APEC: Back to the Future

On 10-11 November 2017, leaders from 21 Asia-Pacific economies met in Danang for the annual APEC summit. It brought to a conclusion a 12-month cycle of work with Vietnam as the chair under the theme of Creating New Dynamism, Fostering a Shared Future. It took place against the backdrop of rising anti-globalization sentiments and uncertainty about the future direction of multilateral cooperation.

When APEC leaders met in Lima 12 months ago they noted that globalization and its associated integration processes are increasingly being called into question, contributing to the emergence of protectionist trends. A potentially serious blow was inflicted on integration processes when the United States withdrew from the TPP. The Hamburg G20 Leaders’ Communique changed what had been consistent language of support for the “multilateral trading system” to the “international trading system.” This question is perhaps or even more fundamental importance to APEC than G20. The 1991 APEC Seoul Declaration, which codified APEC’s purpose, states that one of APEC’s objectives was ‘to develop and strengthen the open multilateral trading system in the interest of Asia-Pacific and all other economies.’ More importantly, while G20 Leaders had failed to agree to language on standstill and rollback, APEC leaders did.

While some might argue that these words have little real impact – G20 and APEC members have been implementing all kinds of measures that restrict trade. But the signalling is important – these words represent the consensus of powerful groupings in the international community. The cost of that agreement is the introduction of the idea of ‘fairness’. The issue of ‘fairness’ is inherently hard to define. Trade economists will argue that trade is simply a transaction, we will engage in it if we perceive it be in our mutual interest – the foundational concept of comparative advantage is that is in all parties’ mutual interest – or in a more modern phrasing ‘win win’. The idea of fairness echoes a discourse largely ignored in the hallowed halls of multilateral diplomacy on terms of trade. That discussion was based on the relatively low prices for agricultural produce. It is an inherently loaded term for which much is in the eye of the beholder. The irony of where the call for fair trade is coming from will not be lost on many.  

Much has already been written in the media on the contrasting speeches of President Trump and President Xi. A couple of things are worth highlighting with respect to the broader Asia-Pacific agenda. President Xi talked about the establishment of a global network of FTAs while President Trump offered to sign bilateral deals with any Indo-Pacific economy that abides by the principles of fair and reciprocal trade.

This is where there is a fundamental tension between the reality of the trading system and the principles that underpin it – especially the most-favoured nation principle. Ironically since the institutionalisation of the GATT into the WTO there has been a proliferation of preferential trade deals that don’t conform to the MFN principle. Yes, the GATT provides for exceptions, but the exceptions have become the rule.

Somewhere between President Xi’s call for a global network of FTAs and President Trump’s call for fair and reciprocal trade there may be some common ground for a regime that recognizes the reality that we have a world of trading blocs but they in turn need discipline.

While some nice words have said about the importance of the rules based trading system – it has not caught up with the rapid changes taking place in both the way in which trade is done as well as changes within domestic economies. It has been over 20 years since the conclusion of the Uruguay Round and the creation of the WTO. At the same time, there is constructive ambiguity on the relationship of FTAs – bilateral or plurilateral with the WTO. In the early 2000s PECC attempted to come up with principles to ensure FTA/RTA consistency with APEC objectives and the multilateral system, and in 2004 Ministers endorsed the "APEC Best Practices for RTAs/FTAs”.  It is time to revisit these and many other sources to ensure that the multilateral system is able to cope with the tectonic shifts taking place in the trading system and that new rules are put in place that give confidence in the system. The risk is a descent into anarchy that adds even greater fuel to the fire when strategic mistrust is already an issue.

One place to start would be to use the annual dialogues on FTA/RTA held by APEC officials to discuss the text that was agreed amongst the TPP11 or the Comprehensive and Progressive Agreement for Trans Pacific Partnership. Benchmarking that text against APEC’s own best practices for RTAs and FTAs and existing model measures would be one place to start resolving the principled commitment to the multilateral trading system and reality of the need for experimentation with rules that cover 21st century commercial realities.

While APEC leaders’ week may have begun under a cloud with the country suffering from the impact of Typhoon Damrey, Vietnam can be proud of significant achievements. The progress on dealing with the digital/internet economy and putting the emphasis on people places APEC in a prime position to set the region on the right course to deal with the 4th Industrial Revolution. APEC has also adopted a roadmap for the digital economy that takes a necessary holistic approach. While many in the commentariat have taken for granted the leaders’ language on standstill and rollback of protectionist measures, APEC leaders again committed to this in Danang. No mean feat in this current context. A backsliding would have been damaging to economic recovery we are now seeing. Businesses need to have confidence that the rules of the game are not going to be changed – if they are to ramp up investment in plants, offices, equipment and importantly, jobs. 

Much more needs to be done – the Buenos Aires WTO Ministerial will again provide an opportunity for more engagement – but real progress will require APEC and other processes to seriously reflect on the kind of support they provide to the multilateral system. The risk is a splitting up of the system that leaves economies feeling marginalized and lacking recourse. The current system needs the kind of leadership that led to the adoption of the most favoured nation principle. Absent that leadership we risk failing to learn from history – as George Santayana warned ‘Those who cannot remember the past are condemned to repeat it’. A repeat of the 1930s and breakdown of the system is not something any right minded individual would want to risk.  One area where rules are badly needed is in the digital economy – this has developed largely in the absence of any multilateral progress. Fortunately WTO jurisprudence has added substantial weight to the idea that the existing rules cover technological change – but as new ways of trading are developed much more needs to be done to ensure that as questions arise, as they undoubtedly will, the multilateral system is ready to weigh in on them. These issues are symptomatic of the complexities of a system in which economic power is increasingly diffused, gatherings like APEC are one way to forge a consensus among those with systemic weight. They need to be used wisely. 

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.