TCS Daily


China's Challenge to APEC

By Alan Oxley - June 1, 2005 12:00 AM

While negotiators have made little headway in the World Trade Organization since the Doha Round was launched in 2001, in the same period, fifteen Free Trade Agreements (FTAs) have been negotiated among the members of the group of Asian Pacific Economic Cooperation (APEC[1]) and another 20 are being negotiated or studied. These governments account for 70 percent of world trade and drive the world economy. The astonishing thing is that China is now the strategic driver of this wave of liberalization. Is it up to it?

FTAs have their free market critics, for example Fred Smith at the Competitive Enterprise Institute in Washington DC. He is likely to argue the Asian Pacific FTAs are basically political agreements, and produce faux, if not bad, liberalization.

Smith would say these agreements distort markets: they remove barriers to trade from partners in the agreement, but not other economies. Trade liberalization should do two things: ensure the cheapest products in the world are available to consumers and to deny governments the chance to distort markets.

Playing politics with trade was common in the 1930s. The trade deals of that period severely enhanced the economic damage caused by the stock market crash in 1929. In an enlightened move after World War Two, multilateral rules to take the politics out of trade were laid down in the General Agreement in Tariffs and Trade (GATT). Smith advocates liberalizing unilaterally or through the WTO, the successor of the GATT.

The APEC economies evidently see it differently. This deserves our attention. They drive world growth. In East Asia, annual growth between 5 and 9 percent is considered normal. (In Africa and Latin America, the expectation is between 3 and 6 percent.) Japan, Korea, Singapore, Taiwan and Thailand have all had spurts at 9 percent. Today it is China's turn. Among OECD countries, growth averages 1.5 to 2 percent. In the EU the expectation is one to two percent. The growth leaders in the OECD are the US, Canada, Australia and New Zealand, currently getting 3 to 3.5 percent. They are all members of APEC.

Fred Smith has free trade allies in APEC. Many of them met at the annual conference of APEC economic scholars last week in Jeju Island in Korea. The leading questions were: "Are the FTAs good or bad for the region?" and "Can APEC achieve its goal of removing all barriers to trade and investment by 2010 (rich countries) and 2020 (developing countries)?" Around 20 papers were considered.

The record of liberalization among APEC economies has been good. Australia, New Zealand, Chile, Hong Kong and Singapore all consciously opened markets to secure growth. The US and Canada are open, except for some important agricultural sectors, and the others have all been impressive in reducing trade barriers.

The ASEAN economies have progressively reduced barriers as have Korea and Taiwan, and China has more than halved its trade barriers following accession to the WTO and its bilateral agreement with the US. Professor Hikari Ishido from Chiba University shows the average applied tariff in APEC is 7.6 percent and the average rate committed to in the WTO is 15.3 percent. If the rate of liberalization achieved in the last decade continues, the APEC economies will eliminate most tariffs by 2020.

No one has yet demonstrated the FTAs among APEC members are diminishing economic welfare and undermining the WTO. One safety valve is that WTO commitments create a floor of common commitment to liberalization. The extent of favoritism shown in the FTAs is only possible where tariffs are lower than existing tariffs. As shown, they average 7.6 percent in APEC economies.

There is concern that administration of the agreements and introduction of new sets of tariffs for every new FTA will increase the transaction costs of trade which cancel out the benefit of tariff cuts. No one has demonstrated this yet. With use of electronic systems, the unit cost of processing trade transactions is probably falling.

There are some worrying trends. China is negotiating agreements that leave out services and investment (although it has agreed to cover these issues in its FTA with Australia). Japan has been unable to include FTAs covering agriculture (but Daisuke Hiratsuka of the Institute of Developing Economies in Tokyo reported a more flexible attitude towards agricultural policy is likely from Tokyo in the future).

On the positive side, many FTAs among APEC economies cover services, investment and intellectual property -- all areas where progress is slow in the WTO. They also include commitments to liberalize further than existing agreements in the WTO.

What is driving this activity? "China is leading this," Dr. Soogil Young, Korea's former Ambassador to the OECD, told the conference of APEC scholars. It is clear China has decided to assert regional leadership through FTAs. It negotiated an FTA with the ten ASEAN economies, initiated the idea of an East Asian Summit (comprising the ASEAN economies plus China, Korea and Japan) and has supported the idea of an East Asian economic community. It reportedly even proposed a bilateral FTA to Japan.

This has wrongfooted the Koizumi Government. It also aspires to regional leadership and has initiated negotiations of FTAs in East Asia. But is having difficulty negotiating such agreements because agriculture is a stumbling block. China's actions also challenge Washington which has embarked on its own program to negotiate FTAs with the ASEAN economies and is reportedly looking at an FTA with Korea.

The former US Special Trade Representative, Robert Zoellick described his strategy for FTAs as "competitive liberalization". Negotiation of one FTA would challenge major traders to match them. His forecast is materializing in APEC. But no one counted on China being the most aggressive competitor. In truth it is not so far. Everybody will consider doing an FTA with China because of the size of its market. But so far it is only offering lower grade FTAs. The challenge in APEC is to ensure that the stakes are high so that FTAs are not just vehicles to secure political allegiance. The burden of this lies on the US to demonstrate that FTAs must be comprehensive and deliver more than the WTO can.

China needs to be encouraged to be a leader of growth policies that benefit its trading partners, not just the leading economy among developing countries. As a study late last year on China's trade by the Institute of International Economics in Washington concluded, to be an effective economic leader in the region, China will have to go beyond its commitments in the WTO. Zoellick's strategy of competitive liberalization is a good tool to challenge it to do so.

Alan Oxley is Host of the TCS Asia-Pacific page and Chairman of the Australian National APEC Study Centre at Monash University.



[1] Members of APEC are Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, Taiwan, Thailand, United States and Vietnam.

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