The Heritage Foundation

Asian Backgrounder #134

November 10, 1994

November 10, 1994 | Asian Backgrounder on

Expanding Free Trade in Asia: The APEC Meeting and Beyond

(Archived document, may contain errors)

134 November 10, 1994


INTRODUCTION Atthe second annual Leaders' Meeting of the Asia-Pacific Economic Cooperation (APEC) organization, which convenes in Bogor, Indonesia, on November 15, President Bill Clinton has an opportunity to create well-paying, export-oriented jobs for American workers, expand investment opportunities for American businesses, and ensure Ameri- can economic leadership well into the next century. To do so, he will have to persuade his partners at the meeting that APEC's free trade objectives should be seen as only one of several possible trade-liberalizing opportunities in the region. For example, free trade agreements among individual APEC members can be pursued without threatening the co- hesion of the eighteen-member organization, and President Clinton should explore such opportunities at the meeting. Such action would be consistent with APEC's objectives. On August 30, 1994, APEC's advisory body recommended that APEC leaders adopt the long-term goal of "free and open trade and investment in the region." I They proposed that APEC begin to implement a free trade zone, incorporating all of its eighteen members, in 2000, with complete implementation by 2020. In the meantime, there is much that can be done short of free-trade deals. Near-term trade and technical cooperation will yield immediate benefits for American business and build confidence in APEC as viable institution for trade and investment liberalization. Such measures include harmonizing customs procedures, establishing common product standards, providing for the mutual recognition of product-testing, and non-binding dis- pute mediation.

Beyond this, an APEC-wide free trade and investment area may be difficult to achieve in the foreseeable future because of the substantial economic and political differences among APEC members. But the United States should not rely solely on APEC to liberal- ize trade in the Pacific. The negotiations to establish an APEC-wide free trade and invest- ment area will be slow and complex. Any resulting agreement will take years to imple- ment. Instead, the United States should work directly with those countries already in- volved in regional free trade agreements to determine the ways in which expanded free trade can complement the slower APEC process. Therefore, in Indonesia, President Clinton should:

V Endorse the APEC trade and technical cooperation program. V Accept the proposed "Concord on Investment Principles," which would stand- ardize investment laws and regulations among APEC members.

V Explore with leaders from Australia, Chile, New Zealand, and Singapore the possibility of accession to the North America Free Trade Agreement (NAFTA).

V Offer to begin negotiating a merger between NAFTA and the other existing free trade agreements, including the Australia-New Zealand Closer Economic Relations Trade Agreement (CER), and the ASEAN 2 Free Trade Area (AFTA).


Hedging against the breakdown of the global trading system and the emergence of competing regional trading blocs, a number of East Asian and Pacific Rim states met in Canberra, Australia, in November 1989. There they established the Asia-Pacific Eco- nomic Cooperation (APEC) organization as a regional forum for consultation about inter- national economic issues. 3 With American support, APEC is evolving into an institution with a broader mandate.

During the fourth APEC Ministers' Meeting in Bangkok, Thailand, in September 1992, APEC established a small secretariat, which opened in Singapore in February 1993, and created an advisory body, the Eminent Persons Group, composed of senior economists and other experts, to help chart APEC's future. APEC also formed two work- ing committees: the Ad Hoc Group on Economic Trends and Issues, to prepare assess- ments of long-term economic trends and study specific issues, and the Committee on Trade and Investment, to develop initiatives to expedite trade and investment liberaliza- tion in the region. The United States hosted the fifth APEC Ministers' Meeting and initiated a Leaders' Meeting in Seattle, Washington, in November 1993. There, President Clinton urged that APEC be transformed from a discussion forum into an active organization promoting free trade and investment in the region. In Seattle, the leaders agreed that APEC should promote trade and investment liberali- zation both globally and regionally. The leaders "welcomed the challenge presented to us in the [first] report of the APEC Eminent Persons Group to achieve free trade in the Asia Pacific, advance global trade liberalization and launch concrete programs to move us to- ward these long-term goals.994 The leaders commissioned the Eminent Persons Group "to present further more specific proposals on how the recommended long-term vision might be realized."

On August 30, 1994, the Eminent Persons Group, chaired by C. Fred Bergsten, a for- mer U.S. Treasury official and Director of the Washington-based Institute for Interna- tional Economics, issued its report proposing an APEC-wide free trade zone.5 The report acknowledges that unilateral action to liberalize trade and investment will produce eco- nomic benefits for APEC members, particularly those with high tariffs and other barriers. While the report encourages all APEC members to initiate their own liberalization pro- grams, it acknowledges that members are unlikely to liberalize trade in the most politi- cally sensitive sectors, such as agriculture and apparel, without receiving reciprocal bene- fits from their wading partriers. Therefore, the report recommends that APEC pursue its liberalization objective through multilateral negotiations based upon what it calls "open regionalism," which .s members flexibility to extend certain trade benefits unilater- ally to non-membersTrmit The Eminent Persons Group report makes several worthwhile recommendations. It ventures into areas not addressed by regional trade agreements such as competition pol- icy, intellectual property rights, and government procurement.1 In addition to technical cooperation, though, the report "recommend[s] setting a timeta- ble for deciding and achieving free trade and investment in the Asia Pacific region," spe- cifically urging the leaders to authorize the start of APEC trade and investment negotia- tions at their Indonesian summit. While the liberalization process should begin no later than 2000, says the report, it suggests that APEC members should have differing dead- lines for completing liberalization based upon their rates of economic development. De- veloped economies should complete liberalization in 10 years; newly industrializing economies should complete liberalization in 15 years; and the least developed economies 8 in 20 years.

In the meantime, the advisors endorse a vigorous trade and. investment facilitation in- itiative in APEC. Specifically, the report urges all APEC members to adopt a voluntary, non-binding Concord on Investment Principles. 9 The Concord would provide for na- tional treatment for foreign investors (treating foreign investors in the same way as inves- tors from the host country) and require transparency in all laws and regulations concern- ing foreign investment, among other things. The report further challenges APEC to work to standardize technical product standards and provide for mutual recognition of product testing. 10 The report proposes also that APEC establish a multilateral dispute mediation service to supplement the dispute resolution mechanism under GATT.


The Clinton Administration generally has supported the advisory body's focus on trade and investment liberalization. At the same time, though, officials have avoided even endorsing the extended timetable that does not see a region-wide free trade agree- ment until 2020.

Reaction overseas has been even more ambiguous. The host of the forthcoming meet- ing, President Suharto of Indonesia, expressed interest in "delivering a strong statement for free trade at the summit.9912 Others express reservations. ASEAN economics minis- ters, except for the minister from Singapore, declared that "Moving forward with the . n. 3 APEC blueprint for regional free trade was not an urgent priority," at their September 22-23, 1994, meeting in Chiang Mai, Thailand. There has been a general concern that the developed members of APEC will move faster than the less developed members can ac- cept. Some ministers noted that "APEC appears tilted toward the interests of the United States and Japan."14 Instead, ASEAN leaders, on the whole, prefer to focus on advanc- ing their own subregional trade liberalization scheme, the ASEAN Free Trade Area (AFTA). There is also apprehension about APEC in Japan. Some Japanese are concerned that the United States may use APEC liberalization to pry open such closed sectors of the Japanese economy as agriculture and financial services. Only Australia and Singapore fa- vor the bold approach toward liberalization outlined in the Eminent Persons Group re- port.15 An Anti-U.S. Trade Bloc. Others, notably the Prime Minister of Malaysia, Datuk Seri Mohammed Mahathir, for some time have been advocating that Asian countries form their own exclusionary trade bloc rather than liberalize trans-Pacific trade and investment through APEC. On December 7, 1990, Mahathir proposed forming an East Asian Economic Group (EAEG), composed of Japan, China, South Korea, and the ASEAN na- tions. Mahathir was apprehensive that the European Union and the United States would erect new protectionist barriers against Asian products should the then-ongoing GATT negotiations break down. Mahathir believed that an Asia-only trade bloc could expand markets for Asian goods and strengthen the economic power of Asian countries relative to the European Union and the United States. He envisioned that Japan would lead the 16 EAEG as Germany has led the European Union. The Bush Administration denounced the EAEG for excluding the United States. Al- though China was supportive of Mahathir's idea, Japan was reluctant to take a lead in or- ganizing the EAEG. The Japanese government was concerned that supporting the EAEG would exacerbate tensions with the United States, Japan's largest trading partner. Japan was also wary that a leadership role in the EAEG would ignite the lingering resentment in other Asian nations over Japan's aggression in World War H. South Korea has also re- fused to support the EAEG to avoid American ire. President Suharto strongly disliked the confrofitational tone of the EAEG. Under mounting pressure, Mahathir scaled back his proposal to an East Asian Eco- nomic Caucus (EAEC) as a subregional forum within APEC. The Bush Administration continued to oppose the EAEC. While still leery, the Clinton Administration has softened outright American hostility toward the EAEC so long as the EAEC remains within the APEC framework and does not obstruct economic opportunities for the United States in Asia. Nevertheless, Mahathir is expected to push his vision of an Asia-only trade bloc at the APEC summit in Indonesia. 17 Such an Asia-only trade bloc would be a serious threat to American interests. In 1993, two-way U.S. trade with APEC economies, even excluding Canada, Mexico, and Chile, was $239 billion. Those Asia bound-exports created 1.9 million American jobs in export- oriented industries. American direct investment in Asian economies totaled $92 billion in 18 1993. Mahathir's plan would weaken those trans-Pacific economic ties, endangering the paychecks of many American workers. Moreover, an Asia-only trade bloc excluding the United States would surely diminish the willingness of Congress and the American people to support an active political role and a visible military presence in the region. An American withdrawal would endanger peace and stability in Asia. Not only is an Asia-only trade bloc bad for America, it is bad for Asia as well. In addi- tion to Asia@s substantial trade with America, Asian two-way trade with the European Union was $249 billion in 1992. An inward-looking Asia-only trade bloc could attenuate Asia's economic ties with both the Americas and Europe.


There is much President Clinton can do to liberalize trade in the Pacific and defeat any attempt to exclude the United States from free trade agreements. AMC plays an impor- tant role in this regard. Many of the technical cooperation proposals in the Eminent Persons Group report are laudable and will improve the ability of U.S. firms to compete in Asia. At the same time, however, APEC should not be seen as the exclusive instrument of trade policy in the re- gion. If it were, progress toward free trade would be only as rapid as the pace of the slow- est member. Moreover, the uneven and often incompatible political and economic sys- tems among the eighteen APEC members will make broad progress difficult to achieve in the near future. At the APEC meeting in Indonesia, President Clinton can reaffirm American support for fi-ee trade and investment throughout the Asia-Pacific region. He can begin by assur- ing Asians that he will win congressional passage of the Uruguay Round of General Agreement on Tariffs and Trade (GATT) implementing legislation before the end of this year. When the new GATT agreement is in force, it will add $120 billion to the world's gross domestic product, $35 billion of which will accrue to Americans. In addition to expressing his general support for free trade, President Clinton should: BW Endorse the APEC trade and technical cooperation program. The long-term objective of free trade and investment in the Asia-Pacific should not distract the Clinton Administration from agreeing to incremental reductions in technical trade barriers at the summit. The APEC Committee on Trade and Investment is conduct- ing a comprehensive study on technical trade barriers and will recommend next year how APEC members can standardize their customs procedures and product standards, and provide for mutual recognition of product testing. Doing this will re- sult in a dramatic expansion of trade. President Clinton should support the commit- tee's on-going work and urge the adoption of the committee's recommendations at next year's Leaders' Meeting in Japan. OW Accept the proposed Concord on Investment Principles, which win stand- ardize investment laws and regulations among APEC members. This agreement would expand upon new the Trade-Related Investment Measures in the just-com- pleted GATr. Under the Concord, each APEC member would agree to make all laws and regulations concerning foreign investment transparent to overseas inves- tors. That means foreign investors would be guaranteed the same treatment as inves- tors from the host country. Moreover, adequate and just compensation would be as- sured if property is nationalized. New performance requirements on foreign direct investment would be curbed, and governments would be encouraged to dismantle existing performance requirements. 19 Any exceptions to these principles would have to be stated explicitly. Initially, the Concord would be voluntary, allowing each APEC member to determine when to apply it. However, the Concord should become the basis of a later binding free investment agreement. 20 BW Agree to the formation of an APEC Dispute Mediation Service. The Uruguay Round strengthens the existing dispute settlement mechanism under GATT. How- ever, these enhanced GATT dispute settlement procedures apply only to those is- sues encompassed by GATT - for example, dumping or trade-related aspects of in- tellectual property rights. A number of important trade issues that have been a source of conflict still remain outside the jurisdiction of the GATT. An APEC Dis- pute Mediation Service could help fill this gap and could channel many bilateral dis- putes into a multilateral forum. Use of the Dispute Mediation Service and the adop- tion of its recommendations would remain voluntary. However, the existence of a multilateral alternative within APEC may remedy some of the nasty bilateral dis- putes that threaten the U.S.-Japan economic partnership such as the controversy over the access of American-made automotive parts to the Japanese market. aw Explore with the leaders from Australia, Chile, New Zealand, and Singapore the possibility of accession to the North American Free Trade Agreement (NAFTA). The NAIFTA went into effect on January 1, 1994. The agreement will phase out all tariffs and non-tariff barriers to trade among the U.S., Canada, and Mexico by 2004. It covers a wide range of goods and services and also protects in- tellectual property rights. In the ten months since its inception, NAFTA already has had a positive impact on the United States; U.S. exports to Mexico were up 20 percent in the first six months of 1994. The first priority should be either to incorporate Chile, APEC's newest member, into NAFTA or to begin negotiations of a bilateral free trade agreement between the U.S. and Chile. 21 Many of the organized special interests and congressional leaders that initially opposed a free trade agreement with Mexico now support Chile's entry into NAFrA or at least are remaining neutral. Chile and Mexico are implementing their own bilateral fire trade pact. Given Chile's enthusiastic support for entry into NAF17A, the Clinton Administration should be able to conclude negotiations on Chile's entry within one year. Australia and New Zealand already belong to a free trade pact known as the Closer Economic Relations Trade Agreement (CER). CER was launched in 1983 and strengthened in 1988. Undei CER, all tariffs and non-tariff barriers to trade were eliminated in 1990. Free trade also exists in the service sector; the agreement allows businesses from each country to compete on an equal basis for government procurement contracts. For its part, Singapore has expressed interest in joining NAFrA. President Clin- ton should offer to commence negotiations as soon as possible.

Offer to begin negotiating a merger between NAFTA and the other existing trade agreements, including the Australia-New Zealand Closer Economic Re- lations Trade Agreement (CER) and the ASEAN Free Trade Area (AFTA). An ASEAN Free Trade Area (AFTA) was agreed in principle by six ASEAN na- tions in January 1993. It would reduce tariffs and eliminate restrictions on virtually all goods among ASEAN members. Tariffs are expected to be reduced to zero per- cent to 5 percent by no later than 2003. Although less comprehensive than NAFrA or CER, it is a major step in the direction of free trade. APEC leaders should build on this and begin negotiating a more comprehensive regional agreement - a Pacific Rim Free Trade Agreement (PRAFrA) that would expand trade for both goods and services to all of its members. Such an agreement would generalize those trade-related measures such as the protecting intellectual property rights, opening government procurement, and securing the rights of for- eign investors that may be not addressed in all of the subregional agreements. PRAFrA would not be a substitute for APEC. Indeed, PRAFrA could be the model from which a broader APEC-wide agreement could later be reached, as rec- ornmended by the APEC advisory board. PRAFrA would embrace the APEC prin- ciple of "open regionalism," allowing any APEC member with a commitment to democratic capitalism to join as its own circumstances warrant.


President Clinton should proclaim American support for APEC initiatives to facilitate and liberalize trade and investment in the region. APEC must remain America's institu- tional economic link to Asia. The November 15 APEC meeting in Indonesia offers Presi- dent Clinton the opportunity to do two things: endorse the general direction of the eight- een member body, and lay the groundwork for a Pacific Rim Free Trade Agreement that expands on agreements already reached by some APEC members. The United States has a vital interest in open markets and free trade around the globe. President Clinton can rightly claim the mantel of fire trader of the APEC conference. Wbile endorsing the meeting's modest objectives, he need not feel constrained to defer future free trade agreements to accommodate the APEC timetable that extends well into the next century. President Clinton should not miss the opportunityto outline a bold vi- sion for expanding markets to his Asian partners.

Robert O'Quinn Policy Analyst

About the Author

Show references in this report

1 Achieving. the APEC Vision: Free and Open Trade in Asia Paciftc, Second Report of the Eminent Persons Group, Asia-Pacific Economic Cooperation, August 1994, p. 5.

2 Association of Southeast Asian Nations.

3 For information on the history and organization of APEC, see Dick K. Nanto, "Asia-Pacific Economic Cooperation (APEC) and the Indonesia Summit in 1994," CRS Reportfor Congress, March 16, 1994, pp. 2-4; and Richard D. Fisher, Jr., "In Seattle, Clinton Should Champion Asian-American Free Trade, Growth and Jobs," Heritage Foundation Asian Studies Center Backgrounder No. 128, November 9, 1993, pp. 2-3. APEC originally had twelve members: the United States, Canada, Japan, South Korea, Australia, New Zealand, and six Association of Southeast Asian Nations (ASEAN) states: Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand. In 1991, the People's Republic of China, Chinese Taipei (Taiwan), and Hong Kong joined, followed by Mexico and Papua New Guinea in 1993 and Chile in 1994. Technically, economies, not countries, are members of APEC, allowing the People's Republic of China, Taiwan, and Hong Kong to join the same organization.

4 Report, p. 1.

5 Report, p. 5.

6 Report, pp. 42-43, see pp. 44-5 1.

7 Report, pp. 52-53.

8 Report, pp. 54-62.

9 Report, pp. 21-22.

10 Report, pp. 23-25.

11 Report, pp. 32-38.

12 "Trade: AFTA Vs. APEC," Asia Week, October 5, 1994, p. 44.

13 Adam Schwarz, "Diplomacy: Local Heroes," Far Eastern Economic Review, October 6, 1994, p. 14.

14 "Trade: AFTA Vs. APEC," p. 44.

15 Richard Borsuk, "APEC Ministers Back Freer Trade, Not Zone Proposal," The Asian Wall Street Journal Weekly, October 10, 1994, p. 2.

16 Stephen G. Brooks, "Regional Economic Integration in the Developing World: Historical Trends and Future Viability," Naval Postgraduate School, Monterey, California, January 1994, pp. 34-35.

17 Ibid. See also Nanto, "Asia-Pacific Economic Cooperation," pp. 5-6, and "rrade: AFTA Vs. APEC," p. 44.

18 See Richard D. Fisher, Jr. and John T. Dori, eds., U.Sand Asia Statistical Handbook 1994 (Washington. D.C: The Heritage Foundation Asian Studies Center, 1994).

19 Performance requirements are rules that force foreign firms to use locally made components in manufacturing their products, to transfer certain technologies to locally owned firms, or to export some proportion of their production.

20 Report, pp. 21-22.

21 See Michael G. Wilson, "Building on NAFIA: Forging an FrA with Chile," Heritage Foundation Backgrounder No. 991, June 27, 1994.