Written by Peter Drysdale.

In the past year perhaps nothing has changed so drastically as the international trade policy environment. Asia’s successful industrialisation grew out of a post-war institutional framework – a system now under threat. Central to trade and economic growth in the region were strong trans-Pacific ties and access to the huge American market during its period of post-war growth and strength. Trans-Pacific ties remain important to robust growth in East Asia. But, after the global financial crisis, China has sought to put in place a new model of growth, less reliant on export-oriented development and more reliant the growth of domestic demand.

While Asia has its challenges, it is also the most dynamic part of the global economy.

The question APEC now confronts is how the world — that has benefited so much from the certainties of economic openness that the WTO and other global institutions have provided — can protect its strategic economic and political interests in face of the change in policy direction of what is still its largest economy. And how can it engage all APEC economies in the same endeavour?

Open regionalism

APEC is a regional organisation defined by its commitment to open regionalism and the multilateral arrangements. Studies show that being a member of APEC is associated with both higher trade volumes not only among APEC members themselves but between APEC members and other countries. APEC is also more open to foreign investment than is the world on average. In the decade past, APEC members’ trade was 32 percent higher against its potential than that of EU members and 10 percent higher than that of NAFTA members. These are large numbers in terms of the volumes of trade involved. APEC has a continuing and strategic interest in new commitments to openness despite the challenges to it. The first priority for APEC continues to be trade liberalisation and economic reform necessary to realise the region’s full economic potential.

But the overarching priority for Asia today is to give voice to leadership that can provide a foundation for underwriting the global regime on which it so utterly relies.  On that foundation alone can Asia successfully engage its largest partner across the Pacific in APEC and protect its own interests in the global economic system.

In this age of policy uncertainty, how can APEC’s agenda be directed to that purpose?  This will not be an easy task as the key industrial economy turns away from support for multilateral efforts. This will require immense diplomatic effort and leadership from Vietnam and its partners this year and beyond.

Priority of global openness

The best strategy is to maintain open trade in the face of the self-harm that protectionist measures inflict on the countries that undertake them; a better strategy still, in coalition with other countries, is to protect the openness in the global trade regime by maintaining the momentum of global liberalisation and economic reform. That was APEC’s mission from the beginning. That is APEC’s mission now.

No one country — even the largest or the second biggest economy and largest trader in the world — can make the difference alone in holding the line on an open trading system. But there is a powerful interest in pushing collective leadership on trade openness from Asia. To many in the older industrial countries, Asia seems the source of many of the world’s most pressing economic problems. Its new industrial strength and competitiveness delivers vast new supplies of cheaper goods to the world’s consumers but it also forces the pace of huge adjustments in industrial structures around the world.

While Asia has its challenges, it is also the most dynamic part of global economy. Hence the intense focus on Asia’s response in this slowly unfolding economic global crisis, because of its size and importance to future global growth and because of what it could deliver to the rest of the world through further opening up. Asia’s economic dynamism depends, in turn, upon success with its own programs of economic reform, programs that will be made more difficult in a hostile external environment with large markets closing up. Confidence in the global trading system is important to Asia. It has underpinned the growth of Asian interdependence, economic prosperity as well as its political security in the past; it will continue to do so in the future. In guarding these strategic global interests Asia thus has this new and critical role to play. And APEC is the theatre in which the action must begin.

A game plan  

So what’s the sensible game plan at APEC 2017? For APEC to remain relevant and credible, its leaders must confront two big, immediate questions.

  • The first is for Asian leaders to assert the priority of multilateral solutions to global trading problems and demonstrate their willingness to act in delivering them.
  • The second is to open straightforward dialogue among APEC leaders on how they might work to do a better job of ensuring that the demonstrable gains from trade are more equitably distributed within their national communities.

The first question might seem the bigger ask, given the urgency with which it must be addressed at the APEC summit and the cold reality that there is no appetite on either side of the US political spectrum for the TPP in any shape or form.

But it’s not.

Already the East Asian members of APEC, including Australia and New Zealand as well as Asian partners outside APEC, are well advanced in negotiation on what can become the largest open regional trading and economic cooperation arrangement in the world — the ASEAN-led Regional Comprehensive Economic Partnership (RCEP). RCEP includes not only the ten ASEAN economies (some not APEC members) but also Japan, Korea, China, India, Australia and New Zealand. It is a coalition of countries with considerable economic weight, able to deliver powerful outcomes and a message to the world on opening trade.

The gains from RCEP

The calculations suggest that RCEP could deliver income gains of between two and nine percent to its members and global trade and income gains to the rest of the world including North America. ASEAN countries would lift their GDP by 3.7 percent. The same calculations also highlight the damage from increasing protectionism in the region that would cause a loss of up to nine percent of ASEAN GDP.

This is meat on the table for the US President and offers balanced trans-Pacific trade engagement between East Asia and the United States. While TPP minus the United States (TPP 11) is still on the table, it’s effectively neutered without the leverage that RCEP can provide. Pining for the TPP is only worthwhile if it is turned to incentivise delivery of some of its potential benefits down the track. To proceed with RCEP, with TPP on the table, is the only credible strategy in Hanoi.

There is too much at stake strategically at this turning point in global economic history for Asia’s leaders to fail to step up and set out its benefits to the region and the world in APEC.

It might seem strange in this time of global crisis for APEC to turn to ASEAN, dogged as it is by perceptions of weakness and vulnerability, weak institutionalisation and distracted by the political and security problems. But ASEAN, with Indonesia at its core, is an experiment in open regionalism that has succeeded. ASEAN’s economic cooperation strategy has persisted despite its perceived weaknesses and slow pace. It is still the theatre for action on regional cooperation within Asia and across the Pacific.

RCEP was designed by ASEAN policy strategists to buttress regional trade reform and lift Asia’s growth potential in the global economy. It is now the only active, credible multilateral endeavour anywhere in the world positioned to deliver significant push-back on the retreat from globalization.

RCEP is not simply another free trade and investment arrangement. It incorporates an important cooperation agenda, an essential element in building capacity for economic reform and mutually reinforcing regional development over time. Its cooperation agenda has an important political and security pay-off that will assist in ameliorating regional tensions and managing relations with the bigger powers, like China, Japan and India (on geo-economic issues such the Belt and Road Initiative for investment in connectivity and geo-strategic territorial issues), and those outside it, like the United States and Europe (in staking out Asia’s interest and claims to ownership in and support of the global public good of an open economy).

This is why the opportunity that RCEP presents to the APEC region is so important today. It is a critical line of defence against fragility in the global political economy. There is too much at stake strategically at this turning point in global economic history for Asia’s leaders to fail to step up and set out its benefits to the region and the world in APEC.

Distributing the gains from trade and growth

The second issue on which APEC leaders need to engage forthrightly is how to deal best with the groundswell, importantly in industrial country polities, against globalisation brought about in part at least by mal-distribution of the gains from international trade and growth.

Maintaining open trade and generating the income gains from trade requires putting in place policies that fix entrenched structural problems, compensate and assist the losers from the gains to the community as a whole. Trade policy alone cannot ensure that the potential benefits of liberalization are fully realised or widely distributed. Complementary policies are needed to manage the impact of reforms (and other economic disruptions), create an environment that spreads the benefits of globalisation, and assist those who lose their jobs to find new work. This will become an increasingly important issue for countries as they develop and their economies mature.

Sharing policy ideas among APEC leaders about the most effective ways of achieving social protection and social security objectives in a way that complements the gains from efficient open economies is now an urgent priority.

Dealing with the big long-term issues

A longer-term issue, on which APEC needs to begin discussion in Hanoi, is about how to re-vivify the forum as a primary platform for launching initiatives to deal with pressing regional economic issues. One aspect of this question is organisational and one aspect substantial.

The organisational issue is that while APEC has done a better job year-by-year in entrenching the practice of cooperation at an operational level, through senior officials meetings, its key committees and its myriad workshops, in recent times it has done far less well in taking strategic initiative and defining the way forward on the big economic cooperation challenges of the day. One way to overcome this weakness is for leaders to use the high-level Ministerial Task Force approach to forging cooperation agendas on new and pressing issues. This requires commissioning Task Forces to prepare the ground for Ministerial meetings on priority issues.

On substance, take the priority issue of energy security in an age of revolution in energy technology. APEC can be the launching pad for a major ministerial meeting to begin dialogue across the region on energy cooperation.  Or APEC can take the lead in establishing a regional framework for ministerial dialogue on how best to deliver the investment needed to fill the huge infrastructure gaps across the region. In launching such initiatives, APEC should use its flexibility to include the East Asian Summit group in its deliberations so that there is effective, broad trans-regional cooperation.

In this way, APEC can re-capture the initiative in regional cooperation and help shape sustainable and equitable development of the Asia Pacific economy.

Conclusion

This is a testing time for APEC and Vietnam’s leadership of the summit. The core of APEC’s founding principles and the lifeblood of its great achievements in sustaining regional prosperity and underpinning political security are under existential threat. These challenges must be met.

There is also opportunity to bring a positive agenda to the table: an agenda that 1) defines the way forward on a new wave of regional economic reform and economic cooperation that simultaneously boosts to resilience of the global trading system 2) engages the US on pushing back against the forces that drive anti-globalisation and 3) takes initiative in shaping longer term strategic cooperation on energy policies and the framework for infrastructure investment.

All three will help to secure APEC’s and the region’s future.

Peter Drysdale is Emeritus Professor in the Crawford School of Public Policy at The Australian National University, Head of the East Asian Bureau on Economic Research and Editor-in-Chief of East Asia Forum. He is recognised as an intellectual architect of APEC. Image credit: CC by President of Russia.

 

 

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