by C. Fred Bergsten, Peterson Institute for International Economics
© Institute for International Economics
“Open regionalism” represents an effort to resolve one of the central problems of contemporary trade policy: how to achieve compatibility between the explosion of regional trading arrangements 1 around the world and the global trading system as embodied in the World Trade Organization. The concept seeks to assure that regional agreements will in practice be building blocks for further global liberalization rather than stumbling blocks that deter such progress.
“Open regionalism” has been adopted as a fundamental principle of the Asia Pacific Economic Cooperation (APEC)2 organization from its creation in 1989. The 18 nations of APEC account for about one half of world output and world trade. The institution includes the three largest economies in the world — the United States, Japan and China. APEC decided at its Bogor (Indonesia) summit in November 1994 to achieve “free and open trade and investment in the region” by 2010 for its industrialized members, which account for about 90 per cent of its trade, and by 2020 for the rest; in light of APEC's size, this is potentially the most far-reaching trade agreement in history (Bergsten, 1995). APEC is thus a major factor in the world trading system and its embrace of “open regionalism” has propelled the concept into global prominence.
Yet neither APEC nor any other official body has defined “open regionalism.” There has been no explicit application of the principle to date. Indeed, there are several competing notions of what it means and how it should be implemented. There is thus considerable confusion about the implications, and even the relevance, of the basic idea
This article addresses this set of questions. After sketching the contours of the basic debate over “globalism vs. regionalism,” it will trace the origins and evolution of the effort to reconcile potential conflicts between them via “open regionalism.” It will then present five alternative definitions of the concept and the arguments for and against each, concluding with my own recommendations for how to proceed. I will draw throughout on the extensive and unanimous treatment of the issue by APEC's Eminent Persons Group, especially in its second report in August 1994 entitled Achieving the APEC Vision: Free and Open Trade in the Asia Pacific. “Open regionalism,” however, could—and, in my view, should—be adopted as well by other evolving regional arrangements, such as the proposed Free Trade Area of the Americas (FTAA)3 and any new North Atlantic Economic Community.4
Building Blocks or Stumbling Blocks?
There are two basic schools of thought concerning the relationship between multilateral and regional trading arrangements. Those who advocate total reliance on the multilateral process express three main concerns (Bhagwati and Panagariya, 1996). First, they note that regional agreements divert trade by creating preferential treatment for member countries vis-a-vis nonmembers. In addition to differential tariffs, members may benefit from preferential rules of origin and regional content requirements. The critics dislike any trade diversion, even if it is offset by the trade-creating effects of the regional arrangements, but they also argue that the impact of preferences may more than offset the trade-creating benefit of the regional liberalization so that the net result is trade diversion. Moreover, they worry that an individual member of a preferential arrangement could suffer from adverse income distribution effects that arise from the arrangement's redistribution of tariff revenues.
Semantics will be important throughout this analysis and it is important to note here that the critics of regionalism frequently label its manifestations as “preferential trade agreements” (PTAs) in contradistinction to “free trade agreements” (FTAs). The criticism obviously would not apply to arrangements that, like APEC to date, have not created any such preferences. The critics rightly assert, however, that all previous FTAs have been PTAs.
The second concern of the critics is attention diversion. They argue that countries may lose interest in the multilateral system when they engage actively in regional initiatives, stalling the evolution of the former and even threatening its vitality.
Particular concern has been addressed to the sharp shift in trade policy by the United States since the early 1980s. Prior to that time, the United States placed overriding priority on the global regime. It refused to participate in regional initiatives itself. It generally looked askance at regional initiatives by others, though it accepted the creation and steady evolution of the European Communities for essentially political reasons.5
Since the early 1980s, however, the United States, has simultaneously pursued global liberalization and a number of regional initiatives. It negotiated bilateral FTAs with Israel and Canada, converted the latter into NAFTA with the addition of Mexico, and promoted far-reaching free trade agreements in the Asia Pacific region via APEC (as noted above) and in the Western Hemisphere via a Free Trade Area of the Americas. Since the United States has been the perennial (and sometimes sole) leader of global liberalization, those who fear adverse effects from regionalism have focused much of their criticism on this policy shift by the United States.
A third concern about regionalism is its geopolitical impact. Some students of history note that, in earlier eras, regional trading arrangements (and economic blocs more broadly) may have contributed to political and even military clashes among nations. The leading examples are the United Kingdom's Imperial (later Commonwealth) Preferences and the closed economic zone created in Central Europe by Nazi Germany in the 1930s. Contemporary critics of regionalism do not envisage such extreme outcomes but do worry that extensive and intensive regional ties may lead to irritations and even conflicts that range beyond economics to broader spheres of international relations.
The proponents of regionalism take opposite views on each of these issues (Bergsten, 1996a and 1996b). First, they argue that regional arrangements promote freer trade and multilateralism in at least two senses: that trade creation has generally exceeded trade diversion, and that the regionals contribute to both internal and international dynamics that enhance rather than reduce the prospects for global liberalization. The internal dynamic is particularly important for developing countries: regional commitments, which can be negotiated much faster than global pacts, lock in domestic reforms against the risk that successor governments will try to reverse them. Internationally, the regionals often pioneer new liberalization ideas that can subsequently be generalized in the multilateral system.6 Moreover, regional liberalization creates incentives for other regions and individual countries to follow suit and thus to “ratchet up” the global process.
Second, the proponents of regionalism note that it often has important demonstration effects. Regional initiatives can accustom officials, governments and nations to the liberalization process and thus increase the probability that they will subsequently move on to similar multilateral actions. “Learning by doing” applies to trade liberalization as well as to economic development itself, and can often be experienced both more easily and more extensively in the regional context with far fewer negotiating partners.
Third, the supporters of regionalism contend that it has had positive rather than negative political effects. Trade and broader economic integration has created a European Union in which another war between Germany and France is literally impossible. Argentina and Brazil have used Mercosur to end their historic rivalry, which had taken on nuclear overtones in recent decades. Central goals of APEC include anchoring the United States as a stabilizing force in Asia and forging institutional links between such previous antagonists as Japan, China and the rest of East Asia.
The supporters of regionalism note that Article 24 of the GATT, and now the WTO, explicitly permits regional agreements and thus acknowledges their compatibility with the multilateral trading system. To be WTO-legal, such agreements must meet three criteria: they must cover “substantially all” trade of member countries, they must avoid raising new barriers to nonmembers, and they must achieve free trade among members by a date certain (normally not to exceed ten years from the start date). The GATT and WTO have been largely ineffectual in certifying and monitoring implementation of these criteria but it is widely agreed that the most important regional pacts (the EU and NAFTA) have wholly or largely met them. Hence the major regionals have been largely justified in claiming their “full compatibility with the multilateral system.”
It is impossible to decisively resolve the “regionalism vs. multilateralism” dispute. Most analyses of most FTAs, including most importantly by far the European Union, conclude that trade creation has dominated trade diversion — but the state of the art does not permit foolproof results and we cannot be sure that future regional arrangements, such as Mercosur, will have similarly benign results. Most renditions of the recent history agree that regional and global liberalization have proceeded together, that they have tended to reinforce each other, and that the United States has continued to provide global leadership for multilateral liberalization while (and sometimes through) pursuing its regional initiatives — but counterfactuals can be constructed that would produce alternative judgments. The balance of evidence suggests that the interactions have been largely positive throughout the postwar period (Kahler 1995, 6 and 9) but this conclusion rests on judgment rather than on definitive analysis.
The only irrefutable conclusion is that the interrelationship between regionalism and globalism depends on the management of the process by the key countries involved. If they seek constructive synergism between the two, the historical record suggests that they can achieve it. If they wish to pursue one at the expense of the other, the outcome in earlier eras reveals that is quite possible too.7 The inherent dynamics of the process seem to be sufficiently balanced that the policy decisions of the participants themselves are determinative.8
Open Regionalism to the Rescue?
It is at this point that open regionalism enters the debate. The concept represents an effort to achieve the best of both worlds: the benefits of regional liberalization, which even the critics acknowledge, without jeopardizing the continued vitality of the multilateral system. Indeed, proponents of open regionalism (including the author9) view it as a device through which regionalism can be employed to accelerate the progress toward global liberalization and rule-making.
APEC embraced the concept at its inception in 1989 and has championed it ever since. The Bogor Declaration “to achieve free and open trade and investment in the Asia-Pacific” by a date certain emphasized that APEC “will achieve this goal in a GATT-consistent manner” and the “we wish to emphasize our strong opposition to the creation of an inward-looking trading bloc that could divert from the pursuit of global free trade.” The APEC leaders at Bogor added that “the outcome of trade and investment liberalization in the Asia-Pacific will not only be the actual reduction of barriers among APEC economies but also between APEC economies and non-APEC economies.”
It is noteworthy that Asia has been largely devoid of regional trading arrangements. China, Hong Kong, Japan, Korea and Taiwan — five of the world's largest traders — are the only major economic powers that have participated in no regional agreements (prior to the creation of APEC, which of course includes non-Asian countries as well). The only subregional agreements that include Asian countries are the ASEAN Free Trade Area (AFTA), which became a serious economic enterprise only in the middle 1990s (to some extent to avoid being “scooped” by APEC itself), and the Australia-New Zealand agreement. The Asian countries, led by Japan and Korea, have thus placed more exclusive emphasis on the global trading system than have almost any of the WTO's other members.
Another important element of trade liberalization in Asia has been its unilateral character. Much of the area's reduction in barriers has been implemented by countries in the region as part of their national development strategies without reference to international negotiations (at either the global or regional levels). Indonesia, for example, announces annual liberalization programs and has applied tariffs that average less than 15 percent compared with its bound WTO tariff average of about 40 percent. Some of the “unilateral liberalization” in Asia, especially in Japan and Korea, represented a response to strong pressure from the United States and other trading partners but was nevertheless undertaken outside of any normal type of reciprocal negotiations.
These patterns of trade and trade policy reveal a strong preference, and tendency, in Asia to avoid discrimination and discriminatory trading arrangements. The United States, with its global political interests and trading patterns, has historically adopted a similar view. Hence the espousal of open regionalism, as a means to avoid new conflicts between regional and global progress, evolved naturally as a guiding principle of APEC.
No other regional arrangement has enunciated such a philosophy. The European Union, the North American Free Trade Area, Mercosur, and the proposed Free Trade Area of the Americas have, to the contrary, emphasized their regional exclusivity. At the same time, however, these and the other existing regionals have proclaimed their fealty to the global system and asserted their consistency with Article 24. All of them have participated fully in the multilateral GATT rounds that have taken place during their existence. Whether APEC turns out to be any different in practice, as well as in its rhetoric, depends on the definition of “open regionalism” and the future behavior of the organization.
Defining "Open Regionalism": Five Options
There are at least five possible definitions of “open regionalism.” All have been seriously advanced by participants in the APEC process or students of it. It will turn out that all five can be implemented simultaneously as well as independently but I will analyze each separately at the outset in an effort to order and clarify the debate among them.10
The first proposed definition of “open regionalism” is open membership in the regional arrangement. Any country that indicates a credible willingness to accept the rules of the institution would be invited to join. The trade-liberalizing effects of the group would thereby expand to an increasing number of countries (and eventually, at least in principle, to the entire world). The most specific proposals of this type were the “GATT plus” ideas of the 1970s and 1980s (Atlantic Council, 1976 and Hufbauer, 1989), which urged the OECD countries to adopt new liberalization measures that would range far beyond those just agreed in the Kennedy or Tokyo Rounds and then offer accession to the club for anyone prepared to accept the obligations.
This approach would of course convert a “regional” arrangement into something much broader and thereby at some point give up its regional character — which is often viewed as having merits of its own, political as well as economic. In addition, such an evolution would ultimately evolve into a new global institution when we already have the WTO. No explicitly regional arrangement has even taken such a course.
A limited but still fairly expansive version of this option is a more practical possibility, however: APEC could accept all countries that are either Asian or border on the Pacific. It already includes countries that are not Asian (Canada, Chile, Mexico, United States) or are not on the Pacific (unless the South China Sea is considered part of the Pacific) so could hardly argue that countries must be both Asian and Pacific to qualify. A dozen countries have already applied, including such major states as India and Russia, and the Subic summit in November 1996 directed APEC officials to develop criteria for considering such bids.
Membership is of course not necessary for nonmembers of a regional arrangement to escape discriminatory economic treatment, as the subsequent options will indicate. Moreover, broadening of the membership of any regional group inherently complicates the process of deepening its integration. This is a particularly crucial consideration for APEC at this early stage of its development, when it is attempting to implement the far-reaching free trade commitment of the Bogor Declaration. As a result, the Seattle summit in 1993—even prior to Bogor—placed a three-year moratorium on future membership to enable APEC to focus on its substantive agenda. But the possibility of inviting new members was discussed again in 1996 and, as noted, criteria for that contingency are now to be developed.
The history of the European Union is instructive in this regard. Europe has faced the “broadening vs. deepening” choice at three key points in its history. At each juncture, it chose to deepen first and broaden later: completing the Common Agricultural Policy before accepting the United Kingdom and others in the early 1970s, completing the Single Internal Market before adding three more members in the early 1990s, and now attempting to forge Economic and Monetary Union before expanding to Central and Eastern Europe in the early 21st century.
In each case, however, the EU ultimately extended (or is likely to extend) full membership to its nearest neighbors—and full membership is likely to reach about 25, from the original 6, within the next decade. In the meanwhile, it worked out interim arrangements—notably the EC-EFTA linkage in the 1960s and the European Economic Area in the 1980s—to obviate most of the discriminatory impact of its preferential trade arrangements (with the notable exception of agriculture) on neighboring countries. It also concluded a series of association agreements with a next tier of countries, including those encircling the Mediterranean and most of its members' former colonies, to limit the effects on them. It is now “going global” to a degree, with proposed trade agreements with Mercosur and others in Latin America and with its Asia-Europe Meetings (ASEM) that attempt to counter APEC in the Pacific.
The European Union has thus chosen the “expanded membership” option as a partial method for opening itself and avoiding discrimination against those countries that are most affected by its preferences. The analogy for APEC would be eventual inclusion of other countries in the region, however defined, perhaps after transitional periods with association agreements à la Europe.11 This would only become necessary, however, if APEC were to actually implement preferential trading arrangements of its own. It has not done so to date. It may never do so, depending on which of the other “open regionalism” options is chosen.
The second “open regionalism” concept is unconditional most-favored-nation (MFN) treatment. APEC trade liberalization would be extended unconditionally to all of the members' trading partners. No new preferences or discrimination would be created.
This concept of “open regionalism” is viewed by its advocates as the pure, indeed only faithful, definition thereof (Elek 1995, 1996). It was advocated or implied in some of the early academic and private-sector blueprints for APEC (PECC, 1992).
The unconditional MFN approach is linked to, and derives largely from, the parallel emphasis of some in the region on unilateral trade liberalization with its inherently unconditional MFN character. Indeed, one of the original proponents of this approach called for APEC to become an “Open Economic Association” with “association” indicating a continued reliance on unilateral actions (rather than negotiations) which in turn would generate “openness” via unconditional MFN (Yamazawa, 1992). This strategy relies on the economic self-interest of individual countries in liberalization and, to the extent that it concerns itself at all with the behavior of trading partners, relies on peer pressure and demonstration effects to encourage them to follow suit (Garnaut, 1994).
Unconditional MFN has several attractions for APEC. It would obviate the need to work out preferential rules of origin and detailed plans to qualify as a “free trade area” under Article 24 of the WTO. It would avoid charges from around the world that the organization was violating its own pledge to eschew new preferential and discriminatory practices. It would thus avoid the risks of creating new trade conflicts and violating the fundamental interests of all APEC members in maximizing the strength of the global trading system and its institutions.
There are both economic and political drawbacks to the unconditional MFN option, however. The economic cost is that it would forego the use of APEC's huge negotiating leverage, based on its formidable size, to negotiate reciprocal liberalization by nonmember trading partners. APEC's “giving away” its liberalization could reduce, rather than increase, the prospect that other countries (or regional arrangements, notably the EU) would respond in kind. If others' trade politics are driven primarily by mercantilist rather than welfare concerns, as often seems to be the case, extension of unconditional MFN by APEC could throw away an opportunity to double the global benefits of APEC's own liberalization by conditioning it on parallel actions by others.12
The political cost of unconditional MFN is that its “free rider” implications, especially for sizable outsiders such as the EU, could doom the prospects for achieving APEC's liberalization goals within some of the member countries themselves. This is certainly true for the United States, whose political economy of trade liberalization rests heavily on reciprocity conditions that mobilize exporters to counter the resistance of import-competing industries and workers (Destler, 1995). Many other APEC members that are veterans of GATT/WTO negotiations, including Canada and a number of developing countries, find it valuable (or even essential) to cite such demonstrable benefits for liberalization to overcome its domestic opponents. An APEC-wide decision to offer global access to its liberalized markets on an unconditional basis could thus severely limit, or even abort, its progress in implementing the Bogor program.13 14
These problems with unconditional MFN have led to a third proposal: conditional MFN extension of APEC liberalization. APEC as a group would offer to generalize its reductions of barriers to all nonmembers that agreed to take similar steps. The prospects are extremely good that outsiders would accept the offer in order to avoid being discriminated against by countries that account for half the world economy. Their doing so would then greatly expand the scope of the liberalization initiative and substantially enhance the global economic benefits. If the bulk of the nonmembership accepted the offer, the extension of APEC liberalization would presumably take place in the WTO and essentially represent a multilateral liberalization. No regional arrangement in history has ever made such an offer.
There are two risks to this strategy. One is that other countries would refuse the APEC offer, at least for a time, so that APEC would — despite its desire to the contrary — have to become a preferential arrangement for at least a temporary period with resultant trade diversion on a substantial scale. The other is that, even if nonmembers agreed to reciprocate, they would resent “being handed a fait accompli by APEC in which they had no voice” and that overall relationships, including future economic ties, would be hurt rather than helped.
To obviate these risks, while still seeking the advantages of the basic approach, APEC has been evolving toward a subtle variant that might be dubbed the “threatened” or, more diplomatically, “implied” conditional MFN suboption. At Seattle in November 1993, less than a month before the target date for completing the Uruguay Round, APEC held its first summit and agreed to create “a community of Asia Pacific economies”. It thus raised the prospect of a huge new trading bloc that could become a focal point for future liberalization efforts, perhaps on a preferential basis, if the GATT system were severely wounded by a failure of the Round. Key European negotiators subsequently revealed that the APEC summit was the key element in bringing the GATT talks to success “because it revealed that you had an alternative and we did not.”15 The implication that future APEC liberalization might be conducted on a preferential basis played a central role in achieving a major global agreement.16
In a similar vein, the APEC summit at Subic in November 1996 endorsed elimination of all tariffs on information technology products by 2000 and called on the subsequent WTO Ministerial Conference in Singapore to globalize this Information Technology Agreement (ITA). There was again an implication, though never an explicit indication, that APEC might proceed on its own if a “critical mass” of the entire WTO membership (including of course the EU) was not prepared to participate.17 The outsiders responded positively and APEC again displayed a major leadership role in simultaneously moving toward “free trade in the region” and promoting global liberalization.
In both these cases, the APEC countries (notably the United States) negotiated simultaneously with the key nonmember countries while doing so among themselves. Indeed, negotiations with the EU were undoubtedly more intensive than those within APEC itself. This obviated any sense of fail accompli that might otherwise have arisen.
One could nevertheless argue that the “implied conditional MFN” approach is closer to actual APEC behavior to date than any of the other options. It has never been formally agreed, however, and its “application” has only been implicit. No explicit decision has been required, of course, because no specifically “APEC liberalization” has yet been undertaken.18
A fourth definition of “open regionalism” would be for the APEC members to simply continue reducing their barriers on a global basis while pursuing their regional goals. This could be done by continuing the past practices of unilateral liberalization and multilateral negotiations in the WTO. Both approaches avoid creating new discrimination so could be viewed as faithful renditions of “open regionalism.” As noted earlier, all regional arrangements have in fact participated in the series of postwar GATT negotiations so have de facto adopted this approach.
Article 24 of the GATT requires only that qualified regional arrangements not increase their barriers to nonmembers. Hence a pledge to reduce those barriers would clearly go beyond the minimum. No other regional arrangement has ever made such a pledge. Prime Minister Mahathir of Malaysia has proposed that APEC adopt such a policy in order to assure the world that it does not intend to limit itself to regional initiatives in the future.
The impact of faithfully implementing such a pledge cannot be determined a priori. On the one hand, it could represent a weaker definition of “open regionalism” than the other options because intra-APEC liberalization could proceed more quickly than multilateral liberalization and, on balance, generate new trade diversion away from outsiders. On the other hand, successful APEC leadership of an initiative to achieve global free trade by the same target dates as for APEC itself would permanently avoid any APEC discrimination against outsiders (Bergsten, 1996a). This option could indeed be deployed to achieve the broadest possible definition of “open regionalism”—simultaneous achievement of free trade in the region and the world. The outcome would again turn on the policy decisions of the key countries.19
All of the options discussed so far focus on tariffs and other traditional border barriers. If conducted on an APEC-wide basis, liberalization of such barriers would force the member countries to decide how to treat nonmembers.
An alternative approach is to ignore these traditional border measures and work on facilitating trade through nontariff and nonborder reforms (Lawrence 1996, Yamazawa 1997). Such initiatives could be narrowly focused, though still valuable in enhancing trade, such as customs harmonization and mutual recognition of product standards. They could also be quite far-ranging, as with cooperation in enforcing national competition policies and deregulation of key domestic markets (“deep integration”). Steps of both types are being actively discussed within APEC.
The point here is not to debate the substance of these possibilities, many of which are as difficult as (or more difficult than) reducing tariffs in the traditional manner, but to note that many of them do not lend themselves to preferential treatment. It would be technically impossible, for example, to improve regulatory transparency only toward other APEC members. It might be technically feasible, but extremely costly and surely foolhardy, to erect differential customs procedures and product standards.20
Hence an APEC focus on nontariff, especially nonborder, measures could enable it to proceed on a nonpreferential basis without raising the “free rider” problem (at least in the traditional manner). In practice , of course, any meaningful APEC liberalization will have to include liberalization of the traditional type along with such facilitation steps. But the latter have the virtue of inherently reflecting “open regionalism” and thus must be included in the list of possible strategies for applying that concept.
Reconciling the Alternatives
APEC has not had to decide among these options because no real “APEC liberalization” has yet taken place. Beginning in 1996, the APEC members have submitted and will continually update Individual Action Plans (IAPs) that are intended to indicate how they plan to fulfill their Bogor pledges of achieving free trade and investment by 2010 or 2020. The initial compilations, however, simply record the steps that the countries are taking (1) to fulfill their Uruguay Round and other negotiated (e.g., NAFTA and AFTA) commitments and (2) to implement their unilateral liberalization initiatives. All of the IAP components to date thus embody either the principle of unconditional MFN, as with the unilateral liberalization steps, or reciprocally negotiated MFN, as with commitments deriving from the Uruguay Round or the subregional agreements.21
This is not to say that APEC has had no impact on liberalization in the region. AFTA has accelerated its liberalization pace and coverage to make sure that it stays ahead of APEC. Indonesia referred prominently to its APEC commitment, and especially its own leadership in forging the Bogor Declaration, in announcing its ambitious unilateral liberalization program in 1995. The Philippines made similar references in speeding its unilateral liberalization in 1996. Other countries may have been influenced similarly.
But APEC as a group has not yet taken any steps that would require a decision on the treatment of nonmembers. It has therefore been able to maintain a policy of “constructive ambiguity” on the issue. It has espoused “open regionalism” in principle but never defined it. It has implicitly threatened to insist on reciprocity but never explicitly done so.
It is conceivable that this situation could continue for some time, or even indefinitely. Unilateral, subregional and global WTO liberalization might proceed quickly enough to enable APEC to meet its goal of “free and open trade and investment in the area by 2010/2020” without undertaking any additional initiatives. But APEC cannot count on it. If the organization is to move credibly toward the Bogor targets, it will at some point almost certainly have to work out specific and additional “APEC liberalization” and thus resolve the “open regionalism” issue. Moreover, APEC itself may well have to take the lead again in forging multilateral liberalization, as it did in 1993 and 1996, and this is turn will require at least implicit decisions on the “open regionalism” issue.
In addition, APEC's reluctance to address and resolve this issue may be playing an independent role in deterring more aggressive progress toward meeting the Bogor targets. Many of the APEC members, notably those in Asia, would prefer to avoid choosing between conditional and unconditional MFN treatment of nonmembers. Many of them want to avoid the economic and political costs of new discrimination, in light of their global trading interests, but also recognize the case for using APEC's leverage to induce reciprocal concessions from nonmembers and the political impracticality (at least in the United States) of permitting extensive “free riding.” There may be important differences of view on this issue within some Asian members of APEC that add to the difficulty of reaching a decision: most trade ministers, even in developing member countries, would probably insist on reciprocity whereas foreign ministries tend toward avoiding new preferences and the adverse political reactions they could occasion.22
In an effort to pave the way for defining “open regionalism,” APEC's Eminent Persons Group deliberated extensively on the issue in 1994 and devoted a sizable section of its second report to the topic. The EPG stated its goal for APEC very clearly (APEC 1994, 54-56):
“We are not proposing creation of an Asia Pacific Free Trade Area (italics in original). We advocate the ultimate creation of free trade in the region. We do so with the greatest possible emphasis on reaching that goal through multilateral liberalization in the GATT. Moreover, our proposals for implementing APEC's “open regionalism” concept imply that the “region” in which free trade and investment result directly from APEC initiatives could extend well beyond the geographical boundaries of the APEC membership itself.”
In an effort to generalize its proposals beyond APEC, the EPG added:
“We also propose that APEC seek agreement of the international trading community as a whole on our proposed definition of “open regionalism”. Such a global commitment would go far to limit the risks of regionalism to trading relationships around the world.”23
The EPG's proposed solution combines all but the first of the five options presented here. Since it represents a unanimous consensus of independent experts from all but one (Papua New Guinea) of the APEC member countries, I quote extensively from its recommendations:24
All liberalization agreed by APEC must proceed in a manner that is consistent with the principle of open regionalism that the institution has adopted from its inception. One of APEC's primary purposes is to promote trade liberalization on a global basis, and it has recently achieved striking success in that respect as reported above. APEC clearly must pursue its vision of free trade in the region in ways that will further promote its global goals. It must faithfully pursue open regionalism in its own practices, and it must encourage other regional arrangements to do so as well. We recommend that APEC adopt a nonmutually exclusive four-part formula to implement its commitment to open regionalism:
In principle, any one of these elements by itself could effectively implement the principle of open regionalism. In the real world, we believe that all four will be needed to do so. We believe that the combination provides an operational definition of the concept of open regionalism that will be both effective and practical.
First, as just discussed, we recommend that APEC members liberalize their trade and investment barriers unilaterally to the maximum extent possible. Such liberalization is inherently available to all trading and investment partners.
Second, we recommend that APEC couple its decision to achieve free trade in the region with a commitment to continue reducing its barriers to nonmember countries as well. Such a commitment would go considerably beyond the requirement of Article 24 of the GATT that countries engaged in creating regional free trade avoid increases in their barriers to countries outside the region. It would be implemented by the continued participation of APEC members in future multilateral liberalization initiatives in the GATT, by further unilateral liberalization on the part of some members, and through specific APEC initiatives detailed immediately below.
APEC should also propose an amendment to, or a reinterpretation of, Article 24 of the GATT to require that all new regional trading arrangements take on such a commitment. (Article 24 should be strengthened in a number of additional ways as well, including a clear definition of “substantially all” trade to close the present large loophole for sectoral exceptions and explicit exclusion of “gray area measures” such as voluntary export restraints (VERs) and contingent protection tools such as antidumping and countervailing duties.) Such an improvement in the global trading rules would be the best defense against the creation of inward-looking trading blocs. Its proposal by APEC, echoing the organization's adoption of the principle itself, would clearly mark APEC as an outward-looking region and one that is willing to translate its stated principles into practice....
The extent and pace of APEC liberalization toward nonmembers would not of course have to be identical to its internal actions. Indeed, the entire concept of APEC leadership of the global liberalization process suggests that the region would move ahead further and faster than the world as a whole. As indicated in our first Report, however, we would hope that the ultimate target of “free trade in the region” could be achieved to the maximum possible extent through global liberalization. Over time, we would hope that the global and regional outcomes were able to approach the same end point.
Third, we recommend that APEC indicate its willingness to extend the benefits of its regional liberalization to nonmembers who are willing to accept similar obligations toward the APEC membership. This would represent one means of implementing the principle of continuing APEC liberalization toward outsiders. If such an APEC offer were accepted by the bulk of the world's trading nations, it would in essence trigger a fullscale GATT negotiation and the resulting liberalization would be virtually global. It would directly “ratchet up” the process of trade liberalization from the regional to the global level.
Such an offer by APEC, with its sizable market, would provide a powerful incentive to other countries to reduce their own trade barriers. The offer by the United States of participation in a free trade arrangement in the Western Hemisphere has induced substantial liberalization by many countries in Latin America. The possibility of membership in the EU has had a similar impact in Eastern Europe. By contrast, extension of APEC benefits to nonmembers on a wholly unconditional MFN basis would limit the incentives for those countries to reduce their own barriers, and might even induce them to hold back on further liberalization of their own, in the expectation that they could receive enhanced access to the huge APEC market without reciprocating in any way. Hence APEC can, through such techniques, most effectively promote world economic welfare and the openness of the international trading system as a whole.
This strategy also reflects the practical realities of trade policy in some, perhaps all, APEC member economies. As noted above, none of the subregional preferential arrangements within the broader Asia Pacific area - the AFTA, the ANZCERTA or the NAFTA - even considered offering its liberalization to outsiders, including other APEC members, on a reciprocal basis let alone extending them unconditionally. Indeed, we know of very few cases where the benefits of negotiated trade liberalization, multilateral or regional, have been extended to nonparticipants on a nonreciprocal basis. (Exceptions include Mexico's decision to globalize its investment liberalization under NAFTA and the current proposal of the US Administration to generalize some US trade liberalization under NAFTA to small Caribbean countries.)
Thus we believe that both economic and political factors argue for this particular approach. Coupled with the recommended APEC commitment to promote the maximum possible degree of global liberalization through the GATT/WTO, and to continue reducing their own barriers to nonmembers through both unilateral liberalization and such global efforts, an offer to extend all APEC benefits to nonmembers on a reciprocal basis would implement “open regionalism” in an effective and pragmatic manner. Countries outside APEC that took up the offer would not become members and would have no voice in APEC decisionmaking. However, they would avoid discrimination against their trade, and global openness would be enhanced on both sides of the arrangements.
Nevertheless, it is possible that some APEC members will not wish to erect new margins of preference against nonmember countries even for temporary periods of time. In particular, some members might wish to avoid discrimination against nonmember developing countries in favor of industrialized member economies. Hence we recommend that each individual APEC member remain free to extend the benefits of its own APEC liberalization to nonmember countries on either a conditional basis, via the negotiation of free trade arrangements with them, or on an unconditional MFN basis (to all other countries or at least to all developing countries, as explained below). This is the fourth component of our proposed policy for “open regionalism.”
Such a right is inherent in membership in any arrangement that seeks only to achieve free trade among its participants. Only membership in a customs union, such as the EU or Mercosur, precludes the independent exercise of commercial policy toward outsiders. Our principle would make this right explicit and clear, however, and indicate that APEC members would have no objection if other members were to unilaterally extend the benefits of their APEC liberalization to nonmembers....
In developing this definition of “open regionalism”, the EPG considered a variety of other alternatives. We rejected the concept of unconditional MFN treatment of nonmembers as the sole means of implementing open regionalism for the economic and political reasons cited above. We did not adopt the concept of “temporarily unconditional MFN”, with immediate extension of APEC liberalization to all outsiders but with a “snapback” formula under which the benefits would be withdrawn from countries which did not reciprocate the APEC terms within a given period of time, because of its administrative complexity and the confusing signals it would send to the private sector.
But we also rejected the standard denial by free trade arrangements of any extension of their benefits to nonmembers (even though all three subregional arrangements within the APEC area themselves follow this approach). We believe this is essential to underline the outward orientation of APEC. We recognize that some APEC members might even want to avoid creating any new margins of preference against nonmembers. We believe that our formula effectively blends the conflicting considerations that surround this aspect of APEC liberalization and provides a healthy basis for moving ahead.
My conclusion is that the EPG proposals, with one critical addition, represent the best way to define and operationalize “open regionalism” in APEC. All APEC countries want to promote liberalization in both the region and globally. APEC leadership may be essential to achieve the latter, as indicated in 1993 (with the Uruguay Round) and in 1996 (with the ITA). Meeting these goals will in turn require APEC both to move credibly toward implementing its Bogor commitments and to use the leverage of that progress to achieve new multilateral reduction of barriers.
The best, perhaps only, way for APEC to do so is to indicate publicly both its precise liberalization program and its willingness to extend that liberalization to all members of the WTO on a reciprocal basis. As pointed out by the EPG, there is a strong probability that the other major trading countries would accept the offer and thus trigger subsequent WTO negotiations (and perhaps rounds). APEC and the WTO would then move in tandem toward freer trade. No new preferences would be created. APEC would meet its goal, as stated in the Bogor Declaration and quoted above, of achieving “the outcome” of a reduction of barriers between APEC members and nonmembers as well as within the region.
The only question would then be the ultimate outcome of the twin liberalization efforts. APEC has committed to achieve free trade in the region. Simultaneous liberalization at the global and regional levels would have to continue until all barriers were removed to fully eliminate the possibility that, at some point, APEC would go further than the WTO and thus raise discriminatory barriers against nonmembers.
The obvious answer is for APEC to persuade the WTO membership as a whole to adopt the same goal as APEC itself: free and open trade and investment by 2010/2020 (Bergsten 1996a).25 The WTO and APEC would then pursue identical paths. APEC would never need to implement its liberalization on a preferential basis. There would be no fear that APEC would ever become a PTA. All other regional arrangements, including the proposed FTAA, would be participating as well. The current preferences in all other regional and subregional PTAs would disappear. The details would be worked out on a multilateral basis in the WTO so even the concern of nonmembers about “being handed a fait accompli by APEC” would be obviated.
Such a strategy is eminently feasible. As noted at the outset, over 60 percent of world trade already takes place within regional arrangements that have either achieved free trade (notably the EU) or are en route to that position (such as NAFTA) or have committed to do so (such as APEC). The advantages of overcoming current preferential discrimination would be sufficiently enticing to convince most countries to take the modest additional step of freeing their trade with all partners rather than a selected few. The domestic politics in most countries, including the Untied States, should be supportive because of the additional export markets that would be opened.26
Implementing this strategy would require the APEC members to work out, initially among themselves but in constant consultation with the EU and perhaps other key nonmembers (as with the ITA), a program of liberalization that would get them to Bogor's “free trade and investment” goal. The members would have to make “comparable” contributions to the APEC program, as agreed in the Osaka Action Agenda in 1995. They would have to remain united in presenting and defending the plan, and in offering to extend it to the rest of the world.
In particular, APEC would have to be prepared to implement its liberalization program on a preferential basis under Article 24 of the WTO if a “critical mass” of the world's trading countries proved unwilling to join at the outset.27 Imagination and steady nerves could be required for some time. But it is inconceivable that very many nonmember countries, if faced by actual implementation of preferential arrangements by half the world as represented by APEC, would fail at some early point to pick up APEC's open offer to eliminate such discrimination by taking reciprocal actions themselves. Any APEC member that felt uneasy at the need to erect new preferences on such a “temporarily conditional MFN basis” (Bergsten 1994, 24) could of course extend its “APEC liberalization” to nonmembers on an unconditional basis, which would hamper the overall strategy only if a large number of the larger economies chose that route—a most unlikely prospect.
The venerable but undefined concept of “open regionalism” can thus be turned into an operational and highly significant policy program. Properly defined and implemented, it can enable APEC to simultaneously achieve regional and global free trade. It can provide the definitive answer to the potential clash between regionalism and globalism by rolling all regional liberalization initiatives into a global free trade agreement and thereby eliminating all preferential arrangements. It may even provide the basis for APEC to succeed the United States as the leader of global liberalization. It may turn out to be the most promising international trade strategy for the early 21st century.
|Free Trade Area of the Americas
(in addition to its subregionals)
|APEC (in addition to its subregionals)||23.7|
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2. The title of the organization has been derided, paradoxically initially by one of its strongest supporters, former Australian Foreign Minister Gareth Evans, as embodying “four adjectives in search of a noun”. That etymology is of course incorrect: three of the four words (Asia, Pacific, cooperation) are in fact nouns. The acronym could be preserved in a much more felicitous manner, however, by renaming APEC the Asia Pacific Economic Community as recommended by the Eminent Persons Group in its first report (APEC, 1993). That proposal was rejected by the Seattle summit, in favor of “a community of Asia Pacific economies,” apparently because it implied the deeper integration pursued by the European Community (now European Union).
3. As recommended in Hufbauer and Schott (1994).
4. As proposed in Frost (1997) as a superior alternative to the earlier ideas for a (possibly preferential) TransAtlantic Free Trade Area (TAFTA).
5. As does even the most vocal critic of PTAs, Bhagwati 1995, 869.
6. Examples include the services chapters of the Canada-United States and Australia-New Zealand free trade agreements, the competition policy chapter of the latter (which enabled the two countries to dispense with their antidumping laws) and the investment chapter of the NAFTA.
7. Schott (1995) argues that “regionalism and multilateralism have worked in lockstep since the founding of the GATT more than forty years ago” and notes that “regionalism has advanced in the context of continuous multilateral trade liberalization, which effectively narrowed the gap between MFN tariffs and the preferential rates accorded regional partners.” He adds, however, that regionalism in the absence of a strong multilateral system “generates protectionist pressures to maintain the discrimination inherent in preferential trading pacts (or even to raise barriers to third-country trade).”
8. Yamazawa (1997) “calls upon the globalists to put aside their lofty ideals of instant globalism, to understand the realities of regionalism, and to join in the battle against inward-looking nationalism.”
9. Some observers, e.g., Bhagwati (1996, 53) and Saxonhouse (1996, 131), suggest erroneously that the author, in his capacity as chairman of APEC's EPG, and the EPG itself, advocated that APEC become a PTA rather than promote global liberalization. See Barfield (1996, 151) and the EPG's proposals.
10. An earlier effort to define “open regionalism” can be found in Garnaut (1994).
11. APEC has already taken a very modest step in this direction by inviting a few nonmember countries to participate in some of its working groups.
12. Funabashi (1995, 124-125) notes that the “American position (in favor of conditional MFN) can thus be seen to be as committed to global free trade as Hong Kong's (insistence on unconditional MFN).” He also reports Singaporean Prime Minister Goh Chok Tong as observing that “in practice, the reciprocal approach is used by all regional trading arrangements to prevent ‘free riding'.”
13. Most of the economic and political concerns surrounding “free riding” relate to nonmember industrial countries, most of which are included in the European Union. A variant on this option is thus to extend APEC liberalization on an unconditional MFN basis to all developing countries (or perhaps to all least developed countries), in essence creating an APEC generalized tariff preference scheme. Such countries would arguably be hurt most by new APEC discrimination and their “free riding” could be most easily ignored. Some APEC countries, however, would still worry about extending nonreciprocal “concessions” to such large if poorer countries as India and Brazil.
14. One idea for limiting the “free rider” problem while retaining the unconditional MFN option is to implement APEC's liberalization program initially in sectors where the APEC countries are “dominant suppliers” (or, in the current political parlance, constitute a “critical mass” of world trade). The several searches for such sectors have not been very promising, however, and this suboption would in any event only buy time until the list of such sectors was exhausted.
15. The APEC Trade Ministers at Seattle also agreed on a set of significant new liberalization proposals for the Round as part of their effort to induce European cooperation. They thus combined a substantial carrot with the implied stick.
16. This conclusion is affirmed by Singaporean Prime Minister Goh Chok Tong (Funabashi 1995, 125). Bhagwati (1996, 53) views it as “unpersuasive” (or, in an earlier version, “quite fanciful” 1995, 870); he should have talked to the negotiators at the time (although some of them, with an eye on future negotiations with APEC, now deny that APEC had much of an impact in 1993). Moreover, Bhagwati's own view that “it is a little hard to swallow (that) the Asian members of APEC would play for the United States in cooperation against the EU...when Asia has for nearly two centuries been within Europe's sphere of influence and interest” ignores the Asians' own interest in achieving multilateral liberalization and is itself quite fanciful (as well as historically incorrect for Japan, Korea and other key parts of Asia).
17. In this case, US negotiating authority carried over from the Uruguay Round and essentially required participation by the EU and full WTO. That authority presumably could have been amended, however, if the EU had blocked an agreement that was otherwise widely acceptable.
18. The one very limited exception is the “APEC business visa” program, announced at the APEC Ministerial meeting in November 1996 by three member countries: Australia, Korea, and the Philippines. In this case, the new “liberalization” applies on a strictly reciprocal basis among the three participants. It thus represents “discrimination” against other APEC countries as well as against nonmembers.
19. APEC as a group could also simply push for maximum global liberalization and agree not to take any regional actions that went further (in order to avoid creating new trade discrimination). Unless the WTO as a whole could be persuaded to adopt the “global free trade by 2010/2020” approach as outlined in the text, however, this would amount to an implicit repudiation of the Bogor commitments and obviate the core of APEC's agreed regional strategy. Hence I do not classify it as a separate “open regionalism” alternative in the APEC context.
20. Though Yamazawa (1997,8) notes that trade facilitation programs could unintentionally exclude nonmembers “unless (they) are well informed of the new rules and adjust themselves to them.” To this end he recommends inviting nonmembers to join APEC's efforts for harmonizing rules and standards (“though that may be impractical”), to make the rules and standards consistent with internationally accepted ones, and to extend technical cooperation to help nonmembers meet the standards.
21. An interesting hybrid, with possible implications for broader adoption by APEC, has been the Indonesian and Philippine approach of unilaterally extending their AFTA liberalization to all of their trading partners on an unconditional MFN basis. The Philippines, during its year as APEC chair in 1996, proposed that AFTA as a group generalize its subregional actions to all of its trading partners (including all of APEC) but could not win assent from the entire group to do so. The APEC leaders at Subic in November 1996 did, however, “applaud the efforts of APEC members which extend to all economies the benefits derived from subregional arrangements.”
22. There are two logical reasons why different countries take different positions on the “conditional vs. unconditional MFN” issue. First, countries that are early in the liberalization process and thus retain high (even if rapidly declining) barriers may find it relatively easy to reduce barriers unilaterally and thus offer unconditional MFN treatment. By contrast, countries where remaining barriers are low generally face much tougher domestic resistance and must therefore mobilize the political economy of reciprocal trade policy to push farther. (Even such a stalwart defender of unconditional MFN treatment as Yamazawa, in correspondence with the author in May 1997, acknowledges that unilateral liberalization “will not be able to cover agriculture, services and textiles.”) Second, small countries (or even regions) do not have much leverage in reciprocal trade negotiations so cannot obtain much foreign response even if they insist on “concessions” by others. Large countries and regions, such as the EU or APEC, by contrast have extensive leverage and should use it. These basic considerations of the political economy of trade policy are developed in Bergsten, 1996b.
23. Bergsten (1994, 23) notes that this was already the precise formulation presented by the EPG in conveying its initial report to the APEC Ministerial in Seattle in November 1993.
24. In response to a specific request from the Bogor summit, the EPG in its third report (APEC, 1995) made a similar proposal for “open subregionalism.”
25. At their annual summits in 1994 and 1995, the APEC leaders explicitly supported “the pursuit of global (italics added) free trade.”
26. The case is developed, especially for the United States, in Bergsten 1996a.
27. Even Elek, one of the strongest proponents of unconditional MFN, suggests (1995, 14) that APEC should consider adopting a PTA à la Article 24 if Europe and others failed to respond positively to any unconditional MFN steps that it might take initially. For the reasons noted by the EPG (cited here), however, this “snapback” approach would be extremely difficult to implement.