In Praise of Lesser Evils
Can Realism Repair Foreign Policy?
Contrary to most expectations about regional economic organizations, the Asia-Pacific Economic Cooperation (APEC) forum is poised to become a driving force for worldwide trade liberalization. There is already strong evidence for this conclusion: the additional liberalization offers that APEC developed at its Seattle summit in November 1993 made an important contribution to the subsequent success of the Uruguay Round, as did the message to countries outside the Asia-Pacific region that APEC represented a feasible alternative to global progress if the GATT talks were to fail. This development may be the most important of several promising initiatives launched at Seattle.
As envisioned by its Eminent Persons Group (EPG), whose proposed vision for APEC was broadly endorsed at Seattle, APEC would become neither a customs union like the European Union nor a free trade area like that covered by the North American Free Trade Agreement (NAFTA). APEC would support every effort in the GATT, as it did to help achieve success in the Uruguay Round. But APEC would also try to achieve regional agreement on issues that could not yet be resolved at the global level. It would address both those that had been tried in the GATT but failed and those that had not yet found their way onto the global agenda. It would then offer to open its accords to other countries, hopefully the entire GATT membership, that were willing to accept their obligations. APEC is, in essence, considering a wholly new model of regional economic cooperation: a steady ratcheting up of trade liberalization between the regional and global levels that would confirm its dedication to "open regionalism."
The initiatives begun at Seattle, in addition to benefiting the Asia-Pacific region, could thus be the catalysts for new global trade negotiations to maintain the momentum of liberalization. This is crucial because extensive protectionist backsliding marked the lengthy hiatuses after completion of the earlier GATT rounds in the late 1960s and late 1970s. The recent success of the seven-year-long Uruguay Round avoided the devastation that its failure would have wreaked on world trade and the fragile world economy. But protectionist sentiments are still quite evident in many quarters and could bloom in a vacuum as they have done so often in the past.
APEC’s uniqueness as a regional economic organization and its potential leverage on the direction of world trade derive from the magnitude of economic activity in the region, the economic strategies of the participating nations and the attitudes of their leaders. A close look at APEC’s Seattle meetings and the strategic considerations of its member states’ leaders illustrate these points.1
Both the Asian and North American members fear that further erosion of the global trading system could undermine their strategies of export-led growth. Both groups worry about inward-looking regionalism in Europe, and Asians worry about similar trends in the Western Hemisphere as NAFTA takes effect and considers expanding southward. Asians are concerned that American withdrawal from the region could trigger instability there, and the United States, having fought three wars in Asia in the last half century, shares the goal of avoiding new regional tensions.
Both groups thus seek to avoid any division between the two sides of the Pacific. They draw the obvious conclusion that firm institutional ties could help obviate such a risk. Hence the leaders in Seattle began the process of converting APEC from a purely consultative body into a substantive international institution.
THE SPECIFIC RESULTS
Even more noteworthy than the repeated references in the leaders’ "vision statement" to their new Asia-Pacific "community" was the series of specific decisions made at Seattle. First, as noted, they agreed to an extensive package of additional trade liberalization offers to help bring the Uruguay Round to a successful completion. The success of the round promoted the cardinal APEC goal of restoring the credibility and effectiveness of the global trading system.
Second, the leaders in essence decided to hold annual summits. Indonesia, at the behest of all participants, offered to host a summit in 1994. Japan has publicly announced that it will probably hold one when it assumes the chair in 1995. This is a radical change from as recently as 1990, when some countries did not even want to hold annual ministerial meetings of APEC.
The decision to hold annual summits assures that the leaders will continue to focus on APEC and get to know each other better, that the president of the United States will travel to Asia at least once a year, that all APEC members will broaden their perspectives and that ministers and officials will be fully energized to carry out their leaders’ instructions from Seattle.
Moreover, the leaders now have a major personal stake in the success of the APEC initiative. Hence they will take its evolution into account when making decisions on related matters. President Clinton, who made a considerable commitment to APEC at Seattle and views improving economic and political relations in the Asia-Pacific region as one of his major foreign policy initiatives, has considered the implications for APEC when deciding such issues as whether to maintain tariff preferences for Indonesia. The upgrading of the APEC process should help in resolving bilateral disputes in the region; conversely, the need to resolve such disputes (such as the current United States-Japan trade wrangle) more effectively adds to the case for rapid upgrading of the process.
Institutionalizing the summits should increase the momentum of community-building in the region. The Seattle sessions showed that the leaders were far more ready than their ministers, who in turn were far more ready than their senior officials, to adopt and pursue visionary goals. Heads of government can rise above the narrow and compartmentalized concerns that derail meaningful progress. Their continued engagement augurs well for the future of APEC.
Third, meetings of APEC ministers across a number of areas of responsibility began this year. The leaders directed their finance ministers to get together to discuss macroeconomic and monetary issues. Environmental ministers met in the spring. Trade ministers will convene to discuss the implications of the conclusion of the Uruguay Round and the future agenda of the new world trade organization. Industry ministers will explore the prospects for small and medium-sized businesses. The proliferation of high-level sessions will nurture the Asia-Pacific identity and a habit of cooperation.
Fourth, the ministers decided that "those recommendations [of the Eminent Persons Group] closely linked to ongoing work should be implemented promptly." One minister interpreted that directive to include proposals for mutual recognition of product standards and domestic testing and monitoring procedures, cooperation in national competition (including antidumping) policies, avoiding region-wide problems from rules of origin included in the various subregional agreements (including NAFTA), annual ministerial review of the entire "trade facilitation" program, and technical cooperation in promoting infrastructure projects such as higher education and telecommunications networks. The details are to be worked out this year.
The leaders themselves agreed to develop an APEC investment code for adoption at their 1994 meeting. The code would initially be a set of voluntary, nonbinding principles designed to protect and promote private investment in the region, one of the driving forces in its economic progress to date. The recent decline in investment flows to several Asian countries, including Indonesia and Korea, have heightened interest in such initiatives, which would enhance the attractiveness of the region to private investors. Adoption of an investment code would require APEC to make another firm decision, as it did with the trade liberalization package endorsed in Seattle for the Uruguay Round, and thus continue its conversion into an operational body.
The summit under Indonesian leadership will likely place considerable emphasis on developmental issues of greatest concern to the group’s less industrialized members. This is all to the good. The Eminent Persons Group recommended an extensive program of technical cooperation within APEC, what the Association of Southeast Asian Nations (ASEAN) countries call "resource pooling", to improve the region’s economic infrastructure and assure that all members benefit fully from its progress. New investment in human resources should be a major part of such an effort and was presaged in Seattle by the leaders’ decision to create an APEC Education Program. The leaders also decided to create a Technology Transfer Exchange Center, to facilitate the exchange of technology and technology management skills among APEC members, and an APEC Business Volunteer Program to promote human resource development.
Fifth, the leaders clearly stated that they "welcomed the challenge . . . to achieve free trade in the Asia-Pacific" (although they did not endorse the EPG recommendation to commit themselves to decide by 1996 on a plan and timetable to do so). APEC is now wrestling with the same "broadening versus deepening" debate as the European Union and has come to the same conclusion: expanding the membership should be deferred until the organization can decide on its substantive future. To underscore that position, APEC declared a three-year moratorium on new members (after admitting Mexico and Papua New Guinea immediately and Chile in 1994).
THE FUTURE AGENDA
The Group of Seven industrialized nations are supposedly highly homogenous and have been meeting for almost 20 years. APEC includes advanced industrial countries (including the world’s largest), newly industrializing economies at a middle stage of development and less developed countries. Its leaders’ conference was proposed only in July and it focused on an EPG report that was formally submitted only in October. Yet the results of Seattle compare favorably with recent G-7 summits.
To achieve these results, several serious concerns had to be dispelled. Thus the presentation of the EPG report to the ministerial meeting emphasized "three noes." The EPG was not proposing a community like the European Union, with extensive economic integration or even a customs union, but rather a community in the generic sense that translates into "big family" in Chinese. Nor was it proposing a discriminatory free trade area, but rather "free trade in the area" achieved to the maximum extent possible through multilateral liberalization. The EPG did not recommend precipitate action, nor indeed any substantive timetable, but only that the fundamental principles be decided within the next three years.
The current period illustrates how the proposed "ratcheting up" strategy could work. The APEC countries made a major and ultimately fruitful effort, at Seattle and subsequently at Geneva, to promote a successful Uruguay Round. But a number of key issues, such as new rules for investment and liberalization of specific services sectors, largely fell out of the final GATT package. APEC could now address these topics and, if it could reach agreement on them, bring its pacts back to Geneva for broader adherence. Likewise, APEC could anticipate issues that will need to be addressed in GATT in the future, such as trade-environment linkages and competition policies. It could seek to develop regional agreements that would become precedents for dealing with the issues at the global level.
Rather than a stumbling block, APEC could thus be a building block, perhaps the leader, in worldwide trade liberalization. Such collective leadership is needed in the post-Cold War period with the United States no longer willing or able to provide it alone. Both the North American and Australia-New Zealand free trade areas have already provided several useful precedents for global negotiations, and APEC could do so systematically. The successful conclusion of the Uruguay Round, by reestablishing the credibility of the GATT in regulating relations between regional arrangements, makes the world much safer for regionalism and hence for the proposed approach.
The strategy would embody the APEC mantra of "open regionalism." It could avoid preferential treatment altogether on some issues, perhaps including competition policy and new industrial standards. It could do so when liberalizing in sectors where the APEC countries dominate world trade, such as computers. Individual APEC members could be permitted to extend their concessions to nonmembers, as Mexico has done with some of its investment obligations under NAFTA.
In general, however, the strategy would open APEC arrangements only to nonmember countries that undertake corresponding obligations. This procedure is increasingly employed in the GATT through codes agreed to during the Tokyo Round in the late 1970s and during the Uruguay Round. It avoids "free riding" by outsiders, including large trading entities such as the European Union, which would run afoul of domestic political realities in the United States and most other APEC members. Every subregional trade arrangement within the Asia-Pacific area, including the ASEAN Free Trade Area (AFTA), which like NAFTA came into effect on January 1 of this year, as well as the Australia-New Zealand and North American entities, has limited all benefits to member countries and has not offered to extend them to outsiders.
Nonmembers would have no incentive to negotiate multilaterally if they could simply sit back and receive the benefits of APEC liberalization without making concessions of their own. The use of "temporarily conditional MFN" uses the negotiating leverage available to APEC because of its large economic weight to obtain maximum liberalization around the world.
A key question is whether APEC should pursue this strategy only if all its members can agree to do so together, or whether individual countries should proceed when they are ready. One way to implement the latter approach would be to extend NAFTA to individual Asian countries or groups of countries, such as ASEAN. The EPG concluded that such a course would be inferior to progress encompassing all of APEC because it would generate new discrimination within the region during a possibly long transition period. In addition, some view it as "imposing a North American model on Asia."
Nonetheless, Singapore Prime Minister Goh Chok Tong announced in Seattle that his country would like to join NAFTA. Thailand has indicated its interest in studying an AFTA-NAFTA link. Korea has also sought association with NAFTA.
NAFTA is likely to open its doors to Chile and perhaps other countries in Latin America over the next few years. The upcoming western hemisphere summit could add impetus to this prospect. It will be essential to progress at least as rapidly toward Asia-Pacific liberalization to allay concerns that the United States is giving priority to the western hemisphere. Any such perception could intensify pressures for East Asia to respond with arrangements excluding North America, thereby dividing rather than uniting the Asia-Pacific region. The United States must indicate its intentions in this regard when informing Congress, by July 1 under current legislative requirements, of its plans for future trade negotiations. All NAFTA and APEC members will have to address these issues in the near future.
APEC’s development will be an intellectually fascinating and pragmatically critical test of whether economic interdependence can override seemingly major national differences. For example, APEC members cover virtually the entire spectrum of economic development. Japan has a per capita income of almost $30,000 (at current market exchange rates), the United States is at about $20,000. The newly industrializing countries of East Asia cluster at $5,000-10,000. Some of the developing nations of Southeast Asia (including, at market exchange rates, China and Indonesia) fall below $1,000 per capita. Thus a successful APEC would end the "North-South conflict," as NAFTA has begun to do and which its further extension into South America would continue.
A successful APEC would also destroy the notion that different civilizations are more likely to confront each other than to cooperate, for APEC includes at least five of Samuel Huntington’s distinct groups. China and others form the core of his Confucian civilization. Indonesia, with the world’s fourth-largest population, and Malaysia are Islamic. Japan is, according to Huntington, an entirely separate culture. The United States, Australia, New Zealand and Canada are Western. Mexico and Chile are Latin American. One might add that part of Canada, including its current prime minister, possesses a distinct French culture.
AT THE CENTER OF A NEW ERA
The historically unique current period, at the end of the Cold War and with new power configurations emerging in both the security and economic spheres,2 offers enormous opportunities for both the United States and the Asian countries. The Asians could sharply reduce the risk of an American withdrawal which would jeopardize both their chief export market and their national security. President Clinton, by convening the summit at Seattle and placing Asia at the center of his foreign policy, has opened the door to creating institutional ties that would link countries across the Pacific as the postwar institutional network linked countries across the Atlantic. Such ties would provide America with access to the world’s most dynamic economies and reduce the risk of future instability requiring American intervention.
At the end of the second global conflict of the twentieth century, World War II, Europe and the Atlantic were the focus of world events. The Atlantic nations created a series of institutional arrangements, including NATO, the Organization for European Economic Cooperation, the Marshall Plan and the European Economic Community, in an effort to preserve the newly won global peace and prosperity. Half a century later, it is clear that those arrangements were a stunning success.
We are now at the end of the third global conflict of the century, the Cold War. Asia and the Pacific are now at the center of world affairs. Thus the time may have come to create an institutional network to link the nations on the two sides of that ocean in an effort to sustain global peace and prosperity for the decades ahead. APEC can play a major role in that process.³
1 C. Fred Bergsten, "The World Economy After the Cold War," Foreign Affairs, Summer 1990.
2 This model for APEC and the approaches described in succeeding paragraphs are developed in A Vision for APEC, Report of the Eminent Persons Group to APEC Ministers, October 1993. The report was unanimously agreed upon by the 11 members of the group, who were appointed by their governments but participating wholly in their individual capacities. The group includes businessmen, economists, former government officials and political leaders.