debate over whether
agriculture should be covered by the Bogor objectives was resolved by including
among the nine ‘guiding principles’ both the principle of comprehensiveness, to
affirm that no sector would be exempt from APEC’s liberalisation objectives, and
the twin principles of flexibility and simultaneous start, continuous process and
differentiated timetable, to emphasise that the sequencing and timetabling of
liberalisation was a matter to be decided by each member on an individual basis.
While specific end-dates for achievement of APEC targets had been set in the
Bogor Declaration, no member was to be tied to a particular timetable for
initiating or implementing liberalisation of specific sectors.
In addition to supporting and reinforcing the existing multilateral agenda
APEC gave indications that it aspired to an agenda-setting role within the WTO.
8 Among APEC members only Canada, Hong Kong China, Japan, Korea, Singapore and the
United States have signed the WTO Agreement on Government Procurement. Australia, Chile and
Chinese Taipei (Taiwan) are observers to the Agreement.
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It claimed credit for exercising a leadership role both in the emergence of the
Information Technology Agreement (ITA), launched at the WTO’s Singapore
Ministerial meeting in December 1996,9 and in the conclusion of the WTO
negotiations on basic telecommunications services in 1997.
At their 1996 Manila meetings APEC ministers also adopted a Framework for
Strengthening Economic and Technical Cooperation. The Bogor Declaration had
identified development cooperation (later refined to ‘economic and technical
cooperation’, or ‘Ecotech’) as an essential complement to APEC trade and
investment liberalisation and facilitation (‘TILF’). Developing country members,
particularly in ASEAN, had stressed that their support for APEC’s TILF
objectives was conditional on equal priority being given to ‘Ecotech’. The
Framework adopted in Manila established six priority themes10 for APEC’s
‘Ecotech’ activities. Included among the six themes were development of human
capital and safeguarding the quality of life through environmentally sound
growth. The inclusion of these two themes provided scope for development of
extensive APEC work programmes on labour and environmental issues without
any need for these issues to intrude onto APEC’s trade and investment agenda,
where they would undoubtedly have proved contentious.
APEC’s commitment to non-discriminatory trade and investment liberalisation
on the basis of ‘open regionalism’ did not preclude preferential trade agreements
(PTAs) among its members. At the time of theBogor Declaration in 1994 three
such PTAs were in existence among APEC members, namely the North American
Free Trade Agreement or NAFTA (entered into force in January 1994), the
ASEAN Free Trade Agreement or AFTA (entered into force in 1993), and the
Australia New Zealand Closer Economic Relations Trade Agreement or
ANZCERTA (entered into force in 1983). These were subsequently followed by
free trade agreements between Chile and Mexico and Chile and Canada, both of
which could reasonably be interpreted as by-products of NAFTA, serving as partial
substitutes for the aborted earlier effort to bring Chile into NAFTA. APEC leaders
were initially concerned that the spread of PTAs in the region could undermine
APEC’s commitment to ‘open regionalism’, and in 1994 commissioned the APEC
Eminent Persons’ Group (EPG) to ‘review the relationships between APEC and the
existing sub-regional arrangements’. The EPG responded (EPG, 1995) by
recommending that ‘subregional trading arrangements (SRTAs) within APEC
9 The ITA provides for the elimination (on an MFN basis) of tariffs on specified information
technology products. Although participation is open to all WTO members, not all members have
accepted the ITA. Despite APEC’s claim of a leadership role in launching the ITA, only thirteen
APEC members have accepted it.
10 The six priority themes were: development of human capital; development of stable, safe and
efficient capital markets; strengthening economic infrastructure; harnessing technologies for the
future; safeguarding the quality of life through environmentally sound growth: and developing and
strengthening the dynamism of small and medium enterprises.
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should accelerate their liberalisation and forge linkages among themselves’ on
the basis of the principles of WTO consistency, ongoing commitment to MFN
tariff reductions, and open accession.
Subsequently APEC concern over the impact of PTAs appeared to temporarily
evaporate, perhaps reflecting the relative lack of activity directed at the formation
of new PTAs in the APEC region. While PTAs continued to proliferate elsewhere
in the world,11 in the four years from 1994 to 1997 the Canada-Chile and Mexico-
Chile agreements were the only new PTAs established among APEC members.
During these years therefore APEC was able to successfully establish itself as the
principal focus for new efforts at regional trade and investment liberalisation in
the Asia-Pacific region, over and above that provided in the existing PTAs.
Two other factors may have contributed to the relatively relaxed attitude
within APEC during these years towards the existing PTAs in the region. First,
the preferential reduction of trade barriers within the PTAs was being
accompanied by MFN liberalisation on the part of the members as they
implemented their Uruguay Round commitments, supplemented by unilateral
trade liberalisation initiatives in the case of the two ANZCERTA economies and
a number of AFTA members. Mexico struck a jarring note by increasing many
tariffs following the peso crisis of 1994–95, but reaction to this may have been
muted due to the relatively low levels of trade existing between Mexico and non-
NAFTA APEC members.
Second, all three existing PTAs in the APEC region were recognised as
relatively high-standard agreements, notwithstanding well-known concerns over
the restrictive nature of some rules of origin provisions within NAFTA and some
nervousness over the possible precedent set by the inclusion in NAFTA at US
insistence of environmental and labour side agreements. Viewed against the
admittedly somewhat nebulous GATT Article XXIV requirement for coverage of
‘substantially all trade’ ANZCERTA scores a clean bill of health with 100 per
cent coverage. The other PTAs all have some exclusions for agricultural products,
although in no case do these amount to total exclusion of the agricultural sector.
Following acceleration and expansion of its timetable AFTA was left with only a
small number of agricultural products, primarily rice and sugar, for which free
trade was not scheduled to be achieved by a specified end-date.12 NAFTA
provides for the retention of tariff-rate quotas, with prohibitive out-of-quota
tariffs, on a number of products, notably bilateral Canada-US trade in dairy
products, US and Mexican exports of poultry and eggs to Canada, and Mexican
exports of sugar to both the US and Canada. The Canada-Chile agreement
11 See WTO (2000b) for a recent survey of the spread of regional trading arrangements in the
1990s.
12 AFTA initially defined ‘free trade’ as the reduction of tariffs to within a range of 0–5 per cent.
For ‘highly sensitive products’ such as rice and sugar, the tariff rate is permitted to remain at higher
levels at the end of the implementation period; for example, 20 per cent in certain cases.
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contains similar exclusions for dairy products, poultry and eggs. All three
agreements also contain examples of products, again almost exclusively in the
agricultural sector, where the period for phasing out of trade barriers substantially
exceeds the ten year standard set in the WTO Understanding on Interpretation of
Article XXIV.
Both NAFTA and ANZCERTA extend beyond the traditional field of goods
trade to embrace liberalisation of trade in services, with NAFTA also making
progress in the liberalisation of investment. Both agreements also contain
provisions on government procurement and a range of progressive trade
facilitation measures. The ANZCERTA and the Canada-Chile agreements broke
new ground by abolishing anti-dumping action between the partner countries.
In the mid-1990s, therefore, regionalism and multilateralism appeared to have
established a relatively benign coexistence in the Asia-Pacific region.
Implementation of Uruguay Round commitments by APEC members was
helping to limit the discriminatory impact of PTAs in the region as well as
providing momentum towards the achievement of APEC’s goals. While
regionalism continued to flourish on a preferential basis within existing PTAs,
impulses for further development of regional integration appeared to have been
successfully attracted into the non-discriminatory channel represented by APEC’s
‘open regionalism’ rather than the creation of fresh PTAs.
3. LATE 1990s: ‘OPEN REGIONALISM’ UNDER PRESSURE
One issue left largely unresolved within APEC was the extent to which the
APEC process itself was expected to yield tangible progress towards APEC’s
goals, as against the progress that could also be expected through multilateral
negotiations and unilateral initiatives by APEC members. One view, expressed by
the influential Pacific Economic Cooperation Council (PECC) in its assessment of
the MAPA (PECC et al., 1996), was that ‘APEC rides on, and mainly reinforces,
the liberalisation wave sweeping the Asia Pacific region rather than being the
leading force (PECC et al., 1996). APEC’s primary function in other words was to
act as a ‘support club of liberalisers in the region’. There was however also a
widespread view that in order to justify APEC’s existence the APEC process would
need to yield tangible results that demonstrably ‘added value’, primarily in the
form of ‘WTO-plus’ commitments by members that went beyond their Uruguay
Round obligations.
Measured against these standards, the early IAPs were a disappointment,
containing relatively few commitments that could be described as ‘WTO-plus’. In
an effort to make more substantial progress, and encouraged by its apparently
successful involvement in the launch of the ITA, APEC embarked on an experiment
with sectoral liberalisation known as Early Voluntary Sector Liberalisation (EVSL).
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Fifteen sectors, selected in 1997by consensus among APEC members were
targeted for early liberalisation, and through 1998 negotiations were undertaken
to establish commitments on the part of APEC members that would give effect to
the APEC free trade goal in nine of these sectors, selected by agreement of
members. EVSL was welcomed by some trade officials as a way of introducing
more rigorous liberalisation commitments into the APEC process, but regarded
by others as an unfortunate intrusion of the reciprocity-based WTO style of
negotiation into a process that the members had earlier agreed would be based on
voluntarism.
In the event it was not possible to reach consensus on an agreed set of
liberalisation commitments in the initial nine sectors. The attractiveness of the
overall ‘package’ was greatly diminished when it became apparent that some
members would not agree to the inclusion of some of the nominated sectors in
their EVSL commitments (particularly the forestry and fishery sectors in the case
of Japan), and that the United States would not undertake non-discriminatory
sectoral liberalisation outside the WTO context. It was agreed that trade
facilitation and economic and technical cooperation in relation to the nine sectors
would continue to be pursued within APEC, but that efforts to achieve
liberalisation in these sectors would be transferred to the WTO, where the APEC
members would endeavour to secure participation in these sectoral initiatives by
the full WTO membership. This latter endeavour has not so far been successful.
The failure of EVSL was a defining event in the evolution of APEC’s approach
to trade liberalisation. It showed the difficulty, and perhaps undesirability, of
moving beyond voluntarism to binding commitments within the APEC process,
and this in turn appeared to lead to an acceptance that at least for the time being
relatively little progress towards APEC’s free trade and investment objectives
could be expected from decisions taken within the APEC process itself.
This did not mean that APEC’s trade and liberalisation objectives had become
unattainable. A review by the independent Pacific Economic Cooperation
Council in 1999 (PECC, 1999) in fact concluded that APEC members had been
making reasonable though uneven progress towards the achievement of those
objectives. It seemed clear however, that momentum towards APEC’s objectives
would have to be maintained through other processes: unilateral liberalisation by
individual members and multilateral liberalisation in the WTO. APEC members
also began to turn their attention to the possibilities of preferential liberalisation
within a new array of subregional trade agreements.
The record on unilateral liberalisation in the APEC region in the late 1990s
was mixed. It has been claimed, with some justification, that the lack of any
widespread reversion towards protectionism in the aftermath of the East Asian
economic crisis of 1997–98 was in part a reflection of APEC’s success in
solidifying a regional consensus on the benefits of open trade and investment
regimes. Some of the ‘crisis economies’, notably Korea and Indonesia, undertook
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significant liberalisation as part of stabilisation packages agreed with the IMF. In
Thailand on the other hand, the IMF sanctioned the raising of tariffs on some
luxury goods as a revenue-raising measure, and in Malaysia also some tariffs
were raised. Outside East Asia Chile continued to implement its programme of
gradual uniform tariff reductions. Conversely, Australia and New Zealand
suspended their tariff reduction programmes, at least temporarily. At the turn of
the century the overall impetus for further unilateral liberalisation among APEC
members was on balance decidedly weak.
APEC itself increasingly looked to the successful launch of a new WTO round
as the key to maintenance of forward momentum in trade liberalisation in the
APEC region. APEC’s efforts during 1999 were accordingly heavily focused on
developing a common position in support of the launch of a new round at the
WTO’s Seattle ministerial in December 1999. The relatively bland formula
eventually agreed by APEC leaders at their September 1999 meeting firmly
supported the launch of the new round but masked ongoing disagreements among
members over how far the agenda should extend beyond services, agriculture and
industrial tariffs. It did, however, include a specific call for the abolition of
agricultural export subsidies and unjustifiable export restrictions and prohibitions.
The failure of the Seattle ministerial was a major setback not only for the WTO
but also for APEC and ‘open regionalism’, since it left the APEC region for the
time being bereft of any significant initiatives for pressing forward with non-
discriminatory liberalisation. APEC’s credibility also suffered a blow from its
inability to act as a cohesive group at Seattle. Some APEC governments were
even reported to have taken positions on certain issues at Seattle that contradicted
the common APEC position agreed three months earlier by their leaders.
APEC members continue to look for ways of providing impetus for the launch
of a new round. This may reflect not only the importance of a new round for
maintaining the momentum of liberalisation in the region, but also the
recognition that APEC members are likely to be among the biggest beneficiaries
of further multilateral liberalisation through the WTO, as indicated for example
in Scollay and Gilbert (2001). Consensus has tended to break down, however,
whenever the discussion has moved beyond statements of general support for a
new round to consideration of the round’s possible agenda. The potential agenda
issues that have been so divisive within the WTO at Seattle and afterwards have
proved equally divisive among the APEC membership.
4. THE RUSH TO PREFERENTIAL TRADE: NEW ROUTE OR CHANGE OF DESTINATION?
In the meantime, while unilateralism (concerted or otherwise) and
multilateralism has been faltering in the region, there has also been a dramatic
upsurge of interest among APEC members in the preferential approach to
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liberalisation, manifested in the explosion of proposals for new preferential
trading arrangements which began in late 1998. By early 2001 there were well
over 20 proposals for new preferential trading agreements at various stages of
discussion, study, and negotiation, although only one of these, the Singapore New
Zealand Closer Economic Partnership agreement, had reached the stage of formal
agreement.13 New initiatives continue to be announced. A brief outline of the
development since 1998 of proposals for preferential trading arrangements in the
APEC is included as an Appendix to this article.
The fact that this proliferation of PTA proposals has coincided with the
emergence of difficulties first in APEC and then in the WTO gives an additional
edge to the obvious and familiar questions as to their relationship to the latter two
processes. The standard question is whether the proposed new PTAs are likely to
be ‘building blocks’ or ‘stumbling blocks’ in the development of a more open
international trading system.14 Since APEC’s Bogor approach was
unambiguously designed as a ‘building block’, this question can be usefully
merged with a further question as to how far these proliferating PTA proposals
can legitimately be regarded as an additional and complementary route to
achievement of APEC’s free trade objective, as some of their advocates have
claimed. The most outspoken proponent of this view has been Singapore, whose
Prime Minister Goh Chok Tong has spoken of an ‘intention to spin a web of
interlocking free trade agreements between APEC members, which could help
move the organisation towards achieving free trade in the Asia Pacific.’15
The questionbecomes still more pointed with the recognition that the
explosion of PTAs has also coincided with reports, highlighted for example in
Bergsten (2000 and 2001), of growing interest within East Asia in the formation
of some form of East Asian economic bloc. This interest appears to have been
sparked initially by East Asian reactions to the experiences of the East Asian
economic crisis, and monetary and financial issues have accordingly been to the
fore in the developing discussion. More recently the prospect of an East Asian
trade bloc has been explicitly raised with the commissioning by ‘ASEAN Plus
Three’16 leaders at their November 2001 summit of a study on the possibility of
an ‘ASEAN Plus Three’ free trade area. Taken in conjunction with the possible
parallel development of a Free Trade Area of the Americas (FTAA) on the
opposite side of the Pacific, this raises the spectre of the Pacific region becoming
13 The New Zealand-Singapore agreement was signed in November 2000 and entered into force in
January 2001.
14 For recent discussions of this issue see Panagariya (1999) and Krueger (1999). Scollay and
Gilbert (2001) discuss the issue in relation to recent developments in the Asia-Pacific region.
15 Quoted in New Zealand Ministry of Foreign Affairs and Trade press release, available at http://
www.mfat.govt.nz/help/file/nzsincep.html.
16 The ‘ASEAN Plus Three’ group comprises the ten members of ASEAN plus Japan, Korea and
China.
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divided between two major trade blocs, and the consequent establishment of a
‘tripolar’ world trading sytem.
The number and variety of new proposals for subregional trade arrangements
(SRTAs) in the Asia-Pacific region may initially seem a little bewildering. In
most cases relatively little is known about the motivations or strategies
underlying the proposals, and there is relatively little information available on
the details of the arrangement that is contemplated. For the purposes of discussion
at least a provisional classification of the new initiatives is however desirable.
Here it will be convenient to divide the new PTA proposals into two main groups.
First there is a set of proposals for bilateral or in some cases plurilateral PTAs
among APEC members. Second, there is a set of proposals, some of which may in
fact be bilateral, which could form the basis of an emerging East Asian trade bloc.
Each of these groups and their implications will be considered in turn.
a. Proposals for New Bilateral and Plurilateral PTAs
Included among the proposed bilateral and plurilateral PTAs are a large
number involving trans-Pacific linkages, and several involving linkages between
countries in the western Pacific.17 This pattern is not unexpected given the twin
facts of growing economic integration within the western Pacific and the
continued vital importance of trans-Pacific trade and investment links for many
countries in the region, particularly those on the western side of the Pacific. The
importance which economies in the region attach to trade and investment
linkages in both directions is clearly reflected in the new developments.
However, while the large number of trans-Pacific proposals must in some
sense reflect recognition of the continuing importance of trans-Pacific trade ties,
it is significant that the United States initially remained largely unengaged with
the new trend, although a move toward a more proactive stance may have been
signalled more recently by the decision at the end of 2000 to open discussions on
an FTA with Singapore, and by early statements to the US Congress by incoming
US Trade Representative Robert Zoellick. Easily the largest trans-Pacific trade
flows are those between the United States and Northeast Asia, and this trade will
remain outside the scope of the proposed new trans-Pacific arrangements in the
absence of US involvement. Similarly, Japan occupies a central position in trade
integration within the western Pacific, and has had preliminary discussions with
some potential preferential partners, but after opening negotiations with
Singapore has been slow to develop additional proposals for PTAs. Statements
by its officials suggest that Japan may be following a ‘learning-by-doing’
17 The term ‘East Asia’ here is used to denote a region encompassing Northeast Asia (China, Hong
Kong, Japan, Korea and Taiwan) and Southeast Asia (the members of ASEAN), while ‘western
Pacific’ denotes these two subregions plus Australia and New Zealand.
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strategy, using the negotiation with Singapore as a ‘training ground’ for the
subsequent negotiation of a wider array of preferential agreements.
In any event, it is clear that the United States and Japan, as major trading
partners of virtually every country in the region, have the potential to play a
decisive role in the development of preferential trading patterns in the Asia-
Pacific region, when and if they choose to pursue such arrangements more
actively. Perhaps still further in the future, the region’s third economic
superpower, China, also has the potential to play an influential role because of
the attraction of the possible opportunity to bypass the still significant barriers
limiting access to its large and rapidly growing market.
In the meantime many of the new initiatives involve smaller and medium-sized
economies of the region, such as Australia, Singapore, Chile and New Zealand.
These countries have tended to emphasise the potential role of preferential
agreements in promoting APEC’s objectives, along the lines of the statement by
Singapore’s Prime Minister quoted above. Initiatives such as the Singapore New
Zealand CEP have been consciously put forward as models of progressive
subregional trade agreements, incorporating forward-looking approaches to a
number of the ‘newer’ issues on the multilateral agenda, such as services,
investment, competition policy, and trade facilitation.
On the negative side is the risk of fragmentation of the Asia-Pacific trading
environment due to the proliferation of sometimes overlapping trade agreements
containing divergent and perhaps even mutually inconsistent provisions. Each
agreement, for example, is likely to have different rules of origin.18 This ‘spaghetti
bowl’ phenomenon, as it has been called by Bhagwati, Greenaway and Panagariya
(1998), will tend to reduce the efficiency of regional trade. It also remains to be
seen how far negotiation of multiple agreements of this kind will absorb scarce
negotiating resources and consume political capital that might otherwise be
employed in support of broader-based multilateral and regional initiatives.
Scollay and Gilbert (2001) have used computable general equilibrium (CGE)
simulations to provide a preliminary analysis of the potential welfare and trade
effects of the free trade provisions of many of the new preferential arrangements
being proposed in the Asia-Pacific region. They find that the impact of
preferential trade agreements among the smaller and medium-sized economies of
the region is typically negligible. This is perhaps not surprising given that most of
these proposals cover trade flows that are relatively small both from the regional
perspective and from the perspective of the prospective participants.
In the cases where proposed arrangements do have more significant effects on
the welfare and trade of the potential partners, these are typically accompanied by
18 To give only one example, rules of origin in the Singapore-New Zealand agreement differ from
those in the ANZCERTA agreement between Australia and New Zealand, and rules in the proposed
Singapore-Australia agreement are likely to differ from both of these.
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quite widelydiffused negative impacts on other trading partners, suggesting the
existence of trade diversion effects and the possibility that these arrangements
may be a source of increased trade tensions in the region. Negative effects of this
kind may themselves add further momentum to the proliferation of preferential
agreements. A form of ‘domino’ effect may operate whereby countries that
otherwise might not be inclined to pursue such arrangements may feel themselves
compelled to do so as a defensive manoeuvre.
The majority of such cases where Scollay and Gilbert’s simulations indicated
more significant impact were possible arrangements involving either the United
States or Japan as one of the partners, for example possible free trade agreements
between Japan and Singapore, Japan and Mexico, Japan and Canada, or the
United States and Singapore. Again this is not entirely unexpected, given that
these two countries are the major trading partners of so many other countries in
the region. This is turn suggests that if the United States and Japan do decide to
become more actively involved in the trend towards preferential trading
agreements they are likely to quickly become the most sought-after preferential
trading partners for other countries in the region.
A further implication is that competition to secure these two economic giants as
preferential trading partners could become a divisive factor in trade relations in the
region.19 Any economic gains to countries that are successful in securing a
preferential arrangement with one of the two major economic powers may come at
least partly at the expense of economic losses for many of the countries who are
unable or unwilling to do so. A ‘domino’ effect may drive even reluctant
participants to defend their interests by pursuing their own preferential
arrangements. The addition of ‘latecomers’ to the ranks of the United States’ or
Japan’s preferential partners may not be welcomed by the earlier ‘incumbents’,
who may perceive this – probably correctly – as diluting their own earlier
economic welfare gains. A preference among other countries of the region for the
United States or Japan as preferential trading partners seems likely to lead to a
regional PTA configuration of the ‘hub-and-spoke’ variety, with all the associated
negative implications of the likely unequal balance of negotiating strength between
the ‘hubs’ and ‘spokes’, and of the tendency of such arrangements to accentuate
further the undermining of the WTO’s non-discrimination principle.
Indications to date of possible strategies towards PTA development by the
United States and Japan provide some grounds for concern. Japanese officials
have openly stated that the choice of Singapore as an initial partner was based
importantly on the consideration that the potential for agricultural exports to
Japan from Singapore is minimal. Even so, Japan has reportedly insisted on
19 Recent developments have indicated how quickly even countries as closely linked in trade (and
in many other ways) as Australia and New Zealand may find themselves cast in the role of rival
suitors for the hand of the United States.
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excluding from any proposed agreement even the small number of agricultural
and fisheries products in which some minor potential for increased exports exists,
such as goldfish and cut flowers.20 In announcing the opening of its own
discussions with Singapore, the United States indicated that an understanding had
been reached that any resulting agreement would contain labour and
environmental provisions modelled on those included in an earlier agreement
with Jordan, including the possibility of trade sanctions. At the time of writing it
remained to be seen how far this approach would be maintained by the new US
Administration of President Bush.
It would be difficult to view as anything other than a setback for the goal of a
more economically-integrated Asia-Pacific region a scenario in which the United
States and Japan began establishing networks of preferential trading links in the
region with partners selected on the basis of willingness to accept their respective
positions on labour and environmental standards on the one hand, and the
exclusion of agriculture from trade liberalisation programmes on the other,
particularly if these networks also became vehicles for renewed trade rivalry
between these two major economic powers of the region. To the extent that it
causes already divisive negotiating positions on such contentious issues to
become still further entrenched, a development of this kind might also have
disturbing implications for the prospect of meaningful progress within the WTO.
Opposing arguments have been put forward in relation to suggestions that
agriculture may be systematically excluded from PTAs involving the Northeast
Asian economies. On the one hand it is argued that in cases where the agricultural
sectors are seriously uncompetitive, their exclusion helps to minimise the risk of
trade diversion. The simulation results reported in Scollay and Gilbert (2001), for
example, indicate that exclusion of agriculture from a Japan-Korea FTA
unambiguously improves the welfare outcome both for those two countries and
for their trading partners.21 On the other side, there is concern that the opportunity
to exclude ‘sensitive sectors’ from PTAs might encourage some important trading
nations to increasingly give priority to preferential alternatives to the multilateral
approach to trade liberalisation.
b. Possible Steps Towards an East Asian Trade Bloc
The key to the development of any East Asian trade bloc lies in Northeast
Asia, which accounts for 20 per cent of world GDP and almost 90 per cent of the
20 This is apparently because Japan’s Ministry of Agriculture, Fisheries and Forestry wishes to
avoid any precedent which might establish the principle of the inclusion of the agriculture fisheries
and forestry sector in SRTAs involving Japan, on the grounds that this would undermine their
efforts to minimise the liberalisation of agriculture in all fora, including the WTO. I am indebted to
Hugh Patrick for this insight.
21 This result is in line with the analytical argument earlier advanced in Laird (1999).
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combined GDP of the Western Pacific economies. ASEAN and Australasia, by
contrast, respectively account for only 2 and 1.5 per cent of world GDP.22
Northeast Asia has hitherto been an ‘empty box’ in the worldwide map of
SRTAs, and any credible move towards establishing an East Asian (or Western
Pacific) trade bloc would have to be based around the filling of this ‘empty box’.
Until very recently Japan and Korea had steadfastly rejected involvement in
preferential trading arrangements in favour of consistent adherence to the MFN
principle, and as such had formerly been counted among the last remaining
‘friends of GATT Article 1’. In addition their trade policies towards each other
had in the past more often seemed directed towards discouraging rather than
encouraging bilateral trade, despite their close geographic proximity to each
other.
The emergence of a willingness on the part of these two countries to consider
participation in preferential trading arrangements, and to consider moving
towards free trade with each other, thus represent essential historic shifts which
had to occur before an East Asian trade bloc could become a realistic possibility.
This is why the proposed bilateral FTA between Japan and Korea is counted here
as a possible step towards formation of an East Asian trade bloc. A decision by
China to consider participation in preferential trading arrangements, and a
willingness by Japan and Korea to contemplate inclusion of China in such an
arrangement involving the Northeast Asian economies, are furtheressential
prerequisites. Once these conditions are in place it in turn becomes realistic to
consider a grouping such as ‘ASEAN-Plus-Three’ as a possible vehicle for an
East Asian trade bloc.
A proposed linking together of AFTA and ANZCERTA would join together
two well-established and relatively ‘high standard’ preferential trading
arrangements. The twelve economies covered by such an arrangement comprise
a large part of the region in geographic terms. However, their economic
significance, as noted above, is much less. In the wider East Asian context the
significance of a joining together of AFTA and ANZCERTA is that it could
provide a natural basis for considering an extension of the concept of an East
Asian trade bloc to embrace the entire western Pacific.
Any proposed free trade area involving Japan, Korea and China of course faces
formidable political obstacles. The results reported in Scollay and Gilbert (2001)
indicate, however, the possibility that in purely economic terms a powerful
‘domino’ effect could operate in favour of the emergence of an East Asian or
western Pacific trade bloc.23 The results suggest that the welfare effects of a
22 See Table 2 for shares in world GDP.
23 The ‘domino’ effect in this case bears an intuitive resemblance to the effect proposed and
analysed in detail in Baldwin (1999), in the context of the expansion of the European Union.
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Japan-Korea free trade area are rather weak, and in fact negative for Korea.24 The
inclusion of China would face even greater political obstacles, but the simulation
results show that it strengthens the economic logic supporting a preferential trade
arrangement in Northeast Asia, yielding a much improved and unambiguously
positive welfare outcome for both Japan and Korea, and generating very
substantial welfare gains for China. However, the improved economic outcome
from the inclusion of China occurs at the expense of significant damage to the
trade and economic welfare of the ASEAN economies, which are direct
competitors of China in a number of fields. Likewise, China’s trade interests are
shown to be threatened by any move by Japan and Korea to link with ASEAN to
the exclusion of China. On the other hand, a free trade area joining all three
Northeast Asian economies together with ASEAN – the ‘ASEAN-Plus-Three’
group – yields enhanced economic welfare both for the individual members of the
arrangement and for the group as a whole. The simulations further indicate that
countries that are closely integrated into western Pacific trade, notably Australia,
New Zealand and Taiwan would suffer economically from being excluded from
an ‘ASEAN-Plus-Three’ free trade area, whereas their inclusion in a wider
western Pacific free trade arrangement has a strong positive effect on their
economic welfare and further enhances the overall welfare of most other
countries in the region.
The degree of inclusiveness towards participation by economies within the
region will thus have an important bearing on the impact of a possible East Asian
or western Pacific trade bloc, and of the steps towards its creation. An inclusive
trade agreement covering all of the economies of East Asia or the western Pacific
will offer substantial economic benefits to its members. A bloc with more limited
membership on the other hand, while offering benefits to the members of the
arrangement, will damage the trade interests of excluded non-members in the
western Pacific as well as elsewhere, and is accordingly likely to be divisive.
The existence of a cogent economic logic in favour of the formation of an
inclusive East Asia-wide or western Pacific-wide trade bloc does not necessarily
mean that such a bloc is likely to eventuate. The politics and related security
issues associated with relations between the potential members of the bloc,
particularly between the Northeast Asian economies, present a complex array of
problems and difficulties that would have to be overcome. The politics of trade
issues could also be potentially divisive in a larger East Asian trade grouping.
There are likely to be sharp differences of view as to whether, and to what extent,
agriculture should be included in any East Asia free trade arrangement. Malaysia
24 The Scollay and Gilbert (2001) results are however based on comparative static analysis. A
paper by the Institute for Developing Economies (IDE, 2000) argues that the result will be much
more favourable when dynamic effects are taken into account. This latter point is also emphasised
by Yamazawa (2001).
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recently insisted on excluding autos from its AFTA commitments, and this stance
also is likely to be contentious if repeated in negotiations for an East Asia-wide
FTA.
A distinct possibility is that economic logic and political feasibility may point
in opposite directions. Whereas economic logic may favour a more inclusive
trade bloc covering the entire western Pacific, political constraints may lead in
the direction of more limited groupings. This may be a recipe for sharply
increased levels of trade conflict, possibly provoking responses that lead to
further reductions in economic welfare in the region. The potential for increased
trade conflict, and also political conflict, is likely to be especially acute if the
Northeast Asian powers – Japan, Korea, possibly later China and perhaps even
Taiwan – pursue separate strategies of building their own SRTA linkages in the
western Pacific (and further afield).
The Scollay and Gilbert (2001) simulations also indicate that of all the possible
trade developments in East Asia, an East Asia-wide or Western Pacific-wide
trade bloc would be most likely to damage the economic interests of the United
States and thus provoke an outbreak of trans-Pacific trade conflict. Given the
importance to them of their trade with the United States, East Asian economies
are likely to be wary of this possibility. On the other hand, potential negative
impacts on major economies outside the region may add to the incentives for
major players such as the United States and the European Union to return to the
WTO negotiating table.
c. Towards a Bipolar Pacific and Tripolar World Trading System?
While the first hesitant moves towards possible establishment of a trading bloc
are surfacing in East Asia, the western hemisphere has already firmly set its
course towards establishing a trading bloc of its own, having already taken the
decision in principle to conclude negotiations for a Free Trade Area of the
Americas (FTAA) by 2005. Although committed to its own version of ‘open
regionalism’ the FTAA is clearly intended to be a preferential trading bloc. The
parallel emergence of an East Asian or western Pacific trade bloc and the FTAA
on opposite sides of the Pacific would polarise the Asia-Pacific region in a way
that APEC was explicitly designed to avoid, and would almost certainly dispel
any residual prospect that APEC’s non-discriminatory approach to regional
liberalisation might eventually prevail. It would also herald the emergence of a
‘tripolar’ international trading system, in which the three ‘poles’ would be the
European Union, the FTAA, and the East Asian bloc. In the early 1990s
commentators such as Krugman (1991) argued that this might be the worst
possible outcome for the world as a whole.
Table 2 shows that on the basis of official 1998 figures an East Asian bloc
corresponding to ‘East Asia’ would comprise just over 20 per cent of world GDP,
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rising to over 22 per cent of GDP for a bloc formed on the basis of the ‘Western
Pacific’ grouping. The Japanese economy would by itself account for over half of
this figure, at 14 per cent of world GDP. By way of comparison, a westernhemisphere bloc corresponding to the FTAA would comprise just over 36 per
cent of world GDP, with the United States alone accounting for over 27 per cent
of world GDP. The fifteen current members of the European Union account for
almost 29 per cent of GDP, rising to nearly 32 per cent if the thirteen additional
potential members earmarked for accession are also included. The three blocs
between them could thus account for approximately 90 per cent of world GDP,
despite the fact that over half the nations of the world, embracing a substantial
proportion of the earth’s land surface and population would not be included in
any of the three blocs.
Separate preferential trade blocs in East Asia or the western Pacific and the
western hemisphere will by definition discriminate against each other to some
degree. Trade creation within each bloc, and the stimulus to trade from increased
economic dynamism, will be offset to some extent by tendencies towards trade
diversion as competitive products from each bloc are displaced in each other’s
markets. For East Asia and the United States, both heavily involved in trans-
Pacific trade, a substantial share of their total trade could potentially be affected
by this discrimination. Table 1 shows that the United States conducts 34 per cent
of its total trade with western Pacific APEC members, as against 30 per cent with
its NAFTA partners and only 5 per cent with the whole of South America. The
Northeast Asian and Southeast Asian economies respectively conduct 24 per cent
and 18 per cent of their total trade with western hemisphere APEC members.
TABLE 2
Shares of Selected Regions in World GDP
(based on official 1998 data)
Region Share of
World GDP
(per cent)
Northeast Asia 20.2
Southeast Asia 2.0
Australasia 1.5
USA 27.5
NAFTA 30.9
FTAA 36.3
EU-15 28.7
EU-28 30.6
Note:
EU-28: Existing EU membership (EU-15) plus thirteen current candidates for
accession.
Source: World Bank: World Development Report, 1999–2000.
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Viewed in this light it is not surprising that the simulation results in Scollay
and Gilbert (2001) show that APEC liberalisation yields superior economic
welfare outcomes to the ‘bipolar Pacific’ scenario both for APEC economies as a
group and for the majority of individual APEC economies on both sides of the
Pacific. This is illustrated in Table 3. If APEC non-discriminatory liberalisation
in accordance with the tenets of APEC’s ‘open regionalism’ no longer commands
sufficient support from the APEC membership, the results also show that
conversion of APEC into a preferential arrangement would be equally effective in
capturing the benefits of a trans-Pacific dimension to regional economic
integration.25 A preferential APEC would however represent a major transform-
ation of the ‘culture’ which has grown up around APEC, and would have to
overcome many of the political considerations which led APEC to adopt the non-
discriminatory approach to regional liberalisation in the first place. Thus while
economic logic may support the retention of the trans-Pacific dimension to
regional liberalisation offered by APEC, political pressures may point in different
25 The results reported in Scollay and Gilbert (2001) are broadly consistent with the main body of
results from other CGE assessments of APEC liberalisation reported in Scollay and Gilbert (2000).
While the welfare gains for the APEC membership as a whole from APEC preferential
liberalisation are comparable to those from APEC MFN liberalisation, the distribution of those
welfare gains among APEC members will be different.
TABLE 3
Impact on Economic Welfare (equivalent variation basis) of Alternative Liberalisation Scenarios
(per cent of initial GDP)
Selected APEC Members and Full APEC Membership
APEC MFN APEC East Asian Western FTAA
Liberalisation Preferential FTA Pacific FTA
Liberalisation (ASEAN plus
three)
Japan 0.68 0.74 0.34 0.57 0.00
Korea 1.08 1.63 1.18 1.20 ÿ0.10
China 3.35 2.56 1.96 1.94 ÿ0.08
Indonesia 0.58 0.70 0.69 0.71 ÿ0.04
Malaysia 1.35 1.59 1.24 1.74 ÿ0.02
Philippines 3.94 4.16 ÿ0.19 1.01 ÿ0.34
Thailand 1.93 1.81 1.00 1.19 ÿ0.06
Singapore 0.37 0.72 4.12 0.92 ÿ0.01
Australia 0.81 0.81 ÿ0.11 1.05 ÿ0.01
New Zealand 2.53 3.60 ÿ0.36 4.32 ÿ0.06
USA 0.01 ÿ0.01 ÿ0.03 ÿ0.06 0.06
Canada ÿ0.07 0.02 0.06 0.06 0.04
Mexico 0.07 0.12 0.03 0.03 0.27
Chile 0.24 0.18 0.02 0.01 ÿ0.04
Total APEC 0.56 0.58 0.25 0.35 0.02
Source: Scollay and Gilbert (2001).
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directions. The proliferation of proposals for trans-Pacific preferential trade
arrangements can be interpreted as an effort to replicate some of the advantages
of the APEC approach, but the advantages will clearly be much diminished to the
extent that the United States does not participate in the new arrangements, and
also because of the patterns of discrimination and exclusion to which a
proliferation of preferential regional trade arrangements inevitably gives rise.
Moreover, the results in Scollay and Gilbert (2001) indicate that the negative
consequences for economic welfare of APEC members from choosing the
‘bipolar Pacific’ over APEC liberalisation are not especially large. For most
economies on both sides of the Pacific the negative impact of the FTAA and an
East Asian or western Pacific trade bloc on each other’s economic welfare are
small relative to the gains from membership of the relevant ‘bloc’. On the other
hand, one striking result is that the negative impact on US economic welfare of
the establishment of a western Pacific trade bloc would almost completely negate
the welfare gains it might expect from the FTAA, suggesting that the United
States at least has a strong economic incentive to press for the retention of an
APEC-wide approach. In this case also, however, economic and political logic
may not coincide.
It remains to briefly consider possible implications of the emergence of a
tripolar world trading system. The apprehension with which such a development
was viewed in the early 1990s was based on concerns at apparent weaknesses
emerging in the GATT system, together with analyses suggesting that the three
large blocs may face particularly strong incentives to aggressively pursue the
enhancement of their own welfare at the expense of the other two blocs,
potentially leading to destructive trade wars – or even that incentives may exist
for any two of the blocs to form a coalition against the third.
Two considerations may be cited to possibly alleviate such concerns. First, the
WTO is in a stronger position than the former GATT to restrain such behaviour
by large trading blocs. Second, studies continue to show that multilateral
liberalisation offers substantially greater benefits to most economies than those
available from alternative preferential arrangements,26 even the formation of
‘mega-blocs’, suggesting that the three blocs will have a strong incentive to
cooperate to ensure the continuing effectiveness of the WTO. It is even possible
that the emergence of trading blocs in East Asia and the western hemisphere may
place additional pressure on the European Union to seek a successful outcome
from multilateral negotiations.
It is also conceivable that a tripolar trading system may have favourable
implications for the problematic relationship between regionalism and the
multilateral trading system. A situation where three large trading blocs, each with
26 In addition to Scollay and Gilbert (2001), see the studies surveyed in Scollay and Gilbert (2000),
also Brown, Deardorff and Stern (2001).
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an interest in maintaining the effectiveness of the WTO, dominate both regional
and multilateral trade, may be less subversive of the multilateraltrading system
than the present worldwide proliferation of PTAs over which the WTO appears
relatively powerless to exert effective discipline in a number of important
respects.27
5. CONCLUDING REMARKS
The emergence of a tripolar world trading system would certainly be a serious
challenge for the WTO. It is at least possible, however, that the WTO might be
strengthened rather than weakened by such a development. An alternative scenario
of a continuing proliferation of regional and subregional preferential arrangements
in the Asia-Pacific region, as in the rest of the world, will also place an added
premium on an effective WTO. Trade economists have long understood that, as
the Kemp-Wan theorem indicates, the overall welfare impact of preferential
trading agreements depends on the level at which external barriers are set by their
members.28 Concern over the welfare effects of proliferating PTAs will be
lessened to the extent that MFN trade barriers continue to be reduced as a result of
successful negotiations within the WTO. Concerns over the negative effects of
‘spaghetti bowl’ effects on the efficiency of trade will however remain.
For APEC, the question remains open as to whether the new preferential
trading developments in the Asia-Pacific region will reinforce or undermine
progress toward the APEC objective of free trade and investment in the region. If
they turn out to be supportive of the APEC objective they are also likely to
qualify as ‘building blocks’ for a more open multilateral trading system. In this
case we would expect to see a gradual convergence of these Asia-Pacific PTAs
towards the APEC free trade goals, through the dual processes of elimination of
barriers between members and the ongoing reduction of barriers against non-
members on an MFN basis. The barriers between members would of course come
down faster, but the preferences thereby created would gradually disappear as
MFN barriers also approach zero. Expansions and amalgamations of some PTAs
could and probably would occur as intermediate steps along the road to full
APEC liberalisation.
27 See WTO (2000a) for a comprehensive review of the so-called ‘systemic issues’ relating to the
interpretation of GATT Article XXIV. The inability of the WTO membership to resolve these
issues severely limits the capacity of the WTO to exert effective discipline over regional trading
arrangements.
28 Kemp and Wan (1976) show that it is always open to the members of a preferential agreement to
choose external barriers such that both their joint welfare and global welfare are enhanced. Strictly
speaking the Kemp-Wan theorem applies only to customs unions. Panagariya (1999) reports an
extension of the theorem to cover the case of free trade areas.
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In the meantime APEC’s ambitions to serve as a primary agent of trade
liberalisation in the Asia-Pacific region are at least temporarily on hold. APEC is
concentrating on encouraging and facilitating trade liberalisation by improving the
transparency of IAPs (including through the introduction of electronic IAPs), by
mounting complementary trade facilitation initiatives, and by building capacity for
liberalisation among the economies of the region through its economic and technical
cooperation programmes. In the aftermath of the East Asian economic crisis APEC
has also been seeking to build consensus on the importance of improving the
efficiency of markets as an essential foundation for economic integration in the
region, through initiatives such as the APEC Principles on Competition and
Regulatory Reform and economic and technical cooperation programmes on
corporate and financial sector governance. If preferential trading arrangements
become established as the dominant mode of liberalisation in the Asia-Pacific
region, APEC is also likely to develop added importance as a forum through which
potential trade conflicts within the region may be mediated and contained.
APPENDIX
Outline of Development of Proposals for Preferential Trading Arrangements in
the Asia-Pacific Region Since 1998
(adapted from Scollay and Gilbert, 2001)
A dramatic early step was the decision by Japan and Korea to study the
implications of a free trade area (FTA) between the two countries as part of a
wider programme of deepening economic ties. This initiative resulted from
meetings during the October 1998 visit to Japan of Korean President Kim Dae
Jung, and received further impetus from the proposal for a ‘Japan-Korea
Economic Agenda 21’ put forward during the March 1999 visit to Korea by then
Prime Minister Keizo Obuchi of Japan. The results of the study were published in
May 2000 by the Institute for Developing Economies (see IDE, 2000) and the
Korean Institute for International Economic Policy. Further studies are under
way. Korea has suggested that it might be preferable to include China in any such
arrangement, and there have been unconfirmed reports that less formal studies are
also under way in all three countries on this possibility.
At the time of the APEC Economic Leaders’ Meeting in Auckland in
September 1999, announcements were made regarding proposals for negotiations
or studies on FTAs between the following APEC members:
(a) Singapore and Japan: initial discussions led to a detailed study, followed by
launching of formal negotiations aimed at concluding a free trade agree-
ment by December 2001, to come into effect during 2002. The second of
three planned rounds of negotiations was completed in April 2001.
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(b) Singapore and Chile: announcement of exploratory talks on a possible FTA.
(c) Singapore and New Zealand: negotiations led to the conclusion of the
Singapore New Zealand Closer Economic Partnership Agreement in
November 2000.
(d) Korea and Chile: an initial round of negotiations had been held in April
1999. In early 2001 negotiations were reported to be on the verge of
breakdown over sensitivities in relation to agricultural trade.
(e) Japan and Mexico: initial discussions were followed by a study released in
April 2000 calling for establishment of an FTA. Japan declined a Mexican
request to begin negotiations during 2000, citing concerns over Mexican
agricultural exports, and indicating an initial preference for a bilateral
investment agreement.
Also at the time of the APEC Economic Leaders’ Meeting, proposals were
circulating informally for a so-called ‘P5’ (Pacific Five) FTA between the United
States, Australia, Singapore, Chile and New Zealand. While this proposal never
reached the stage of formal discussions, it is known that some prospective
participants remain interested in taking it further.
Subsequent to the Auckland leaders’ meeting it emerged that proposals had
also been made for FTAs between:
(a) Japan and Canada: after the idea was originally raised during 1999, studies
were commissioned by Japan’s MITI and by Canada-Japan business groups.
(b) Japan and Chile: reports during early 2001 indicated that analysis of a
possible FTA is continuing.
(c) Korea and Mexico: an FTA was discussed in March 2000 and again at the
November 2000 APEC leaders’ meeting in Brunei, where an investment
guarantee treaty was signed.
(d) Singapore and Mexico: negotiations began in June 2000 and the two
countries issued a joint declaration at the November 2000 APEC leaders’
meeting.
(e) Singapore and Canada: agreement reached in June 2000 to begin talks on a
possible FTA.
Other developments during 1999 were an attempt to revive an earlier proposal for
an FTA between Chile and New Zealand, and the announcement by the Korean
and New Zealand governments of a joint study into an FTA between the two
countries. In the early part of 2000, a similar announcement was made by the
governments of Korea and Australia. Discussionon a Korea-Singapore FTA has
also been reported.
Discussions have also been proceeding on further development of the linkage
between the ASEAN Free Trade Area (AFTA) and the Australia New Zealand
Closer Economic Relations Trade Agreement (ANZCERTA, usually shortened to
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CER). The AFTA-CER linkage has hitherto focused on facilitation measures and
information exchanges but some participants on both sides of these discussions
have expressed clear interest in elevating this linkage to the status of a full FTA
arrangement. A high-level task force produced a report entitled the ‘Angkor
Agenda’ in October 2000 outlining recommendations for proceeding with an
AFTA-CER free trade arrangement (accessible at http://www.aseansec.org/aem/
angkor_agenda.pdf). Under pressure from Malaysia ASEAN ministers at that time
declined to consider the possible elimination of tariffs between the two groups.
The APEC Economic Leaders’ meeting in November 2000 was the focus of still
further announcements. Perhaps the most dramatic, was the announcement that a
study would begin on a free trade area between the United States and Singapore,
marking the first time the United States has officially engaged in the new trend
towards bilateral arrangements in the region. The Prime Minister of Singapore,
Goh Chok Tong, forcefully put forward the view that new trans-Pacific bilateral
developments represent a fresh concept in regional integration, which he dubbed
‘Cross Regional Free Trade Areas’ (CRFTAs). He argued that in present
circumstances CRFTAs offer the best defence against the evolution of a ‘three-
bloc world’. Other proposals for bilateral arrangements to surface at this time
included Australia-Singapore and New Zealand-Hong Kong, with some
suggestions also of a possible New Zealand-Taiwan link. Informal discussions
apparently also took place on possible reduced-form variations on the P5 formula,
involving some combination of Australia, Chile, New Zealand and Singapore. Just
prior to the APEC Leaders’ meeting the Singapore New Zealand Closer Economic
Partnership agreement was signed by the Prime Ministers of the two countries.
There have also been further significant developments in East Asia. In
November 2000 Premier Zhu Rongji is known to have suggested an FTA between
China and ASEAN, and a study on this possibility is now being undertaken by an
ASEAN/China Expert Group on Economic Cooperation. At the ‘ASEAN Plus
Three’ summit, also in November 2000, a study on a possible East Asia-wide free
trade area was commissioned. More recently still, a new expert group has been
created to consider prospects of a Japan-ASEAN FTA.
In December 2000 came an announcement that discussions would re-open on a
possible free trade area between the United States and Chile. Early in 2001
Australia announced that it would seek a bilateral free trade agreement with the
United States and there have also been reports of discussions of a possible
Australia-Thailand free trade arrangement.
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