APEC - The Gains and Losses for Australia

By Tas Luttrell
Luttrell Consulting Services, Canberra, ACT
December 1997
 

The APEC process has, to some people’s surprise, moved forward from the "vision" of the Bogor Declaration and on to the practical problems of implementing the concepts of that Declaration.  Moving to the practical phase has not meant, however, that the misgivings of those who doubt the viability of the APEC vision have been assuaged.

APEC is a unique regional grouping in several ways.  It lacks the formal bureaucratic structure which typifies most regional groups and international organisations. APEC proceeds on a consensus basis, reflecting that lack of formal structure, and does not have the power of enforcement which is available to organisations such as the World Trade Organization (WTO).  It also includes a very diverse range of economies in the membership - the highly developed US and Japanese economies, mid-level (or so-called transition) economies such as Korea and Chinese Taipei and economies still working their way through the early stages of development.

Not everyone sees the development of APEC as a desirable process.  There are fears that there will be detrimental effects which may outweigh the benefits of APEC.  Alternatively, there may be severe, although localised, sectoral effects, which could be politically difficult to resolve.  This was the essence of the arguments presented for retention of substantial levels of protection in the recent Industry Commission inquiries into the Automotive and Textiles, Clothing and Footwear (TCF) industries.  There are also concerns that the very diversity of APEC members will make it impossible for the group to succeed.

In Australia there have always been those who doubted the wisdom of a close economic bond between Australia and Asia (and some in Asia doubtful of Australia's full commitment to the bonding process).  The recent financial crisis in Asia has strengthened the voice of the doubters and weakened the resolve of some of those previously convinced that full economic engagement with Asia would be in Australia's best interests.

The recent meeting of APEC leaders in Vancouver at which the members presented the second round of Individual Action Plans, makes this an opportune time to examine the validity of such doubts and to ask: Is APEC a worthwhile exercise for Australia? Do the benefits outweigh the costs or vice versa?  The results of the Vancouver meeting will be a guide to the progress in APEC and assist in answering those questions.

It is important to note at the outset that one of APEC’s key decisions has been to ensure that changes introduced through the group are ‘WTO consistent’ - i.e. that the activities of APEC will supplement the activities of the WTO and not compete with or undermine them.

There has been a tendency in this debate (as in many others) to see the issues as black and white, with no shades of grey in between.  The protagonists on both sides tend to magnify their own arguments and either ignore or play down the opposing arguments.

To achieve that aim, it will be necessary to examine the major advantages of the integration process in APEC and to weigh them against the major cost factors which also flow from that process.  The benefit and cost factors must be examined in the context of current economic conditions.  The public attitude to industry reconstruction in Australia, for example, would be quite different in a period of full employment, to the public response in the present circumstances of high unemployment and meagre prospects for those thrown out of work in the reconstruction process.

The APEC Ministerial Meeting in Vancouver in November 1997, acknowledged the importance of a clear understanding of the impact of the liberalisation and facilitation programs.  The Ministers requested further study, with an interim report to be presented in June 1998 to the meeting of APEC Ministers responsible for trade.

The Gains From APEC

Trade and Investment Liberalisation

The commitments made at Bogor call for free trade and investment in all the APEC economies by 2020.  Achievement of this goal will provide duty free access to economies which in 1996/97 accounted for 71 per cent of Australia's total trade.  APEC economies in that year bought 75 per cent of Australia's exports and supplied 66 per cent of imports.  Their overall economic importance is indicated by the fact that in 1995 APEC member economies produced 56 per cent of world Gross National Product.

Australia has already made great strides towards liberalisation of its protective regime and as other APEC members progressively implement their liberalisation plans, Australia can expect growing export opportunities.  With the exception of the Automotive and TCF industries, Australia has already reduced tariff levels to a maximum of 5 per cent.  In these circumstances, the gains to Australia from liberalisation by other APEC members should increase rapidly by comparison with any additional costs incurred as the Australian program proceeds.

In a report in 1995 examining the potential gains from APEC, the Bureau of Industry Economics commented:

For Australia, the APEC process provides a significant opportunity to ensure that its largest trading partners will continue the trend towards deregulation and internationally oriented policies which has been crucial for the growing prosperity of the APEC region.  This will reduce barriers to Australian exports and lower uncertainty about future market access.  It could also result in new opportunities for exports, such as for services.¹

A recent report by the Department of Foreign Affairs and Trade (DFAT)²  observed:

Australia has benefitted substantially from trade liberalisation, despite significant short term adjustment costs.  Even conservative estimates suggest that in the past decade, the average Australian family has gained around $1,000 per year from tariff reductions.

· Falls in trade barriers have contributed to a stronger industrial base, higher productivity, better access to international markets and new technologies, and more competitive manufactured and services exports.

Similarly, derestriction of the investment regimes of the APEC economies will provide investors with improved opportunities to compete for projects - infrastructure projects alone already planned for the APEC region have been estimated at $1.5 trillion over the next ten years.³  While some of these projects may well be cancelled or delayed because of the current financial crisis, there will still be immense opportunities for Australian investors if foreign investment regimes in the region can be progressively harmonised and derestricted.

At the 1996 APEC meeting at Subic Bay in the Philippines, the member economies presented their first Individual Action Plans (IAPs).  The plans are to be revised annually and will be a guide to the progress of liberalisation in each economy.  The initial IAPs mainly covered initiatives to which the members were already committed under the Uruguay Round or through unilateral programs previously announced: e.g. the Philippines agreed to reduce its applied tariffs from an average of 16 per cent to 5 per cent for most products by 2004, and Indonesia to reduce tariffs of over 20 per cent on manufactured products to a maximum of 10 per cent by 2003.

New tariff initiatives in the 1996 IAPs were modest but gave some indication of the benefits Australia can expect as liberalisation proceeds: e.g. China proposed to reduce its simple average tariff from 23 per cent in 1996 to 15 per cent by 2000, and Hong Kong and Singapore agreed to bind all tariffs at zero by 2010.

Investment measures in the 1996 IAPs were varied, with most members either promising reviews or announcing liberalisation measures: e.g. China to progressively open more sectors to foreign investment and grant national treatment; Korea, the full range of sectors to be liberalised, 92 sectors from 1997 to 2000; Chinese Taipei to relax restrictions on foreign investment, such as reinvestment requirements, types of capital and remittances; Japan to deregulate the foreign exchange law, remove notification restrictions for mining and ease restrictions on telecommunications carriers by 2000.

The Department of Foreign Affairs and Trade in its submission to the Senate Inquiry on APEC, stressed the advantages for Australian business of the use of IAPs in the APEC process:

· first, by helping to maintain the momentum of future policy toward more liberal trade and investment regimes, they help create a more favourable operating environment for business in the region;
· second, they promote liberalisation on a "most-favoured-nation" as distinct from discriminatory liberalisation within free trade agreements; and
· third, most plans include at least some measures which improve market access for Australian business ... ⁴

The Government’s Trade Outcomes and Objectives Statement early in 1997 commented:

The process of informal bilateral consultations on IAPs provides an opportunity for Australia to press individual APEC members to include liberalisation measures that address Australia's market access concerns.  In this way, APEC complements bilateral efforts and those in the WTO in keeping the pressure on our regional trading partners to continue and accelerate the rate of liberalisation. ⁵
 

The 1997 IAPs built upon the 1996 lists and included reductions in tariffs in a number of areas of interest to Australia⁶ : e.g. Korea to reduce tariffs on 182 items, including sugar and wool; China reduced its average tariff rate to 17 per cent on 1 October 1997; Malaysia to review 254 tariff lines to which high tariffs apply and Hong Kong eliminated all tariffs on information technology products from 1 July 1997.

In the investment area, Indonesia has abolished the 49 per cent limit on foreign holdings of listed shares in several sectors; Malaysia has exempted companies in the Multimedia Super Corridor from local ownership requirements and from restrictions on the hiring of foreign skilled workers; Japan will review investment restrictions in its remaining reserved industries and Chinese Taipei will privatise 42 government corporations within 5 years and will open the previously closed tobacco, wine, spirits and beer sectors.

Although most public attention is usually given to the trade and investment liberalisation program, it would be a mistake to regard that program alone as the dominating feature of the APEC agenda.  The programs for Trade Facilitation and for Economic and Technical Co-operation offer potential benefits to the APEC members which are largely free of the political difficulties faced when reducing industry protection but promise very impressive benefits.
 

Trade Facilitation

The program for Trade Facilitation among APEC members is designed to reduce the cost of transactions in the region.  It covers a diverse range of subjects including Customs Procedures, Standards and Conformance, Mobility of Business People, Services, Intellectual Property, Government Procurement and Electronic Commerce.⁷

At the end of 1996 in a speech discussing the merits of free trade, the Chairman of the Hong Kong Trade Development Council referred to an estimate which indicated that reducing tariffs could add US $300 billion to the region’s real income by 2020.   He then said:

But perhaps even more important, they calculate that more than twice this sum will be generated by modest and unglamorous regulatory reforms - like customs harmonisation, mutual recognition of industrial standards - and the opening up of procurement business.⁸

In areas such as the streamlining of Customs procedures, the program has the potential to generate very large savings for APEC trading companies through faster processing, reducing formalities and making rules and regulations more transparent.  A very recent estimate suggested possible cost savings of US$56 billion per year through harmonisation and the use of electronic processing in this area.

The program to align national product standards with international standards is intended to overcome another costly bottleneck in APEC trade flows.  Work is progressing on the adoption of Mutual Recognition Arrangements (MRAs) under which product testing and certification systems of exporting economies are recognised by their trading partners.  Importing economies do not need to re-test products covered by such Arrangements and estimates of cost savings range from 5 to 15 per cent of exporters’ costs for a new market.

MRAs are already in operation or under development for food and food products, automotive products, telecommunications, electrical and electronic appliances.  In 1993 the Economic Planning and Advisory Committee estimated that a modest liberalisation of restrictive standards could increase regional trade by around 20 per cent and add 3 per cent to regional Gross Domestic Product.

The services sector is the fastest growing sector in world trade.  The value of Australia's services trade has grown by 11 per cent per year for the last five years.  In 1996/97 it was valued at $24.3 billion.  Consequently, Australia has much to gain from the APEC work program aimed at facilitation of trade in services.  Of particular interest to Australia is the work intended to facilitate improved trade in professional services and the development of standardised principles and guidelines for APEC trade in services.

Similarly, Australia has a deep interest in the effective protection of intellectual property rights.  This area is growing in importance because elaborately transformed manufactures (ETMs) are the fastest growing segment of Australian exports - 24 per cent of total merchandise exports in 1996/97.  Protection of intellectual property rights is also important for the continued progress of Australian exports of computer software, pharmaceuticals, music, films and for goods covered by patents and trade marks, featuring unique designs or linked to geographical locations (such as wines).

Government procurement makes up some 10 per cent of global trade but Australia and most of the other APEC members are not signatories to the WTO Agreement on Government Procurement.  At the Osaka meeting of APEC, however, members agreed to liberalise government procurement and to make the processes more transparent.

Among the measures to be adopted is the advertisement of tenders on an APEC government procurement homepage on the Internet.  This arrangement will improve access to the tendering process for interested Australian firms and combined with improved transparency, will give greater certainty to the processes and procedures and should result in overall cost savings.  It will also make the tendering process more open and accessible, providing Australian firms with more opportunities to compete for large-scale contracts.

APEC also has work in progress in several other areas of trade facilitation where improved policies and greater co-operation between the member economies are expected to result in further reductions in the cost of international transactions.  These sectors include: dispute mediation, competition policy and deregulation, information gathering and analysis, and assistance with the implementation of Uruguay Round commitments.
 

Economic and Technical Co-operation

The third major strand of the APEC program is Economic and Technical Co-operation, now becoming known simply as ecotech.  This program also covers a variety of subjects and in a similar way to efforts in the Facilitation program, seeks to reduce costs and improve resource allocation.  The coverage of the ecotech program includes: energy, telecommunications, transport, infrastructure, human resources development, fisheries, tourism, industrial science and technology, trade and investment data and assistance to small and medium enterprises. ⁹

The aims for the Ecotech program have been summarised by the Minister for Trade as:

... to achieve sustainable growth and equitable development in the Asia-Pacific region, and to assist developing economy members to participate fully in APEC’s trade liberalisation agenda.  APEC’s ecotech and trade and investment liberalisation and facilitation ... agendas are thus complementary and supportive.  Many ecotech activities, such as those designed to improve regional infrastructure in energy, transport and telecommunications are of direct relevance to business.¹⁰

In the energy sector APEC is seeking to improve access to regional energy markets and to reduce costs and impediments to trade and investment in energy infrastructure, technology and services.  Australia has the resources to supply the APEC economies through sales of coal, gas, petroleum products, technology and equipment.  Other opportunities will arise from a continuing demand for expertise in management, operations and training in mining ventures and investment in the energy production sector.

In telecommunications Australia has already made substantial progress towards an open market.  For some APEC members, however, the telecommunications sector presents particular problems in moving from monopoly control to a competitive market, a situation new to some of the countries involved.  High priority has therefore been assigned by APEC to consultation, development of standard training techniques, cooperative projects and agreement on an MRA.  An Asia-Pacific Information Infrastructure is being developed to assist this process, as are techniques for dealing with the growing problem of electro-magnetic interference in the region.

Australia is well placed to take advantage of the opportunities which will flow from a liberalised and increasingly integrated Asia-Pacific telecommunications market.  Australia can expect benefits from reductions in technical barriers, cost reductions and greater access for exporters and service providers.  Network expansion, electronic commerce and management of education and training projects are expected to provide opportunities for Australian contractors and consultants.

In its submission to the Senate Inquiry on APEC, the Australian Telecommunications Industry Association indicated the potential for Australia in this industry:

The market potential for the Australian industry in Asia for example is enormous with a Bureau of Transport and Communications Report estimating the accumulated export potential in the region over the next 15 years could total $US163 billion.  ... APEC offers significant scope to increase export opportunities for Australian industry ...¹¹

In the transport sector, APEC Ministers have endorsed a Model MRA on Automotive products.  This will assist Australian industry by reducing barriers to trade in automotive parts and components, already a major export item.  Common standards for Intelligent Transportation Systems are also likely to benefit Australia's established manufacturers of reliable and efficient systems.

Reconstruction of APEC’s transport infrastructure is gathering pace.  The Asian Development Bank has estimated that US $350 billion will be needed to modernise the region’s transport network.  Australia has already achieved some notable successes in this area. ¹²

The construction or reconstruction of economic infrastructure is one of the biggest tasks facing the Asia-Pacific region.  APEC leaders have nominated this as a priority area for economic and technical cooperation.  Efforts are being directed towards cooperation and sharing of information on planning and implementation; several projects are already underway in various APEC Working Groups.  Australia has been asked to carry out a review of analytical work on infrastructure and the capacity of APEC economies to carry out infrastructure projects.

Another important task is the development of human resources in the region.  Part of APEC’s development plan is to work towards a well-trained, well-educated workforce and an effective, efficient and flexible labour market.  To fulfil these expectations, the APEC economies will have a continuing need for high quality education and training.  Australia is already an established exporter of education products (total exports are expected to exceed $3 billion in 1997).  There is also likely to be an increase in demand within Australia for courses designed to help companies gain a foothold in APEC economies.

In one sector, the mutual recognition of professional qualifications, this task ties in with the trade facilitation program and its work on the alignment of standards.  Australian organisations are particularly interested in a positive outcome because many professional bodies, especially in engineering, expect a strong demand for their services if the barriers are removed.

The Fisheries Working Group has as its aim maximisation of economic benefits and sustainability of fisheries resources in the APEC economies.  Australia has much to gain from the work of this group because 90 per cent of Australia's seafood exports go to APEC members.  APEC members are responsible for about 80 per cent of the volume of world aquaculture trade, which is Australia's fastest growing primary industry.  The activities of this group will provide Australia with improved sources of business oriented market information and access to those markets.

Other Working Groups which are likely to produce benefits for Australia include:

· Tourism Group, which is seeking to reduce barriers to tourism movement, business operation and investment;
· Industrial Science and Technology Group, which seeks improved distribution of technology and information and to contribute to sustainable development;
· Trade and Investment Data Group, which is improving the collection, compatibility and compilation of trade data;
· Small and Medium Enterprises Group (SMEs), which is assisting SMEs with improved access to markets, market information, finance, managerial skills, and technology;
· Trade Promotion Group, which promotes trade-related activities for goods and services, trade financing, trade skills and training;
· Marine Resource Conservation Group, which seeks to protect the marine environment and its resources;
· Agricultural Technical Cooperation Group, which promotes cooperation on agricultural technical issues and encourages sustainable agricultural development and improved production capacity.  The group covers plant and animal quarantine, biotechnology and the marketing, processing and distribution of agricultural products.

There is also a group which draws together strands from several other groups and examines the long term effects of rapid population growth and sustained high levels of economic growth on food, energy and the environment.
 

The Losses From APEC

What are perceived as the detrimental effects on Australia from APEC, the ‘costs’ or ‘losses’ from the APEC process, fall generally into four main areas:

· effects on employment,
· control of foreign investment,
· environmental issues, and
· technical standards.
 

Employment Effects

Of major concern to those opposing the APEC liberalisation process is the effect on Australia's level of unemployment.  The argument is that Australia has already given away too much of its manufacturing industry and that improved access to the economies of its trading partners received in return has failed to compensate.  Consequently, there is strong support for the idea that Australia should suspend its tariff reduction program and use the remaining protection as a bargaining counter in negotiating multilateral agreements. ¹³

There are fears that reduction in tariff and non-tariff trade barriers will leave Australia vulnerable to the loss of further significant sectors of industry.  An important factor is the suspicion that low wage levels in the developing countries of the APEC region will influence investors (particularly multi-national companies [MNCs]) to move their manufacturing operations offshore.  This argument is applied to any industry which is a large employer of labour but the most forceful application has been in the recent debates over protection levels for the Automotive and TCF industries.

In the present climate of high unemployment, there is considerable public support for the argument that by reducing protection for these vulnerable sectors, Australia is exporting the jobs of Australian workers.  As a substantial proportion of the workers displaced in the reconstruction of the TCF industries in recent years have been female immigrants (many of whom lack fluent English), there are quite reasonable concerns that Australia's industry policy should not worsen their future employment prospects.

There is no doubt that some sectors of Australia's manufacturing industry are going through a very difficult period of restructuring and realignment; the relevant question, however, seems to be: Is it reasonable to blame all of these problems (or even a substantial part of them) on the trade liberalisation process in APEC?

This question was directly addressed in the DFAT report mentioned earlier:

Trade liberalisation creates jobs but these tend to be scattered widely among unprotected sectors and often go unnoticed.  Instead the public usually sees the factory closures and is made aware of some costs w