TCS Daily

APEC for Tomorrow, Not Today

By Alan Oxley - October 8, 2004 12:00 AM

As Brazil and Venezuela toy with reverting to government agencies to generate economic growth, Chile remains a free market standout. The first Latin American nation since NAFTA to negotiate a Free Trade Agreement with the United States, its President, Ricardo Lagos, has now proposed a Free Trade Agreement among the nations of APEC, the organization for Asian Pacific Economic Cooperation. His ambition to entrench free trade in the Pacific Rim is right, but he is shooting too low with this idea. The "Free Trade" model is out of date for APEC. A new paradigm is required.

The annual APEC Summit is a big deal. Ricardo Lagos is host this year. The leaders of the US, China, Japan and Russia will join their counterparts from the leading economies in East Asia in Santiago in November. Canada, Australia and New Zealand as well as Mexico, Chile and Peru will also be there. The Pacific Rim is the fastest growing region in the world, and is set to remain so.

APEC was born out of fear in 1989. Leaders in Asia were anxious that Europe's plans for a "Single Market" and negotiation of NAFTA might create regional trade blocs which excluded them. They formed APEC and made bold declarations to get Government out of trade and investment in the Pacific Rim. They tasked a wise man's group to tell them how to do it. Fred Bergsten, a leading Washington free trader pitched for an APEC Free Trade Agreement. Good FTAs have legally binding commitments. That was too much for the Asians, so APEC settled on volunteerism. Each member would set its own program to meet the goal of free trade and investment.

APEC has been half successful. It clings to the rhetoric of free trade but, with the remarkable exception of China, there has not been much liberalization in Asia since the Asian currency crisis in 1998 and Japan entered its prolonged slump. APEC Leaders of late talk more about Islamic terrorism and making trade secure rather than free.

Bergsten was ahead of his time. Ten years ago trade tension between Japan and the US made an FTA impracticable and free market reforms were not advanced enough for China to commit to free trade. Has Lagos got the time right now? China is in the WTO. Japan is coming out of its slump. Furthermore, East Asia is at a development crossroad.

China's surge of exports has shown the rest of Asia that they need to move to a higher plane of development. There is no point trying to compete with China's low cost manufacturing. They need to increase productivity. Critical to this is fostering competitive services industries. They are essential for value adding in manufacturing and generate jobs and growth in their own right.

Most service industries are not footloose like cheap labor manufacturing. Tourism and foreign workers may be the exceptions. But other services industries -- finance, transport and distribution and telecommunications for example -- require solid business foundations in the markets they serve. Investment and property rights must be secure and competition guaranteed.

The economies in APEC that have had significant growth spurts, like Malaysia, Korea, Thailand and Mexico, talk regularly about becoming first world economies. Getting there will depend less in the future on removing controls on foreign suppliers -- the key tool in trade liberalization -- and more on laying down the necessary national legal infrastructure to enable free markets to flourish.

Only when domestic laws and institutions clearly delimit the extent of Government interference in how business works will these economies move to a higher level of economic development. Not even Japan and Singapore have achieved the necessary degree of separation of government from business. This is the level of ambition to which APEC should now aspire.

Ricardo Lagos is still a bit too early. An FTA among APEC economies would require the same commitments as an FTA among the US, Japan and China. They are not yet ready for that today, but at least know that is feasible in the future.

But would an APEC FTA based on today's models of trade liberalization set the bar high enough? By the time APEC countries are ready to agree to an FTA, it will be a mechanism to consolidate the status quo, not one that sets directions for the future.

The Heritage Foundation recently proposed that countries fed up with the snail's pace of trade liberalization in the WTO should consider separately entering an agreement to provide reciprocal rights to extend greater economic freedom to each other. This is the direction in which we should move. It is time we changed the international paradigm of economic integration from "Freeing Trade" to "Freeing Markets".

APEC should commit to an Agreement in which members jointly provide citizens and businesses in their economies legal protection to operate in free economies. President Lagos should be congratulated for trying to move APEC on. But he should set a target for the future, not a target for today.

Alan Oxley is the host of the Asia Pacific page of Techcentralstation and Chairman of Australia's national APEC Study Centre


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