Pathway to Asia-Pacific Economic Community: ASEAN +3, +6, or TPP?

1. Pathway to Asia-Pacific Economic Community: ASEAN +3, +6, or TPP? 22-23 September, 2011 Dr. Sangkyom Kim Korea Institute for International Economic Policy Korea National Center for APEC Studies

2. Features of FTAs/RTAs in Asia-Pacific • Currently, 43 RTAs have been implemented, 3 RTAs have been signed, and more than two dozen RTAs are being negotiated or considered by APEC economies. • After East Asian financial crisis in 1997, the Northeast Asian members have changed their policy stance from favoring a global approach to favoring a regional approach • 37 RTAs have been implemented after the crisis. Fact 1 Fact 2 • Most of RTAs in the Asia-Pacific region have taken a form of bilateral negotiation similar to the world-wide trend of seeking a lower and easier negotiation cost even though the gains from the freer trade are limited Fact 3 • No distinction between intra and inter-regional partnerships Fact 4 • Most of sub-regional RTAs within APEC have been making a complicated web of hub-and-spoke type of overlapping RTAs which may cause a spaghetti bowl phenomenon. Fact 5 • Progress has been slow in taking an expansionary path of RTAs

4. General Characteristics and Drawbacks • Major objective is to liberalize trade and investment • More emphasis has been placed to lowering trade and investment barriers among key trading partners than to seeking broad economic integration • Incorporate a variety of commitments to economic cooperation in a number of areas • However, some agreements have no feasible work plan • A comprehensive scope and more sophisticated type of FTAs/RTAs. • However, there are not many FTAs/RTAs in the APEC region containing chapters on next generation issues including E-commerce, labor and environment • Complex and inconsistent provisions in Rules of Origin • Increased transaction cost may disrupt supply chain • May lead to hamper the process of production networking

5. Market Conditions for A-P Economic Community Asia-Pacific region satisfies the following market conditions for Asia Pacific Economic Community (FTAAP) to become adesirable RTA • The consolidated market size (40% of the world population and 53% of the world GDP) is large enough to create a positive trade creation effect Condition 1 Condition 2 • The strong interdependence among APEC member economies in terms of intra- regional trade share of over 65% is the most promising factor in expecting a large trade creation effect • Pre-union industrial structure of the potential members is competitive and may expect significant efficiency gains from the regional free trade. • The simple averaged complementarity index of APEC is 53.7, a figure not excessively high or low. Condition 3

6. Table 1.Complementarity of APEC Economies in 2007 where d is the importing country of interest, s is the exporting country of interest, w is the set of all countries in the world, i is the set of industries, x is the commodity export flow, X is the total export flow, m the commodity import flow, and M the total import flow. In words, we take the sum of the absolute value of the difference between the sectoral import shares of one country and the sectoral export shares of the other. Dividing by 2 coverts this to a number between 0 and 1, with zero indicating all shares matched and 1 indicating none did. Subtracting from one reverses the sign, and multiplying by 100 puts the measure in percentage terms. It takes a value between 0 and 100, with zero indicating no overlap and 100 indicating a perfect match in the import/export pattern (UNESCAP, Trade Statistics in Policymaking: A Handbook of Commonly Used Trade Indices and Indicators). 2) * indicates a simple average of all the complementarity indices in the table. 3) Brunei Darussalam, Canada, Chile, Mexico, Papua New Guinea, Peru, and Chinese Taipei are excluded because the data source does not report the index of these countries. Source: APTIAD (Asia-Pacific Research and Training Network on Trade) Interactive Trade Indicators, http://www.unescap.org/tid/artnet/artnet_app/index_rca_fm.aspx

7. Conditions for Desirable Pathway • Significant economic gains for sustainable growth and co-prosperity • Produce trade creation while minimizing diversion • Potential to consolidate into larger-scale RTAs • Stepping stone towards global free trade • Is there any diagnose and prescription on both domestically or regional wide obstacles to access a target pathway?

8. Conditions for Desirable Pathway Economic Gains A desirable pathway needs to demonstrate potential to create substantial economic gains • Significant economic gains for sustainable growth and co-prosperity • - ASEAASEAN+3, 6 and TPP each satisfies condition for trade creation for participating members • Minimize trade diversion to non participating members • - All three sub groups does not create serious trade diversion • effect if trade and service liberalization and facilitation

9. Conditions for Desirable Pathway ② Potential to Consolidate In order to consolidate into larger-scale RTAs leading global free trade, each sub group needs to embrace following conditions • The capacity to respond to the challenges and changes facing the region • Inclusiveness of interests and harmonization with other groups in the region • Pursuit of high quality and consistency with the WTO.

10. Challenges Facing the Asia Pacific Region • Asia-Pacific economies needs to build on FTAs by improving the business environment • The heterogeneity of economic interests and political stances in the region and challenges facing the region make it very difficult to envisage a proper architecture for the region as a whole • There is no “top-level management” to substitute for WTO discipline, to ensure that bilateral trade tensions—tensions that are inevitable in East Asia—do not spill over into region-wide problems due to lack of cooperation and communication (Baldwin 2007)

11. Inclusiveness of Interests and Agenda • The possible conflicts in interests between different cooperation mechanisms such as APT, EAS and TPP have alarmed non-member economies in the Asia Pacific region. • Existing regional sub groups in the Asia Pacific region (APT, EAS, TPP) are not adequately institutionalized to deliver non-member’s interests: Proper regional and sub regional Institutional Architecture is required • The emergence of regional cooperation mechanisms in East Asia only such as APT and EAS have caused considerable concern and criticism has often been made in the context of nationalism and protectionist regionalism which emphasizes “Asian Only”: Potential inter and intra-regional conflict of Interests

12. High Quality and WTO Consistency • An optimum FTAAP calls for a high-quality and comprehensive free trade agreement for the participating economies to enjoy the economic gains • TPP targets high quality and comprehensive FTAs under the legal provision of GATT Article XXIV. However, market size needs to be expanded to enjoy the benefit of integration. • APS, EAS each proposed the establishment of FTA under the framework of EFTA and CEPEA respectively. However, these two regional sub groups have not entered into negotiating stages.

13. Policy Implications • Any single regional cooperation mechanism alone cannot function perfectly in isolation • APT. EAS and TPP should not be viewed as conflicting mechanisms. Rather, they can be mutually reinforcing. • As APEC strongly supports the WTO process, regional sub groups in AP can also function in this supportive role. • Regional sub groups can be viewed as the stops to be reached on the way to arrive at the farther destination, “Asia-Pacific community.”

14. Policy Implications • Strong political commitment is required for each of sub groups to become a catalyst for Asia Pacific Economic Community. • Strong commitment from the regions’ major economies are required. However, number of political challenges are lying ahead against promoting Asia Pacific integration. • Each group should demonstrate substantial progress with clear visions to Leaders in Honolulu. At the same time, Leaders need to agree to allow flexibility while strengthening capacity building activities.

15. Policy Implications • APEC itself must strengthen its role as a catalyst to promote regional cooperative approaches. • A strengthened APEC with strong regional supporters such as APT, EAS and TPP will eventually form the strong architecture that the Asia-Pacific region needs. • APEC must take full advantage of its dynamism (e.g. diversified membership & broad scope of agenda) to forward consensus reached agenda to sub groups for an effective implementation of Asia Pacific Economic Community.

16. Policy Options APEC’s dynamism including its non-binding principle is subject to be taken advantage of, not to be abandoned. • Endeavour to utilize pathfinder initiative: 21- X, Sector/Area Specific Approach • Take full advantage of current initiatives on REI, Growth Strategy and etc • Promote Further Structural Reform • Introduce Peer Review mechanism for intra- FTAs/RTAs

17. Concluding Remarks • APEC’s sustainable development lies in the successful establishment of unique role in harmonizing and deepening economic integration in the region. • Deepen regional economic integration by a successful incorporation of Behind the Border Issues, Next Generation Issues, Structural Reforms, Climate Changes • Become a Pathfinder for internationally applicable agenda via introducing Soft Law in operational mechanism of APEC

18. Thank you very much.

19. Annex: Key Empirical Findings ① Scenario Building The economic impact analysis has been conducted on following scenarios developed as the desirable forms for CGE model analysis. • Basic Scenario for Trade Liberalization through Tariff Reduction • For the economic impact analysis on both the members’ and non-members’ economies • in general as a reference value, an elimination of all tariffs on trade in goods by all • 19 member economies* has been assumed Scenario 1 • (1) + Liberalization of Trade in Services through 10% reduction of trade-equivalent • barriers in construction, distribution, transportation and telecommunication, and, • business and financial services as adopted from Hoekman (1995) Scenario 2 Scenario 3 • (2) + Trade Facilitation through 5% trade cost reduction in four main areas (customs • procedures, standard and conformity, business mobility, and, electronic commerce) • With this scenario, APEC’s contribution to the establishment of the infrastructure for • member economies’ sustainable development has been reflected • Rules of Origin Simplification by any of bilateral, diagonal and full cumulation • To address the technical limitations, PECS method has been adopted through analysis • of Gravity regression results of Park and Park (2009) Scenario 4

20. Key Empirical Findings ② Aggregation Inorder to examine plausible economic impacts in an unbiased and transparent manner, the consortium has aggregated the CGE model as below:

21. Key Empirical Findings ③ Statistical Results Empirical estimation shows that an FTAAP is economically beneficial for all participating economies. (Unit: US$ Billion, %)

22. Table A1 Effects of ASEAN+3: Scenario III (% deviations from the Base) Tariff Elimination + Reduction in Tariff Equivalents of Services by 10% + 5% Reduction in Trade Cost by Trade Facilitation

23. Table A2 Effects of ASEAN + 6: Scenario III (% deviations from the Base) Tariff Elimination + Reduction in Tariff Equivalents of Services by 10% + 5% Reduction in Trade Cost by Trade Facilitation

24. Table A3 Effects of TPP: Scenario III (% deviations from the Base) Tariff Elimination + Reduction in Tariff Equivalents of Services by 10% + 5% Reduction in Trade Cost by Trade Facilitation

25. TableA4 Effects of Expansion of TPP: Scenario III (% deviations from the Base) Tariff Elimination + Reduction in Tariff Equivalents of Services by 10% + 5% Reduction in Trade Cost by Trade Facilitation