Welcome!

In this edition we look at:

• Asean, Australia and New Zealand FTA
• Consequenses of the GFC and key challenges

Plus we report on recent training programs, with a focus on enhancing risk management and governance in banking

We encourage your feedback. apec@apec.org.au

ANALYSIS: by Kristen Bondietti , Trade Consultant to the APEC Centre, and Principal Consultant at ITS Global.

The Australia, New Zealand ASEAN Trade Agreement (AANZFTA), signed early this year, will be one of the largest and most comprehensive FTAs in the Asia Pacific region. The AANZFTA covers an area with a combined population of 600 million and estimated GDP of A$2.7 trillion.

AANZFTA is a significant achievement. It is Australia’s first regional FTA. It is the first time Australia and New Zealand have been involved jointly negotiating an FTA with other countries. The agreement is the most comprehensive trade deal ASEAN has negotiated to date. It could well serve as a standard setter for ASEAN’s future FTAs.

AANZFTA is comprehensive in scope and broad in coverage. It builds significantly on ASEAN’s other FTAs by including not only trade in goods, but also services trade and investment in the one agreement. It includes disciplines in a range of other areas now important for trade, including non-tariff measures and quarantine. It addresses “beyond the border” issues such as movement of natural persons, electronic commerce, standards, intellectual property and competition policy. These issues are not often addressed by ASEAN in its FTAs outside of ASEAN Free Trade Area.

In a first for ASEAN, provisions to liberalise investment form an integral part of the agreement alongside those for goods and services. Parties agreed not to discriminate among each others investors and investments and to prohibit performance requirements for them. Annexes set out the sectors and activities which are exempted from these obligations.

The agreement also adopts a more simplified structure than many of ASEAN’s other FTAs, to the benefit of traders, investors and governments. It minimises some of the complexity associated with multiple “tracks” for liberalisation for different categories of products which have been adopted in FTAs with other trading partners. AANZFTA limits commitments for all parties to two “tracks:” sensitive products are differentiated from “normal products” but are generally not excluded from tariff reductions. The need for differential commitments among parties at varying levels of development is recognised through lengthier time periods for tariff reductions. Transparency is achieved through specification of agreed reductions and timing for their implementation in schedules annexed to the agreement.

When implemented, AANFTA can be expected to lead to considerable liberalisation among ASEAN, Australia and New Zealand. The outcome for goods is substantial. Over time, Australia and New Zealand will eliminate all tariffs on imports from AANZFTA parties. For ASEAN countries, between 90 and 100% of tariff lines will be progressively removed (with the exception of Cambodia, Lao PDR and Myanmar for which less extensive commitments are agreed). Very few products are excluded from liberalisation – generally covering less than 1% of tariff lines – and no sectors or areas are. Existing applied ASEAN tariffs are bound, providing added certainty for business.

Regrettably, the outcomes on services are not as comprehensive as those for goods, reflecting partly the slower progress by ASEAN of liberalisation in this area. Services and services trade are increasingly important for supporting trade and economic growth in South East Asian economies.

Liberalisation outcomes and closer economic ties that flow from the agreement will contribute to regional integration. They will play a role in supporting economic integration within ASEAN itself. Just recently ASEAN concluded a new ASEAN Trade in Goods Agreement (ATIGA) which builds upon current ASEAN commitments in its FTAs, including those of AANFTA. This is a welcome development. It can complement liberalisation efforts in APEC and the WTO.

Even after four years and 16 negotiating rounds, the AANZFTA process is not over yet. The agreement must still be ratified and implemented. A dedicated work program on economic cooperation and capacity building will support this, as will solid relationships among government officials in each of the FTA parties, strengthened as a result of the FTA process. Along with review mechanisms built into the agreement itself, all will ensure the AANZFTA remains a dynamic FTA arrangement in the Asia Pacific region.

Kristen Bondietti recently designed and delivered “Policy Options to Promote Reform in Non Agricultural Market Access (NAMA) in an Era of Falling Demand, Rising Protectionism and Economic Uncertainty”. She has previously delivered trade in services programs for the Centre and has managed major capacity building programs involving ASEAN countries.

The Longer Term Cost of the Crisis is Slower Growth: Better Governance is a Key Challenge.

PERSPECTIVE: by Ken Waller, Director of the Melbourne APEC Finance Centre

The IMF in its most recent World Economic Outlook declared that economic growth has turned positive. The Fund projected a fall in world output for 2009 of -2.3%, but noted prospective improvement of 0.3% over its forecast in July. World trade in goods and services is now expected to be down by -11.9%, but again slightly better than forecast in July.

The massive public financial support (and the private losses) provided to major components of the global banking and investment banking system – particularly in the US, the UK and Europe, and the highly accommodative monetary policies and the significant fiscal deficits that have been incurred in many countries to resuscitate growth, have worked in averting a global economic disaster.

The Fund also notes that policy makers now need to begin preparing for an orderly unwinding of extraordinary levels of public intervention. The Australian RBA has already started to raise official rates in light of a marked positive change in sentiment about Australia’s economic situation.

The favourable changing global outlook, reflected in revised growth forecasts and a significant recovery in equity and commodity market prices over recent weeks and recovery, particularly in Asia, of cross border trade, is evidence that confidence is returning to investing institutions and to businesses. This is of fundamental importance if the growth now being generated is to spread and become sustainable.

There are reasons however why growth will be subdued over the period ahead and why sustainability will be elusive.

Importantly, and as a consequence of the response to the crisis by the G20 and the Financial Stability Board and other international standard setting bodies, the regulatory arrangements that are now being put in place to influence the activities of financial institutions and markets, are becoming sharply constraining.

More capital will be needed to support the activities of financial institutions, leveraging will require greater capital backing and the regulatory reach will now impact on large institutions which are not necessarily banks but whose size could impact on systemic stability should they fail. Additional measures to protect consumers and shareholders and the public at large against the actions of business decision makers through constraints on compensation packages are designed to constrain risk taking. They may or may not deter innovation in the financial sector.

Apart from these regulatory responses, asset values have been written down in very significant proportions, investment and wealth creation have been eroded and this at a time when major financial intermediaries are required to recapitalize on a major scale. This conjunction of circumstances suggest that real economic activity – that which is financed by financial intermediaries and that which creates employment – could be subdued for a lengthy period ahead.

Banking intermediation at least in major western economies is and will continue to be on a lower trajectory for some period ahead than that which we have become used to over the decade since the Asian financial crisis.

In his response to the Turner report on “Reforming Financial Markets” UK Chancellor of the Exchequer in July noted that in accepting the major recommendations of the report the (UK) Government’s objectives are to:

• strengthen financial regulation
• reduce the impact of financial firm failure and prevent contagion
• boost consumer trust and confidence in financial markets
• improve competition and efficiency in financial markets
• strengthen regulators and the international regulatory framework

To achieve these objectives, the Chancellor proposed key areas of reform as:

• corporate governance of banking institutions
• changes to capital requirements
• reduction of leverage
• more intensive regulation
• enhanced powers to deal with banks that are seen to be failing

These kinds of response are broadly shared by the international community and are some of the many matters that are under consideration for implementation as a consequence of agreements reached in the recent G20 Summit in Pittsburgh.

The cost of this approach will be slower growth and some higher degree of risk aversion than that witnessed over the last couple of decades. These “financial” factors are likely to contribute to a slower decline in global poverty and to some slowing in rising living standards. But hopefully they should contribute to a somewhat more ordered and stable system of global economic relationships.

The benefits of the monetary easing and fiscal expansion late in 2008 and into 2009 are now more clearly evident. They have averted a global economic and financial system collapse and created a platform for recovery.

How sustainable recovery will be will depend on many factors, including commitment to structural reforms, but ultimately it will reside in the quality of governance that governments and their agencies and public and private financial institutions and markets will choose to be guided by. More stringent levels of supervision and regulation over financial intermediaries and large conglomerates are only part of the challenge now confronting the global system.

It would be imprudent to underestimate the complexity of the work program that is now being formulated by G20, the IMF and standard setting agencies, nor its importance and the challenges it poses to national and regional authorities in the APEC region.

A crisis in which governance failures in both public and private sector agencies occurred on a major scale and which required and has received remarkable public policy responses – as well as highly constructive responses from banks and other financial institutions.

Importantly, the Federation noted that culture must be set at the top. Banks play a key role in promoting growth of the real economy and enhancing financial stability. The board and senior management have a key role in setting the overall culture of a bank and establishing the key ethical values to which it subscribes, as a means of ensuring that its employees act in accordance with these values.

A holistic approach involves a shared public/private sector challenge. The Economist journal a few months ago touched on this challenge when it noted a common task for the finance industry and for macro economists is to work out what central bankers should do about bubbles – now that it is plain that they do occur and can cause great damage when they burst.

CAPACITY BUILDING: by the APEC Centre

Since the inauguration of the Australian APEC Study Centre on May 1st, we have run several successful capacity building training programs, all of which were sponsored by AusAID. The first in June focused on food security, bio fuels and food price inflation. The second program in July was about enhancing investment flows. This was the third in the series, and it focused on trade and taxation policies. In late August there was a program on promoting policy options and reform in Non Agricultural Market Access (NAMA), as defined by the WTO.

The most recent program in September focused on enhancing risk management and governance in banking in light of the global financial crisis. The objectives of the program were to expose policy makers and regulators from APEC developing economies’ banking supervisory systems to current thinking and practices regarding the implementation of Basel II from both a regulatory and an industry practitioners’ perspective, against the backdrop of the global financial crisis. The course focused on key risk categories and the techniques to measure and manage risk. Specific attention was devoted to liquidity risk and the pressures arising from the global financial crisis, tightening global credit and liquidity conditions and reviewing measures to deal with them in the region’s banking systems.

The 6 day course contained 41 individual sessions, comprising a mix of presentations, workshops and paneldiscussions, delivered via a series of themed daily modules. To reinforce course learning, participants were also allocated to one of four syndicate groups and allocated a contemporary topic to examine and present back to their peers on the final day of the program.

Toward the conclusion of the program participants from the region's policy and financial regulatory agencies were tasked to demonstrate their capacity to better respond to the challenges confronting the banking supervisory systems in the implementation of Basel II, in implementing a better risk culture across the regulatory and finance sectors and in embedding appropriate management models and tools in the supervisory processes.