Speeches and Articles

Regional economic integration - Is it all headed in the same direction?

13 November 2013


Address by Stephen Jacobi to NZIIA Symposium "Asia Pacific Integration - The Economic and Security Dimensions for New Zealand" - Wellington, 13 November 2013

Thanks for the opportunity to be with you today.

I’d like to congratulate the Institute for once again asking the hard questions about the shape of New Zealand’s external economic policy. 

Is regional economic integration all headed in the same direction - I’m tempted to answer ‘yes, but we’re just not sure which one!’ 

I’m reminded of the quote by that great American baseball player and part time philosopher Yogi Berra - “If you don’t know where you’re going, you might end up some place else”.

In any event, this is an important question and one that is being asked by governments, business and other stakeholders as we pursue today’s roadmap towards regional economic integration.

I propose to attempt an answer - or at least to contribute to helping us all to figure out the answer – by talking first about the APEC vision for free trade and investment encapsulated in the Free Trade Area of the Asia Pacific (FTAAP). 

I’ll go on to look at progress in the pathways to FTAAP currently under negotiation. 

I’ll conclude by hazarding a guess - because at this stage it can be no more than that - about what might happen in the next few years.  

Seizing the FTAAP vision

I hate to think that the Institute has brought you here under false pretences, but I must point out, Madame Chair, that a gremlin has crept into the programme. 

FTAAP as an acronym is a mouthful.  

As a concept it may be incomprehensible, even reviled by some, but it is not, as suggested in our programme, the Free Trade Agreement of the Asia Pacific, it is the Free Trade Area of the Asia Pacific. 

The difference between Area and Agreement is not just semantics. 

This lies, I would suggest, at the heart of the debate around the nature of regional economic integration and explains why FTAAP has been so difficult to achieve.

To understand the dynamics at play here it is necessary to reflect on the role of APEC, that grouping of 21 economies which accounts for over 70 percent of New Zealand’s overseas trade.

Trade negotiators tend to take a rather disparaging view of APEC which operates as a voluntary and non-binding arrangement. 

Trade negotiators prefer the world of binding agreements forged either bilaterally in free trade agreements (or preferential trade arrangements if you prefer the more academic term) or multilaterally through the World Trade Organisation.  

It’s true that APEC as an organisation can at times be deeply disappointing, because it always seems to drop the ball just when the game gets interesting. 

Think back to the demise of “early voluntary sectoral liberalisation” - in the early nineties this was an APEC initiative by which economies would co-ordinate their individual decisions to reduce trade barriers in particular sectors. 

“Concerted unilateralism” was another word for this approach which spoke to APEC’s voluntary and non-binding nature.

As I recall, and I’m open to correction on this point, that initiative came to grief because the United States Congress upheld the reciprocal nature of trade policy - the free riding problem just didn’t cut any ice in Washington.

In 1994 the APEC economies proceeded to adopt the famous Bogor goals which committed them to achieving free trade and investment in the region by 2010 for developed economies and 2020 for developing economies.  

It was envisaged that these goals would be achieved through a mix of unilateral, bilateral and multilateral efforts. 

It took another ten years before the APEC Business Advisory Council (ABAC) first started to think seriously about developing a more ambitious proposal to achieve comprehensive free trade in the region.   

Business leaders in ABAC were even then impatient at the time being taken to put some runs on the board with the Bogor goals.  

The FTAAP concept also arose due to the lack of progress in the Doha round of WTO negotiations - does this sound familiar? 

The proposal was supported by new research undertaken by New Zealand’s own Professor Rob Scollay and others, completed for ABAC in 2004.   

As always New Zealand always seems to be at the heart of good ideas in the trade liberalisation field.  

By 2006 at the APEC Leaders’ Summit in Hanoi President Bush proposed that APEC adopt the vision of FTAAP.   

After much debate Leaders decided that FTAAP would be achieved through a range of practical and incremental steps - something that the trade negotiators in the room will be quick to assure you means no progress whatsoever.    

In 2007, APEC Economic Leaders endorsed the report Strengthening Regional Economic Integration which contained no less than 53 agreed actions aimed at strengthening work among APEC economies.   

These included reference to FTAAP but as a long-term prospect.    

“A long term prospect” - somehow that fails to inspire!     

As far as I know there’s only one “long term prospect” that never fails to materialize, one that will definitely get you in the end, and most of us are not in hurry to get there!

But despite the continuing reluctance of the APEC economies to contemplate anything that might resemble an actual decision to do something by date certain, the FTAAP concept continues to form the direction in which much of APEC’s work is headed.   

In the last five years a plethora of reports, inventories of issues, analytical studies even model FTA chapters have been undertaken by APEC officials all with the aim of FTAAP firmly in mind.        

There’s nothing wrong with all this - on the contrary it is good work, provides valuable data and resource material and a habit of APEC co-operation which can be built on in the future.         This work has also pointed to the significant gains to be realised from regional economic integration. 

An analytical study completed for APEC by Australia, China, Korea and New Zealand in 2010 found that FTAAP would be economically beneficial for all participating economies, particularly when a cumulation approach was taken to rules of origin and services were also included. 

The study found that comprehensive tariff elimination combined with trade facilitation and services liberalisation would result in a 2.9% increase in the region’s GDP and gains to welfare of US$527 billion  . ( http://aimp.apec.org/Documents/2009/SOM/CSOM-R/09_csom_r_010.pdf )    

The gains estimated in a more recent study by Peter Petri, Michael Plummer and Fan Zhai for the East West Center suggests that full free and open trade and investment in the Asia Pacific region could be worth US$5.8 billion for New Zealand alone and around US$2 trillion for the region as a whole.  

 Now these studies are only as good as the assumptions that go into the modelling.

They also remain subject to the quality of the outcome and the depth of the integration that occurs.

You would think that these numbers would encourage progress towards FTAAP as a matter of urgency, particularly in the financially constrained world we have lived in over the last few years.        

Yet, despite all this, FTAAP remains elusive.

 I would suggest that the reason is that the first “A” in FTAAP stands for “Area” and not “Agreement”.

After all these years we seem none the wiser about how to create an “Area”. 

Certainly FTAAP, as a top down approach to creating regional economic integration will not be achieved through a conventional negotiating process.         So economies have had to go back to a bottom up approach and are pursuing agreements which are seen as “pathways to FTAAP”. 

Walking along the FTAAP pathway

I mentioned a moment ago that New Zealand was closely involved in the early moves towards FTAAP.

We’ve also been at the forefront of the most advanced pathway towards FTAAP in the form of the Trans Pacific Partnership (TPP) and we are intimately involved in the more recent pathway that is centred around ASEAN, the Regional Comprehensive Economic Partnership (RCEP). 

Both TPP and RCEP are “bottom up” approaches in that they are pointing towards the bigger prize which is FTAAP. 

TPP is a coalition of the willing - four economies became eight, then nine, now twelve. RCEP is a development of the ASEAN dialogue process - a sum of pluses, if you like, ASEAN plus its six dialogue partners. 

TPP is big on vision - it aims to be a new generation agreement, fit for the twenty first century.

CEP is less grandiose at least in its public presentation but no less wide-ranging in its potential impact. 

Both are conventional FTA negotiations - with formal negotiating mandates, rounds of negotiations - nineteen plus in the case of TPP, two in the case of RCEP, all involving dragoons of negotiators, stakeholder processes, and some sense of timetable.  

Both are subject to contradictions. 

In the case of TPP it has proved difficult to match the lofty rhetoric with the negotiating practice.

TPP Leaders have all signed up to the idea of a fully comprehensive outcome, but negotiators appear to have made little progress on the market access negotiation and several economies seem to harbour fantasies that they can continue to keep so-called “sensitive sectors” off the table.

RCEP participants already all have FTAs with ASEAN but of the non-ASEAN participants most do not have FTAs with each other - apart that is from Australia and New Zealand and, interestingly, New Zealand and China.

A successful outcome to RCEP would seem to imply that China, Japan, Korea and India would all be able to negotiate an FTA with each other, which would be no small accomplishment.         For the time being these two negotiations are running along separate paths according to different timetables.  

Economies involved in both, like New Zealand, have an obvious interest in maintaining some synchronicity between the two - after all, no economy would want to part of rule making which delivered different outcomes.

Business too is particularly wary of creating yet more noodles for the noodle bowl. 

I think that is why some of the rather pessimistic talk about TPP and RCEP conflicting with each other is premature.

Hopefully too some of the habit of APEC co-operation - of which admittedly India is not a part - will rub off on the two negotiating processes.         As economies look for solutions to address increasingly complex economic and commercial issues my guess is that they will look to APEC to provide much of the analytical background against which policy is created.         Which brings me back again to the centrality of APEC as far as regional economic integration is concerned.

Looking ahead

However unsatisfactory APEC’s processes are from a trade negotiating perspective, the organisation exists, it has a history of achievement and is the glue which holds the framework of regional economic co-operation together. 

Others may say that the East Asia Summit can play this role and they may be right - it’s just that APEC has been in the business longer. 

It is APEC that is the holder of the FTAAP vision and it is the natural place for economies to seek to bring together the outcomes of the negotiating pathways.

I understand China as the incoming APEC Chair for 2014 has already spoken about ensuring that APEC provides a forum where economies can share information about these negotiating processes.

I noted earlier that India is not part of APEC but is a participant in RCEP.

It seems to me inevitable therefore that a way will have to be found to include India, along with other aspirant economies like Colombia, in APEC at some point soon - if only to ensure that the wider region moves ahead cohesively in the future.

I cannot see how the region’s broader economic interests can be advanced unless we adopt a fully inclusive process towards regional economic integration which ultimately includes anyone who wants to be “in” regardless of their level of economic development.

So how might this process develop in years to come? 

I’m grateful to Peter Petri and Jeff Schott and others whom I met while on sabbatical in the United States earlier this year for helping develop my understanding of these matters.       Petri and colleagues speak of three phases towards FTAAP and regional economic integration.

A competitive phase where TPP and RCEP will be in contest for attention and coverage.

An enlargement phase where TPP moves to encompass other economies.

 A consolidation phase where the US and China will be persuaded to negotiate with each other.

 An early result from the competitive phase has been Japan’s decision to join TPP which, while late, will hopefully be another example of Japanese “just in time” manufacture.

Japan has not abandoned RCEP but Japan’s participation in TPP, along with Canada and Mexico, has changed the game not just for New Zealand but for all the participants in TPP by increasing significantly the economic gains from the expansion beyond the initial nine

I think there can be little doubt that TPP as the more advanced process will deliver an outcome before RCEP. 

When that might be is uncertain at best, but my guess is the negotiation will be concluded if not by the end of this year, then in the first half of next year.

I suggest that once TPP 12 is concluded we will see a fairly speedy second enlargement to include Korea, Thailand, the Philippines and potentially other economies. 

By this stage RCEP will hopefully begin to deliver some concrete outcomes and greater confidence will have been built between the North Asian players.

As to when the consolidation phase might begin I am loathe to predict, other than to observe that China’s interest in TPP is increasing beyond academic circles.

Already in Washington last month business leaders and former officials from China and the United States meeting for the fifth time agreed that trade and investment liberalisation achieved under a US China Trade and Investment Agreement would promote and enhance economic growth and job creation.

At the risk of counting chickens before they are hatched, I would look in coming years for increasing signs that an eventual US-China agreement is not only conceivable but possible.

Conclusion 

Yogi Berra was undoubtedly right when he said “If you don’t know where you’re going, you might end up some place else”. 

Regional economic integration requires a long term and patient vision. 

FTAAP provides such a vision and would represent the accomplishment of the Bogor goals. 

But a vision without a plan is a daydream and FTAAP is as yet an unfulfilled vision.

FTAAP represents a “top down” approach to trade liberalization - the pathways TPP and RCEP represent “bottom up” approaches.

TPP is the more advanced but RCEP no less useful in getting us further along the road. 

APEC provides the place for sharing information and developing ideas in the negotiation.

A successful conclusion to TPP in 2014 could lead to a further round of enlargement.

RCEP will also encourage further confidence building and consolidation.

An eventual US-China accommodation will mean that FTAAP will at last be born.

Is it all headed in the same direction?

We’ll have to wait and see.



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