Inclusive Global Value Chains

George Manzano and Kristine Joy Martin

        Inclusiveness is a big word in the development community. Given the increasing ubiquity of global value chains (GVCs), policy attention has turned towards making these more 'inclusive.' APEC, for one, is promoting inclusiveness of GVCs through international cooperation.

        APEC is interested in GVC because it is perceived to be a game changer, i.e. a new paradigm that will increasingly define the patterns of international trade. Indeed, GVC has shaped the current global business environment in more ways than one. It has shifted the focus of the unit of trade from trade in goods to trade in tasks. Secondly, GVC encourages firms and countries to specialize in specific tasks and business functions based on their comparative advantages in order to ratchet up efficiency in production. GVCs provide potential mechanisms for all countries - whether these countries are large or small, developed or developing - to improve their income, employment, and productivity.

        The emergence of GVCs thus raises many important trade policy questions, which can be discussed and for which a consensus for collective policy action can be drawn out in APEC.

Why does APEC have to raise inclusiveness in GVCs as a policy objective?

        APEC raises the issue of inclusiveness for a number of reasons. Firstly, inclusiveness is at the very heart of development, i.e. what development is for, if not for people. Secondly, because participation in GVCs does not automatically lead to inclusive outcomes, there is a groundswell for a policy stance. In addition, as GVCs, by nature, reaches beyond borders, there are avenues for cooperation. APEC is thus, an appropriate forum to discuss and initiate policy responses, either at the collective level or at the level of individual APEC members, to promote inclusiveness in GVCs.

Inclusiveness at the extensive margin

        Inclusiveness can be understood in various ways. One way is to consider inclusiveness across countries, i.e. getting more countries to participate. Different countries, of course, have different initial capacities to participate in GVCs. Such differences may be due to different factors that are fixed, such as, country's geographic location and resource endowment. Conversely, the differences can also be due to public policy, such as, a country's human capital, physical infrastructure, and overall investment climate. Thus, to facilitate the entrance of developing countries into the GVC, proper trade and investment policies that aim to liberalize exchange of goods and services worldwide should be encouraged and implemented. We call attempts to broaden inclusiveness across countries as the extensive margin.

        Because of the nature of GVCs, where parts and components necessarily cross borders multiple times, countries with low trade barriers have better chances of participating. It also has been observed that GVCs tend to propagate in industries or product groups that have been subject to global trade liberalization. The passage of the 1997 Information Technology Agreement (ITA), which calls for the liberalization of IT products on an MFN basis by many countries, has been credited with the blossoming of GVCs in the electronics sector. To the extent that sectoral liberalization such as the ITA has promoted the participation of many countries - developed and developing alike - in the electronic GVC, it can be said that such initiatives foster inclusiveness across countries.

        Thus, inclusiveness at the international level could be fostered if APEC could take the lead in promoting more sectoral liberalization on an MFN basis. APEC has a role because the sheer size and economic weight of its members is likely to give it the critical mass which is needed to push for sectoral liberalization. In addition, APEC is a forum for cooperation, which makes it an appropriate venue to gather consensus and support for sectoral liberalization in different sectors.

        It is, however, not easy for APEC to negotiate for more sectoral liberalization because of the 'free rider' problem. Free riding entails that the countries which are not signatories to a sectoral liberalization agreement will also enjoy additional market access even without having to offer tariff concessions of their own. To lessen the possibility of free riding on the trade liberalization efforts by APEC, the challenge is to identify those areas in which the benefits of trade liberalization would redound mostly on APEC members rather than on non-members. These product groupings would be the promising candidates for sectoral trade liberalization. Wonnacott suggested a trade liberalization scheme on a selective product-by-product basis wherein countries choose the commodities for early liberalization based on a pre-defined criteria1.[1]

Inclusiveness at the intensive margin

        Inclusiveness in GVCs could also be enhanced among the elements of the value chain within a country. Inasmuch as there are lead countries at the international level, there are also lead firms that coordinate production across a series of producers, each with different tasks, along a domestic supply chain. The lead firms, which could be producers or traders, thus act as the nexus between the international and the domestic supply chain. By and large, policies aimed at promoting inclusiveness within countries deal with getting more small and medium establishment (MSMEs) and fostering more linkages especially between foreign firms with local firms. We call policy actions directed to promote inclusiveness within the country as the intensive margin.

        Making GVCs more inclusive can be achieved through many means. In this article we focus on (1) intensifying existing participation of Micro Small and Medium Enterprises (MSMEs) and (2) developing linkages of lead firms with local firms.

MSMEs

        Because GVCs are export-oriented, the firm-actors are operating under a very competitive environment. They are agile enough to modify products to suit the changing tastes and to adopt technology and production practices to remain cost effective. For these reasons, MSMEs that join GVCs are likely to enjoy positive spillovers of production technology as well as best managerial practices. However, the literature is replete with accounts of the many barriers that MSMEs face as they attempt to join, deepen and widen their GVC participation. These barriers are usually related to trade costs which could have structural or policy induced origins.

        Thus, government plays a big role in lessening trade costs for MSMEs. For example, it can provide financial aid to help companies access credit for more efficient operations. More importantly, it can also facilitate MSMEs compliance to international standards, especially since MSMEs find it difficult to adjust to global standards and regulations at public, private, and civil society levels. Note that the GVCs, standards and certifications are at the heart of a firm's ability to participate and compete.

Linkages

        The linkages of MSMEs and other local firms - especially those outside the special export processing zones (SEZs) - with lead firms or large multinational enterprises (MNEs) can also promote GVC inclusiveness. SEZs do not necessarily help in creating spill-over if the participating firms engage in processing activities with very little interaction with the local supplier firms. Thus, enclaves with little connection with the local firms are created.

        An opportunity to make GVCs more inclusive is through forging partnerships among lead firms and local firms outside SEZs. Local firms can be suppliers of manufactures while the lead firms can be the buyers. This would increase the smaller partner's market and capabilities which can eventually hook them to the GVCs [2].

        Policy should be directed at strengthening the linkages between the lead and the supplier firms in the GVC model that have the weakest link. APEC, being a body that supports economic and technical cooperation can consider initiating capacity-building programs or advocacy where linkages can be deepened in pursuit of inclusiveness, in the following areas:

1. On standards and international certification: Participation of firms in a GVC is conditional on their ability to meet the product or process standards of the lead firms. APEC can spearhead initiatives such as designing capacity building initiatives in certification compliance so as to facilitate the ability of small local firms to participate meaningfully in the production chain.
2. Entrepreneurship: In certain industries, supplier firms may have started as informal subcontract suppliers. However, transitioning towards formal status could be problematic. Given this difficulty, it is recommended that policy attention be directed towards facilitating the transition of informal establishments to the formal sector by reducing red tape and enforcing of property rights [3]. In addition, company programs where managers in lead firms could be trained and 'spun off' to head supplier firms could be explored.
3. Trade facilitation: Trade costs act as tax on supplier firms or as a fixed cost to internationalization. Trade costs need not necessarily be monetary in nature (tariff, taxes, etc). Delays can be particularly debilitating to the tight process flows of GVCs, thus any policy that improves export-import procedures at the border could encourage local firm participation. Programs to cluster service suppliers can create economies of agglomeration, lower transaction costs, and diminish the enclave behavior of lead firms.

Final Remarks

        The advent of the GVCs, on the crest of network economics, is an important development to warrant keen policy attention. APEC, for one, has taken an interest in GVCs, because fostering this mode of integration raises many policy issues that can be discussed in the context of economic cooperation. Missing out on the policy questions surrounding GVCs would make APEC less relevant. Furthermore, APEC desires to imbue regional integration with an inclusive character for developmental purposes.

        We suggest two broad areas to promote inclusiveness in APEC. The first deals with increasing the potential for GVCs. The proliferation of GVCs could only increase the possibilities for developing countries to participate. APEC, as a collectivity, could engage in initiating sectoral liberalization. The second avenue addresses fostering linkages between lead firms, which are usually foreign, with local suppliers (small businesses or otherwise) within the country. The idea is to prevent enclaves of foreign led GVCs. Though there is a host of complementary policies that could improve linkages, we highlight those that will help local supplier firms acquire the necessary standards, deepen entrepreneurship and benefit from trade facilitation measures.

References:

1.  Wonnacott, P. (1994) "Merchandise trade in the APEC region: Is there scope for liberalisation on an MFN basis?" The World Economy, Special Issue on Global Trade Policy: 33-51
2. Ibid.
3. Organization for Economic Cooperation and Development (OECD), World Trade Organization (WTO) and UNCTAD. "Implications of Global Value Chains for Trade, Investment, Development and Jobs." Prepared for the G-20 Leaders Summit Saint Petersburg (Russian Federation), August 6, 2013

Overview of the 2015 APEC Study Centers Consortium Conference

Chen Ho

Introduction 

        The APEC Study Centers throughout the APEC region have been meeting with each other every year. This year, the APEC Study Centers Consortium Conference was held in Boracay Island, Philippines on May 12-13, 2015. The main hosts of the Conference were the Philippine Institute for Development Studies (PIDS) and the Philippine APEC Study Center Network (PASCN).

Main Points of the Sessions 

        The Conference primarily consisted of six sessions. In Session 1, the focus was on "Pathways to FTAAP." The participants agreed that APEC should provide the strongest support for realizing the FTAAP. Specifically, APEC should serve as the platform for communication, exchange of best practices, and capacity building. In addition, APEC should maintain its support for the principle of open regionalism and the World Trade Organization. Another important point was that the participants believed that in any pathway to FTAAP, the role of small and medium enterprises (SMEs) should be emphasized and that concrete actions to advance SMEs should be developed (PIDS 2015). Most importantly, APEC should ensure that all APEC members can become members of the FTAAP. The reason was that the FTAAP was a product of APEC and APEC members had reached consensus to achieve the FTAAP. The economic benefits to APEC would be substantial when all APEC members could participate in the comprehensive FTAAP.

        In Session 2, the main topic of discussion was "Connectivity through Services." The main point was that efficiency in services had increasingly been associated with higher labor productivity and competitiveness in manufacturing. Moreover, services had been recognized as the facilitator of global value chains and logistics chain in particular. The main challenge was that the services sector continued to be highly restrictive in many parts of the world as well as the APEC region. Furthermore, the difficulty of changing domestic regulations had led to the reluctance of economies to liberalize their services sector. It is suggested that economies should promote knowledge sharing and the development of a knowledge community for promoting regulatory reforms (PIDS 2015).

        Session 3 was about "Trade and Investment Patterns and Supply Chain Connectivity." It was mentioned that the extent of gains from regional integration would depend greatly on the volume and quality of trade and investment patterns, infrastructure, and connectivity in the region. The experiences of Thailand and Viet Nam indicated that factors such as real interest rate, degree of openness, and exchange rate could significantly affect and explain foreign direct investment (FDI) trends and patterns. Another important point was that policies that promoted investments and lowered trade transaction costs were considered crucial to FDI inflows (PIDS 2015).

        With regard to Session 4, the emphasis was on "Fostering SMEs' Participation in the Regional and Global Economy." It was related that SMEs could be a major driver for economic growth. SMEs had contributed by creating a stable economy given their flexibility and capacity to easily absorb both skilled and unskilled labor. The viability of SMEs is important for developing competitive and efficient markets. Presently, SMEs had faced the greatest difficulty in borrowing money from banks. The reason was that most SMEs did not have credit data and the perceived risks in lending to SMEs. A suggestion was made that stronger financial cooperation must be advanced and a credit rating system for SMEs should be developed. In addition, with trade being integrated by production and supply chains, natural disasters can cause serious problems for SMEs. It was estimated that only 25 percent of SMEs had re-opened following natural disasters. APEC should enhance the resilience of SMEs (PIDS 2015).

        Session 5 was about "Investing in Human Capital Development." It was mentioned that education, training, and human resource development could raise the output and productivity of workers. However, several issues continued to be important, such as developing 21st century workforce, aligning education and training to industry needs, and strengthening the productivity of SMEs through skills training. Another suggestion was that it would be necessary to create an environment that would encourage academic and technical exchanges. APEC economies could send at least five percent of the students enrolled in their leading universities to universities in other APEC economies to stimulate cross-border education. It was also suggested that an APEC Qualification Framework could be created. The Framework would function as a standard for comparing the training, qualifications, skills, and competencies of various semi-skilled workers (PIDS 2015).

        The focus of Session 6 was on "Building Sustainable and Resilient Communities." With regard to climate change, it was suggested that there was the need to enhance the supervision of change by adopting an integrated approach, given the wide-ranging impacts of climate change. Intersectoral and inter-agency collaboration would be necessary and further multidisciplinary research to understand climate change would be needed. Moreover, fiscal risks arising from natural disasters were a concern shared by most APEC member-economies. Individual governments often shoulder a large part of the cost of disasters, particularly in developing economies. A suggestion was the promotion of insurance and other risk-sharing schemes. In addition, APEC could contribute to the mitigation of the adverse effects of environmental degradation. Since these were cross-border issues, solutions must be derived through international cooperation. A suggestion was that APEC could liberalize a number of environmental goods in the APEC list, so as to contribute to global efforts to foster sustainable development (PIDS 2015).

Comments and Suggestions 

        The annual APEC Study Centers Consortium Conference has been an important event for the Centers to gather together and discuss major APEC issues for that year from the perspective of researchers. From the Conference, valuable suggestions have been presented that could be further developed. In order to enhance the linkage between APEC and the APEC Study Centers as well as to strengthen the linkage among the APEC Study Centers, it is suggested that APEC provides funding for one research project each year to the APEC Study Centers. The APEC Study Centers would choose the topics for research, so as to ensure that the APEC Study Center are able to undertake outstanding research.

        It is also suggested that the APEC fora and the APEC Study Centers could collaborate on examining APEC issues. This means that the APEC fora could request comments and suggestions from interested APEC Study Centers. In doing so, the APEC fora would have access to good quality research. The APEC Study Centers would enhance their knowledge of APEC issues and the views of the APEC fora.

Reference 

PIDS. 2015. "Summary Report of the APEC Study Centers Consortium Conference 2015." Manila: PIDS. 

Implications of ADB Joining Forces with AIIB

Darson Chiu

        Takehiko Nakao, President of the Asian Development Bank (ADB) announced during ADB's 48th annual meeting in early May this year that ADB would work together with the Asian Infrastructure Investment Bank (AIIB) through co-financing development projects. However, Nakao put down AIIB on April 20 this year by stating that it would take a very long time for AIIB to catch up with ADB in terms of available resources as well as outright influence in the region. What have been the critical reasons making ADB eventually turning the tables around on AIIB within only two weeks?

        After Bretton Woods Conference charting financial agendas and regulations for major world political and economic powers in 1944, the World Bank (WB) led by the US and ADB jointly dominated by the US and Japan have been financing development projects in conjunction with other poverty reduction missions across the Asia-Pacific region and rest of the world. The initiative of establishing AIIB was announced by China in October 2013, a purposely set timing, as China served as the host of APEC meetings the following year.

        There is without doubt an extremely strong demand for emerging economies in the region to finance their much needed infrastructure improvement. It is estimated around US$ 700 billion required to meet the needs of infrastructure development in Asia per annum. Furthermore, given Asian economies' excess savings and significant gaps in economic development, directing capital to infrastructure could more or less ensure continued growth, especially when most Asian economies are losing steam for growth at this moment. From the simple supply and demand perspective, the lending capacity of ADB is unable to sufficiently finance infrastructure development projects in the region even with its proposal of expansion, enhancing its credit line each year by 50% to US$ 20 billion starting from 2017. But this is definitely not the only reason that explains why ADB has decided to join forces with the AIIB.

        During the 2014 APEC meetings, as there were doubts that the formation of AIIB was intentionally to challenge existing multilateral financial institutions, the WB and ADB. And Chinese APEC delegates in many international occasions often stressed that AIIB was not set to compete but complement works of WB and ADB. In addition, Chinese APEC delegates even claimed that AIIB could cooperate with the WB and ADB in joint projects. Therefore, the AIIB did extend its goodwill gesture before; however, neither WB nor ADB responded to that offer with adequate courtesy. The US and Japan did not wish to see a burgeoning new bank led by China to go beyond the works long been doing by the WB and ADB. The White House even warned its allies against joining AIIB then considering there's a possible purpose behind the AIIB to hold down the operations of WB and ADB.

        The big turning point would be when the United Kingdom announced in March this year that it intended to become a prospective founding member of the AIIB and be the first major Western power and a long time US ally to seek to join the China-led bank. Right after that announcement, the US expressed its unease at UK's decision by issuing serious concerns regarding if the new bank would be able to meet the modern governance benchmarks. As the UK is also a member of ADB, it is not irrational for the European country to join in Asia's development projects that might be equally relevant to the AIIB. In spite of everything, an estimated investment of about US$ 11 trillion in infrastructure for the next 15 years of emerging Asia is just too tempting.

        Despite the reproving signal from the US, Germany and France also joined the UK in becoming members of AIIB in March this year. Following these European Union fellow members, Italy was soon set to join the Chinaled bank. That means four out of seven G7 member countries, four largest European economies and the once most reliable US allies have "jumped ship" in a way, and it is probably enough and about time for the White House to put aside its animosity towards the new bank and consider revising the game plan.

         Jack Lew, the US Treasury Secretary stated in late March this year that US would position itself to welcome a China-led development bank on the conditions that the bank could complement existing institutions, implement good governance practices, and attain transparency. During a press conference set for welcoming Japanese Prime Minister Shinzo Abe's visit on April 28, the US president Barack Obama said the AIIB could be a positive thing for the region of Asia as long as it adopted high standards to finance development projects. The presidential press pronouncement unveiled the fact that how to address AIIB was definitely on the agenda of Obama-Abe meeting.

        Adding these all up; we can summarize several concluding points here. First, the US leadership in Asia-Pacific region was challenged by China, and then jeopardized by its European allies. As the EU Big Four also own memberships in ADB, it is sensible for them to continue their endeavors and help Asia's development projects. And it's probably unfounded to stop them from doing so. Second, as the only major ally of US now, Japan tried to seek US opinion of whether to join or jointly contain AIIB. The former seemed improbable, as Japan had been joined the US expressing skeptical of whether the AIIB would redundantly overlap the functions of existing institutes in the first place. The new bank looked so influential and powerful making the latter also seemed less likely to succeed, despite the Japanese ADB president attempted to discourage AIIB several days before the Obama-Abe meet up in April.

        Finally, the optimal solution would be using ADB to join AIIB thru the means of co-financing projects. The merits of doing so are multiple: a) Japan and the US can also enjoy a share of potential business opportunities associated with AIIB, b) Japan and the US can keep an eye on AIIB through cooperation, as then AIIB needs to be more transparent when working together with ADB, c) AIIB did offer the willingness to combine forces in the past, so ADB would hardly get a thankless cold shoulder from AIIB, and d) the AIIB does need to pull experience and expertise from ADB.

        Finally, the optimal solution would be using ADB to join AIIB thru the means of co-financing projects. The merits of doing so are multiple: a) Japan and the US can also enjoy a share of potential business opportunities associated with AIIB, b) Japan and the US can keep an eye on AIIB through cooperation, as then AIIB needs to be more transparent when working together with ADB, c) AIIB did offer the willingness to combine forces in the past, so ADB would hardly get a thankless cold shoulder from AIIB, and d) the AIIB does need to pull experience and expertise from ADB.

The Year of Promising Economic Integration in the Asia-Pacific

Eric Chiou

        The year of 2015 is going to be indicated as a remarkable year for economic integration in the Asia-Pacific region. Not only the negotiation of Regional Comprehensive Economic Partnership (RCEP) is scheduled to be concluded by the end of this year, but also the Trans-Pacific Partnership (TPP), after a series of intensive and difficult negotiations, aims to reach a principle framework agreement in this year. In addition, an ambitious vision of the ASEAN Economic Community (AEC) is planned to be fulfilled within this year, which will make it one of major global player in the world, and become the seventh largest economy as well as the most consolidated trade bloc in Asia.
     
         Furthermore, foreseeing robust demands of infrastructure financing in developing countries in Asia, China initiated the proposal of Asian Infrastructure Investment Bank (AIIB), in order to provide sufficient financial support to bridge the gap of financial needs for infrastructure development in the region. The Bank is expected to operate by the end of this year and its establishment has been considered positive contribution to deepening regional economic integration and spurring economic momentum by strengthening physical connectivity in the Asia-Pacific region. Based on these favorable factors, the year of 2015 is likely to be a promising watershed in the history of Asia-Pacific economic integration.

        As the most vibrant and long-standing locomotive in promoting economic integration, APEC has been one of the most dynamic forums and a critical incubator for cultivating various ideas toward a common goal of facilitating free and open trade and investment in the Asia-Pacific region. Meanwhile, it has also played as the most persistent advocate and assiduous actor in carrying out numerous policy measures to enhance regional trade and investment.

        For example, APEC has adopted the global Trade Facilitation Agreement and also set a goal of increasing 10 percent from 2009 levels in regional supply chain performance by the end of this year. This initiative targets at reducing customs bottlenecks for goods at borders by enhancing custom cooperation among APEC members, which expects to improve efficiency, lower operation costs, and facilitate trade flows across APEC countries.

        To continue the efforts and progress made in 2014, one of APEC's priorities in this year is "Enhancing Regional Economic Integration." As a host member in 2015, the Philippines has laid out a plan to organize a task force and launch a two-year collective strategic study on issues related to the realization of a Free Trade Area of the Asia-Pacific (FTAAP), in order to ensure the fruitful results of the Beijing Roadmap for APEC's Contribution to the Realization of the FTAAP to be maintained and carefully implemented.

        Moreover, from a geopolitical aspect, heightened tensions over territorial disputes in recent years have gradually lessened since last fall, while the forecast of moderate economic growth for most countries in the region in 2015 has also played a positive role for allowing national leaders to keep cool head and concentrate on the issues of how to stimulate economic growth, instead of augmenting their existing political frictions. Last year, the lukewarm, but symbolic meeting between Chinese leader Xi Jinping and Japanese Prime Minister Shinzo Abe signified a historical turning point and showed deliberate efforts to turn down their rising suspicion and hostility in recent years.

        In a word, an overall geopolitical environment in 2015, so far, provides a fairly constructive and peaceful milieu in fostering economic integration. Nevertheless, despite various advantageous elements being depicted above, some critical hindrances to the final achievement of regional integration remain challenging in the coming months of this year. Here are possible challenges worthy of further discussion.

        First, despite the latest TPP negotiation just taking place in Hawaii in March, some thorny issues, such as intellectual property rights (IPR), have not been solved, which cast a shadow over the prospect of successfully concluding the TPP this year. Furthermore, with the upcoming presidential election in the United States in 2016, the chance for the Obama administration to obtain the Trade Promotion Authority (TPA) from US Congress seems gloomy.

        If the United States could not attain the TPA to complete the final stage of negotiation, the TPP may eventually turn out to be a failed attempt. At this juncture, Abe's visit to Washington in late April becomes crucial. If two leaders from Japan and the US can effectively narrow their differences and reach consensus in the meeting, this breakthrough may generate sufficient political momentum to compel US Congress to grant the TPA to the Obama administration. Then, the TPP will be more likely to be concluded within this year, given that two largest TPP members are able to settle their differences.

        Second, compared with intensive negotiations among TPP members, the progress and pace of RCEP seem relatively limited and slow. Although these indications do not necessarily suggest that the RCEP may become an illusion in the end, this tepid development certainly invokes some concerns over its quality and future implementation, even if RCEP members eventually reach a deal this year.

        It is estimated that the RCEP accounts for 28 percent of world economy and its implementation will produce income gains of $240-644 billion to the world economy in a decade. However, these inspiring figures are likely to be illusionary, if the final agreement of RCEP fails to live up to its original objectives of being a high quality regional free trade bloc.

       A similar predicament can be applied to the AEC, since it is exactly a product and also a victim of so-called "ASEAN Way." The characteristics of ASEAN Way have highlighted consensus-building, flexibility, mutual respect for differences, etc. The outcome and effectiveness of AEC will be dubious, if it fully abides by and operates in accordance with the ASEAN Way. Hence, what matters is not whether the AEC can be established or not, but to what extent the contents of the AEC can be faithfully implemented by ASEAN members.

        Despite some possible weaknesses, the formation of AEC will certainly generate a big boost to regional economic integration in the Asia-Pacific. At least, it will consolidate its pivotal role as a center of regional integration and spur the interests of its trading partners to further strengthen economic ties with the AEC. This outcome is likely to induce a virtuous circle of competition and accelerate the completion of other regional trade deals.

        In short, the year of 2015 will be a critical juncture for the Asia-Pacific economic integration as a whole. If the above trade initiatives are fully realized as promised, this year will be a historical turning point in the history of Asia-Pacific integration. Then, the question of how to efficiently converge those diverse regional integration initiatives will be a crucial task in the next stage, in which APEC will continue to take a leading role in facilitating discussion and guide a better way to the future.

Enhancing SMEs Participation in Global Value Chains

Wayne Chen

        Under the theme of "Building Inclusive Economies, Building a better World", the Philippines, the host economy of APEC 2015, announced that Fostering SMEs' Participation in the Regional and Global Economy is centered as one priority areas for this year.

        SMEs have been recognized as a significant dual engine of employment and economic growth after the financial crisis. Similarly, in the APEC context, SMEs are highlighted for its contribution mainly for the Inclusive Growth, one of the five attributes of the APEC Growth Strategy announced in 2010. Inclusive Growth implies that APEC should pursue economic growth and meanwhile improve quality of industrial development and livelihood by a more integrated regional economy. In this light, SMEs is an indispensable pathway to ensure economic prosperity last longer and benefit people's livelihood in a more inclusive manner.

Reducing Barriers to SMEs Trading in the Region

        One remarkable move was initiated in 2011, where APEC Ministers Responsible for Trade and the APEC Ministers Responsible for Small and Medium Enterprises announced a joint statement to recognize SMEs' contribution to economic growth and job creation in the Asia-Pacific as well as consider SMEs as a source of innovative business models and new technologies.

        Consequently, Ministers identified top 9 barriers to SMEs trading in the region and urged collective actions of APEC economies addressing the 9 barriers, namely: 1) lack of access to financing; 2) lack of capacity to internationalize and difficulty in identifying foreign business opportunities; 3) need for open and transparent business environments; 4) high transportation and related costs; 5) Customs clearance delays caused by difficulties in navigating overly complex customs requirements and documentation; 6) problems navigating differing legal, regulatory, and technical requirements; 7) difficulty with intellectual property acquisition, protection, and enforcement; 8) inadequate policy and regulatory frameworks to support cross-border electronic commerce; 9) difficulty in taking advantage of preferential tariff rates and other aspects of trade agreements. Barriers 1-4 were investigated by SMEWG and barriers 5-9 were studied by CTI. Later in the year, the findings and policy recommendations were published as guidelines for APEC in fostering the development of SMEs.

Fostering SMEs' Participation in the Regional and Global Economy

        For the first time, SMEs are listed as annual priority area in APEC 2015. Continuing ongoing works and in an attempt to create new agenda for APEC SMEs, the Philippines announced three sub priorities, namely Removing Barriers to SMEs; Promoting Inclusive Growth through Sustainable and Resilient SMEs, and; Advancing Modernization and Standards Conformance among SMEs in the region. The sub themes reflect a firm belief of the Philippines that SMEs are the backbone of local economy and they are in need of stronger dynamism. Furthermore, as one of ASEAN countries suffering from natural disasters, the Philippines is associate SMEs work with strengthening resilience of communities against natural catastrophes, including earth quakes and typhoons common in places. Promoting SMEs' business continuity plans, therefore, is accented as a significant cross-cutting issue, between the SMEs priority and another priority of Building Sustainable and Resilient Communities, and deliverable for APEC leaders this year.

        Nevertheless, ongoing initiatives which were primarily promoted by SME working group may not seem adequate to support the SME priority as an annual pillar. Recognizing that creating new pages for the APEC SME agenda is necessary, the "Towards an APEC Action Plan to Foster SMEs' Participation in Regional and Global Markets" (Action Plan) was tabled at the 1st Senior Official Meeting in February. In short, the Action Plan proposed to establish an Overall Goal of improving SMEs' share of exports by 2020, and addition of 4 new priority actions for APEC economies' consideration, namely:

a.Increasing the de minimis threshold or waiver for the issuance of certificates of origin. Economies should consider waiving the certificate of origin requirement for shipments of US 2,000 or less. 

b.Providing trade and tariff information for SMEs. Timely and accurate information on tariffs, trade and business procedures are essential to support SMEs in getting their products and services abroad. 

c.Enhancing SME participation in authorized economic operator (AEO) and trusted trader programs. AEO and trusted trader programs should be designed in a way that SMEs can participate and be recognized as safe, secure and compliant business partners in international trade. d.Setting appropriate labeling requirements for SMEs. As rules and regulations vary widely between economies as well as between importers and distributors, information on appropriate labeling requirements will assist SMEs in the food sector with a view towards establishing a mechanism for recognizing labeling requirements across APEC economies.

        The Action Plan demonstrates the ambition to expand current boundary of APEC SME works which is more in the Economic and Technical Cooperation (ECOTECH) domain by merging more intensively and broadly with the pillar of Trade and Investment Liberalization and Facilitation (TILF), including custom procedures and food safety issues.

        However, the discussion was not smooth. The Action Plan did not receive enough deliberation as it should have for wining agreement on its proposals. Japan, one of few economies spoke up, suggested APEC economies to incorporate more SME related works, rather than limited to the 4 proposed, in the Action Plan. No comment was shown on the Overall Goal, and hardly could we conclude that a consensus was found among senior officials in this regard.

        At present, the Philippines is doing an APEC-wide stocktaking on SME plans, initiatives and projects implemented/conducted/planned since 2011. How the Action Plan can support the SME priority and consolidate concrete deliverables for APEC Leaders need further elaboration. Moreover, how APEC fora and sub fora should cooperate once the 4 new priority actions of the Action Plan endorsed can be another challenge to APEC and member economies.

References:

1.APEC, "APEC Leaders' Growth Strategy", 18th APEC Economic Leaders' Meeting, 2010/AELM/DEC/3, 2010/11.

2.APEC, "Enhancing SMEs Participation in Global Production Chains", 2011/ CSOM/026app10, 2011/11. 

3.APEC, "Joint Statement of APEC Ministers Responsible for Trade and Ministers Responsible for Small and Medium Enterprises", 2011/SMEMM/JMS, 2011/5 

4.APEC, "Towards an APEC Action Plan for Cooperation to Foster SMEs' Participation in Regional and Global Markets", 2015/SOM1/009, 2015/2.

The APEC Beijing FTAAP Roadmap and the Collective Strategic Study

Chen-Sheng Ho

Introduction

        APEC's realization of the FTAAP has accelerated with the inclusion in the 2014 APEC Leaders' Declaration of "The Beijing Roadmap for APEC's Contribution to the Realization of the FTAAP." In addition, the CTI's REI FotC Group has formed a task force in early 2015 to undertake the FTAAP collective strategic study. In light of APEC's desire to work seriously to advance the FTAAP, the analysis of APEC's thinking on the FTAAP are warranted. The article's purpose is to examine the Beijing FTAAP Roadmap and its relevance for the collective strategic study. Finally, the article will offer suggestions to advance the FTAAP.

The APEC Beijing FTAAP Roadmap

        From the 2014 APEC Economic Leaders' Meeting, the APEC Leaders have finally generated a clear roadmap for realizing the FTAAP. The document summarizes APEC's views regarding the FTAAP over the years. It mentions that APEC agreed to examine the FTAAP idea as a long-term prospect in 2006. Furthermore, in 2010, APEC Leaders had generated the notion of "Pathways to FTAAP." The 2010 idea was that an FTAAP should be realized as a comprehensive free trade agreement that will be built through regional undertakings, such as ASEAN+3, ASEAN+6 and the TransPacific Partnership (TPP). Thus APEC will make important contribution as an incubator of the FTAAP (APEC 2014).

        In addition, the Beijing Roadmap has stated the latest APEC Leaders' views on the FTAAP (APEC 2014):
● The FTAAP will support and complement the multilateral trading system.
● The FTAAP should be comprehensive, high quality and address "next generation" trade and investment issues.
● APEC will attain the Bogor Goals by 2020. The Bogor Goals will advance APEC's contribution to the eventual realization of the FTAAP.
● The FTAAP will be realized outside of APEC, parallel with the APEC process. APEC should maintain its non-binding and voluntary cooperation principles.
● The FTAAP should aim to minimize any negative effects resulting from the proliferation of regional and bilateral RTAs/FTAs. Greater efforts should be made to concluding the possible pathways to the FTAAP, including the TPP and RCEP.
● APEC will assist APEC economies with participating in ongoing regional undertakings and preparation for the realization of the FTAAP.

Analyzing the APEC Beijing FTAAP Roadmap

Supporting the Multilateral Trading System

        Leaders have stated that the FTAAP will be capable of supporting and complementing the multilateral trading system. APEC has always expressed support for the multilateral trading system. The open regionalism idea of APEC is the result of APEC's desire to strengthen APEC's regional economic integration and the WTO. Therefore, it is important for APEC Leaders to continue to express their backing for the WTO. However, there is the need for APEC to relate how the FTAAP will support the multilateral trading system. The present way is to state APEC's support for the WTO and that the FTAAP will support the multilateral trading system. Another way would be for APEC to announce that APEC would be willing to add more WTO members to APEC. In doing so, the FTAAP would become larger and the FTAAP would be able to promote the inclusive and trade liberalizing spirit of the multilateral trading system.

Negotiating Outside of APEC

        The idea that the FTAAP will be negotiated outside of APEC but will remain parallel with the APEC process is understandable. Leaders have stated that APEC will continue to adhere to the non-binding and voluntary principles. Since a free trade agreement (FTA) is binding in nature, it is only logical that the FTAAP will be negotiated outside of APEC. Leaders are implying that the FTAAP could be a FTA, so that the FTAAP is to be negotiated outside of APEC. With regard to the idea that the FTAAP will be paralleled with the APEC process, Leaders are conveying the message that APEC will continue to provide guidance to the FTAAP. In order to show that APEC will play a major role in the realization of the FTAAP, APEC will need to ensure that all APEC members are also members of the FTAAP. All APEC members have reached the consensus to promote the FTAAP, so that the development of the FTAAP, as a FTA, should also entail the participation by all APEC members.

Advancing the Pathways to the FTAAP

        The Leaders' view that greater efforts must be made to advance the pathways to the FTAAP, consisting of the TPP and the RCEP, is valid. The reason is that the TPP and the RCEP are the two most viable pathways to the FTAAP. Thus the conclusion of the current TPP and the RCEP negotiations would push forward the advancement of the FTAAP. The APEC members of the two pathways could play the major role of ensuring the TPP and the RCEP are the pathways to the FTAAP. There is the possibility that a race would take place between the TPP and the RCEP to see which one of them is more suitable to be the only one pathway to the FTAAP. The reason is that the TPP and RCEP could be interested in enlarging their membership in the future, so as to attain greater economic benefits from a larger free trade area.

        Another possibility is that both the TPP and the RCEP would be considered by APEC to be viable pathways to the FTAAP. The fact that APEC has stated that the TPP and the RCEP are pathways to the FTAAP implies that APEC would like to include both FTAs in the advancement of the FTAAP. Therefore, it may not be a race between the TPP and the RCEP. If the FTAAP would be negotiated as a FTA, one way for the FTAAP to incorporate both the TPP and the RCEP would be for APEC to choose some parts of the TPP and some parts from the RCEP. APEC could develop the guidelines for the selection process. For example, one guideline would follow the Bogor Goals spirit of having two different deadlines for achieving free trade, one for developed economies and another one for developing economies. Another guideline would state that all of the Chapters in the TPP and the RCEP would be included in the FTAAP. In addition, a guideline for implementing capacity building programs to assist developing economies would also be developed.

Suggestions

        An important suggestion is that the FTAAP collective strategic study should ensure that it considers the APEC Leaders' views on the FTAAP that are stated in the 2014 APEC Beijing FTAAP Roadmap and are aforementioned. In doing so, APEC's position on the FTAAP will become clearer, so that the realization of the FTAAP will be advanced.

        Specifically, it is suggested that the FTAAP collective strategic study incorporates the suggestions that are stated below:
● APEC would need to add more WTO members to APEC. In doing so, the FTAAP would become larger and the FTAAP would be able to promote the inclusive and trade liberalizing spirit of the multilateral trading system. Furthermore, the new APEC members would be WTO members that touch the Pacific Ocean or share borders with APEC members.
● APEC would need to state clearly that the FTAAP would be realized in the form of a FTA. The Beijing FTAAP Roadmap has mentioned that the FTAAP will be negotiated outside of APEC. In doing so, APEC members could begin to make preparations. In addition, APEC must ensure that all APEC members are also members of the FTAAP, since APEC has reached the consensus to achieve the FTAAP. The economic benefits to APEC would be substantial when all APEC members are participating in the FTAAP.
● APEC would ensure that the TPP and the RCEP are pathways to the FTAAP. APEC's FTAAP agreement could take some parts from the TPP and some parts from the RCEP. Some guidelines could be developed. One guideline could state that the developed economies and developing economies would have different deadlines, just like the Bogor Goals. Another guideline could relate that the FTAAP would include all of the chapters in the TPP and the RCEP. Furthermore, a guideline for the implementation of capacity building programs to assist developing economies would be developed.

References:

 

1.APEC. (2014). "Annex A - The Beijing Roadmap for APEC's Contribution to the Realization of the FTAAP." Singapore: APEC Secretaria

Analyzing ''The Beijing Roadmap for APEC's Contribution to the Realization of the FTAAP''

Chen-Sheng Ho

Introduction

       After a year of concerted efforts by APEC to develop a meaningful plan for advancing the Free Trade Area of the Asia-Pacific (FTAAP), the APEC Economic Leaders have finally generated a clear map for realizing the FTAAP in the 2014 APEC Economic Leaders' Meeting (AELM) in Beijing, People's Republic of China. The purpose of this article is to analyze the main points of the document that is attached to the 2014 APEC Leaders' Declaration called ''The Beijing Roadmap for APEC's Contribution to the Realization of the FTAAP.''

Analyzing the Roadmap

       The document begins with the summarization of APEC's views regarding the FTAAP over the years. It states that APEC agreed to examine the FTAAP idea as a long-term prospect in 2006. In 2010, APEC Leaders had generated the notion of ''Pathways to FTAAP.'' The idea is that an FTAAP should be realized as a comprehensive free trade agreement that will be developed and built through regional undertakings, such as ASEAN+3, ASEAN+6 and the Trans-Pacific Partnership (TPP). Thus APEC will make important contribution as an incubator of the FTAAP (APEC 2014).


       Even though it is not stated in the document, it is important to note that the APEC Business Advisory Council (ABAC) had initiated the FTAAP idea back in 2004. The views of ABAC are significant because it is the businesses in the APEC region that have played a significant role in advancing economic development and regional economic integration (REI) through the building of global value chains (GVCs). Therefore, businesses are the main supporters of trade and investment liberalization and facilitation. The creation of the FTAAP will certainly provide a business-friendly environment in the Asia- Pacific region, so that GVCs can be strengthened.


       According to the ''2014 ABAC Report to APEC Economic Leaders,'' ABAC is appreciative of APEC's effort in being an incubator of the FTAAP and for providing leadership and intellectual input in developing the FTAAP. Furthermore, ABAC believes that Leaders should impart ''top down'' direction. In addition, APEC should identify the needs of business. ABAC also suggests that APEC develops a roadmap and undertakes analytical work on realizing the FTAAP. At the same time, ABAC urges APEC to ensure the broadest participation in pathways to the FTAAP (ABAC 2014).


       We can infer from the ABAC suggestions that ABAC is hoping that APEC will take greater steps in achieving the FTAAP. Undoubtedly, businesses in the APEC region would like to see freer trade of goods and services. The APEC members are also willing to discuss ways to advance trade and investment liberalization and facilitation. The challenge is to seek the best ways to enhance REI through trade liberalization and the enhancement GVCs. The FTAAP idea is certainly a great way to strengthen REI, as the FTAAP would be a manifestation of trade liberalization and would deepen GVCs in the APEC region.


       With the strong support from ABAC for the FTAAP, APEC Leaders may have been convinced that there is the need to show greater interest in 14 realizing the FTAAP. Thus in the 2014 APEC Leaders' Declaration, Annex A of the Declaration is about the FTAAP. APEC Leaders have stated in the document that the FTAAP should support and complement the multilateral trading system. The FTAAP will be achieved outside of APEC but will be paralleled with the APEC process. This means that APEC will continue to promote its non-binding and voluntary principles as well as to serve as an incubator of the FTAAP. In addition, Leaders have related that the FTAAP should seek to minimize any negative effects from the proliferation of FTAs. The FTAAP will be built on existing and developing regional architectures. Furthermore, Leaders have said that more efforts should be exerted to conclude the pathways to the FTAAP, such as the TPP and the RCEP (APEC 2014).


       Let us now examine the Leaders' views regarding the FTAAP. First, the FTAAP would be capable of supporting and complementing the multilateral trading system, because the FTAAP would be composed of twenty-one APEC member economies. The free trade area would be large, so that it would be able to promote the inclusive and trade liberalizing spirit of the multilateral trading system.


       Second, the concept that the FTAAP will be negotiated outside of APEC but will remain parallel with the APEC process is understandable. The reason is that Leaders have stated that APEC will continue to adhere to the nonbinding and voluntary principles. Since FTAs are binding in nature, it is only logical that the FTAAP would be negotiated outside of APEC. However, the Leaders have also said that APEC will continue to provide guidance to the FTAAP. Thus the FTAAP will be paralleled with the APEC process.


       Third, the Leaders' notion that greater efforts must be made to advance the pathways to the FTAAP, consisting of the TPP and the RCEP, is valid. The reason is that the TPP and the RCEP are the two most viable pathways to the FTAAP. Thus the conclusion of the current TPP and the RCEP negotiations would push forward the advancement of the FTAAP. If the members of the TPP and RCEP are truly interested in ensuring that they are the pathways to the FTAAP, they would seek to make sure that they are attractive to the FTAAP members or APEC. There is the possibility that a race would take place between the TPP and the RCEP to see which one of them is more suitable to be the only one pathway to the FTAAP. Another possibility is that both the TPP and the RCEP would in the end be considered by APEC to be equal pathways to the FTAAP. This means that APEC members would be able to join both the TPP and the RCEP or to join just one of the two. The two FTAs will be considered to be the FTAAP.

Suggestions

       In order to advance the achievement of the FTAAP, Leaders have also called for actions to do so in the Annex A of the 2014 APEC Leaders' Declaration. Leaders have said that a collective strategic study will be conducted. A suggestion for the study is that APEC should clarify the meaning of the FTAAP to be negotiated outside of APEC but will be paralleled with the APEC process. Since APEC has developed the FTAAP idea, it will be more beneficial to APEC members if APEC can play a major role in realizing the FTAAP.


       In addition, it is suggested that the study analyzes the issue of the TPP and the RCEP to be pathways to the FTAAP. It is valid to say that both the TPP and the RCEP are viable pathways to the FTAAP, since they are expected to be concluded sooner or later. Therefore, the fastest way to realize the FTAAP would be when the TPP and the RCEP members as well as APEC members all agree that APEC members could join both the TPP and the RCEP or only one of the two.

References:

1. APEC. 2014. ''Annex A - The Beijing Roadmap for APEC's Contribution to the
Realization of the FTAAP.'' Singapore: APEC Secretariat.
2. ABAC. 2014. ''2014 ABAC Report to APEC Economic Leaders.'' Manila: ABAC
Secretariat.

Strengthening APEC's Role in Regional Economic Integration

Chen Ho

Introduction

        In recent years, APEC has begun to consider the realization of a Free Trade Area of the Asia-Pacific (FTAAP). The FTAAP goal is more ambitious than the Bogor Goals. The development indicates that APEC is seeking to enhance regional economic integration (REI) through deeper trade and investment liberalization and facilitation as well as economic and technical cooperation. At the same time, APEC members are also forming free trade agreements (FTAs) in the form of Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP). APEC has regarded RCEP, TPP and other regional undertakings to be pathways to an FTAAP. The main purpose of the article is to provide suggestions for APEC to enhance REI through the building of the trilateral relationship among FTAAP, TPP and RCEP.

Development of an FTAAP

        In the "2004 ABAC Report to Leaders," ABAC suggested the development of an FTAAP. ABAC called for APEC Leaders to show strong political commitment to negotiate a region-wide agreement that would bring economic benefits to members. An FTAAP would accelerate the achievement of the Bogor Goals and minimize the negative effects from the proliferation of complex web of FTAs (ABAC 2004).

        Subsequently, the views of APEC on the creation of an FTAAP were stated in the various annual APEC Leaders' Declarations. The 2004 Leaders' Declaration mentioned that ABAC had presented a relevant proposal regarding the need to study the feasibility of an FTAAP (APEC 2004). In 2006, the Leaders' Declaration said that difficulties in negotiating an FTAAP existed but APEC should undertake studies on ways to promote REI and FTAAP. The creation of an FTAAP will be a long-term prospect (APEC 2006). By 2008, Leaders had mentioned in the Declaration that an FTAAP could bring economic benefit to the region but challenges existed. The Leaders called on Ministers to examine the prospects of an FTAAP through analyzing the economic impact of an FTAAP as well as discussing the capacity requirements that would be needed for negotiations in the future (APEC 2008).

        The most important milestone for the FTAAP idea was reached in 2010 when the APEC Leaders stated in their Declaration that APEC will take concrete steps to realize an FTAAP. The Leaders further said that an FTAAP should be a comprehensive free trade agreement that will build on regional undertakings, such as ASEAN+3, ASEAN+6 and the Trans- Pacific Partnership. In addition, APEC will serve as an incubator of an FTAAP through the provision of leadership and intellectual input into its development (APEC 2010).

        Afterwards, the support for attaining an FTAAP seems to lose momentum without mentioning a free trade agreement. In the 2012 Leaders' Declaration, Leaders mentioned that they recognized FTAAP to be an important instrument to advance APEC's REI. In addition, they noted that the various regional undertakings could serve as a way towards an FTAAP. The Leaders also maintained that APEC will continue to be an incubator of an FTAAP and will also provide leadership and intellectual input (APEC 2012). APEC Leaders mentioned in the 2013 Declaration that they reaffirmed their commitment to realize an FTAAP. APEC will continue to offer leadership and intellectual input into the REI process (APEC 2013).

        With China as the 2014 APEC host, the APEC's work towards achieving an FTAAP is showing signs of renewed vigor. One of the priorities for APEC in 2014 is: "Advancing Regional Economic Integration." Specifically, APEC will pursue the realization of an FTAAP through the creation of favorable conditions for FTAAP (APEC ISOM 2013).

        During the 2014 SOM1 Meeting in Ningbo, China presented a proposal titled "APEC Framework of Strengthening Regional Economic Integration." The proposal seeks to enhance the realization of an FTAAP. The framework consists of four elements: 1) Enhance transparency of RTAs/FTAs; 2) Strengthen capacity building activities to achieve an FTAAP; 3) Formulate a work plan to realize an FTAAP; and 4) Launch an FTAAP feasibility study (APEC SOM1 2014).

        Most importantly, the proposal calls for the development of a work plan or roadmap. Essentially, the roadmap will identify the steps toward an FTAAP. In addition, the roadmap will clarify major principles focusing on the relationship between the pathways and an FTAAP as well as the relation between an FTAAP and the Bogor Goals. Furthermore, the proposal suggests the year 2025 to be the deadline to realize an FTAAP (APEC SOM1 2014).

Analyzing the FTAAP-TPP-RCEP Relationship

        The APEC Leaders' support for ensuring that an FTAAP will be built on regional undertakings was clearly stated in the 2010 Declaration, as mentioned in the literature review. In the 2013 APEC MRT Meeting Statement, Ministers agreed that APEC will analyze the convergence of TPP and RCEP within the APEC framework (APEC MRT 2013). Specifically, there is a need to study ways to converge TPP and RCEP with an FTAAP.

        In theory, one way to enhance the convergence of TPP and RCEP with an FTAAP would be to ensure that the rules of the TPP and RCEP are as similar as possible. After doing so, APEC could state that the two FTAs have led to the realization of an FTAAP in which an FTAAP is define to be a free trade area with loose meaning and not a formal agreement. In addition, if an FTAAP is regarded to be a formal free trade agreement, an FTAAP agreement could be composed of rules from the TPP and RCEP.

        If an FTAAP is an idea and not a formal agreement, another way to converge the two major FTAs in the Asia-Pacific region would be the enabling of open membership for APEC members. This way can be called membership convergence. From a technical standpoint, this method is feasible in that the two FTAs can develop their own rules. The APEC members will be able to join the two FTAs, as long as they are willing to accept the rules. At the same time, the members of the two FTAs will become APEC members. Thus the TPP and RCEP are linked with an FTAAP through membership convergence. The benefit is that businesses in the Asia-Pacific region will be able to choose the FTA that satisfies their needs the most.

Suggestions

        First, it is suggested that APEC continues to support the open regionalism idea. APEC's realization of an FTAAP should include the support for the WTO and ensure that non-APEC members are not discriminated. APEC should show to the world that the creation of a free trade area will also be beneficial to non-APEC members.

        Second, APEC membership in the future should be enlarged to further advance an FTAAP. The expansion of APEC membership would increase the size of an FTAAP. Economies that touch the Pacific Ocean should be able to join APEC. Furthermore, economies that border the economies touching the Pacific Ocean should also become APEC members. The outcome is the building of a seamless regional economy and the generation of greater benefits from an enlarged FTAAP.

        Third, APEC should work to ensure that TPP and RCEP can be joined by APEC members, as long as their rules are followed. In doing so, the FTAAPTPP- RCEP relationship will be strengthened. At the same time, APEC will consider an FTAAP to be a free trade area and not a formal agreement. The TPP and RCEP will jointly serve as an informal FTAAP without a formal agreement. Additionally, members of RCEP and TPP can become APEC members. The benefit is that APEC will not need to spend tremendous amount of resources to negotiate a formal free trade agreement to realize an FTAAP.

References:

1.ABAC. 2004. "2004 ABAC Report to Leaders." Manila: ABAC Secretariat.

2.APEC. 2004. "2004 APEC Leaders Declaration." Singapore: APEC Secretariat.

3.APEC. 2006. "2006 APEC Leaders Declaration." Singapore: APEC Secretariat.

4.APEC. 2008. "2008 APEC Leaders Declaration." Singapore: APEC Secretariat.

5.APEC. 2010. "2010 APEC Leaders Declaration." Singapore: APEC Secretariat.

6.APEC. 2012. "2012 APEC Leaders Declaration." Singapore: APEC Secretariat.

7.APEC. 2013. "2013 APEC Leaders Declaration." Singapore: APEC Secretariat.

8. APEC ISOM. 2013. "Theme and Priorities of APEC 2014." Singapore: APEC Secretariat.

9. APEC MRT. 2013. "2013 APEC MRT Meeting Statement." Singapore: APEC Secretariat.

10. APEC SOM1. 2014. "APEC Framework of Strengthening Regional Economic Integration." Singapore: APEC Secretariat.

Developing an APEC FTAAP Conceptual Framework

Chen Ho

Introduction

           APEC has begun to seriously consider the importance of realizing a Free Trade Area of the Asia-Pacific (FTAAP). The FTAAP goal can be considered to be more comprehensive and ambitious than the Bogor Goals. The reason is that an FTAAP could imply the inclusion of non-members of APEC that are linked to the Asia-Pacific region. It also indicates that APEC seeks to enhance regional economic integration (REI) through deeper trade and investment liberalization and facilitation as well as economic and technical cooperation.

           Most importantly, APEC has regarded RCEP, TPP and other regional undertakings to be pathways to an FTAAP. This development shows that APEC would like to place an FTAAP at a higher level of REI than the Bogor Goals. There is also the possibility that an FTAAP could be achieved through the signing of a free trade agreement (FTA) among APEC members. Since APEC is still working on achieving the Bogor Goals, the realization of an FTAAP remains a long-term APEC goal without a deadline.

           Thus APEC has not exerted the greatest efforts to develop a framework for an FTAAP. In response, ABAC has incessantly called on APEC to generate an FTAAP plan. The 2014 APEC host, China, has raised the issue of building an FTAAP framework (APEC SOM1 2014). In sum, the idea of creating an FTAAP is receiving more focused attention and necessitates greater consideration. The main purpose of the article is to construct an APEC conceptual framework for attaining an FTAAP in a systematic manner based on APEC principles.

The Development of an FTAAP

           The views of APEC on the creation of an FTAAP were stated in the various annual APEC Leaders' Declarations. The 2004 Leaders' Declaration mentioned that ABAC had presented a relevant proposal regarding the need to study the feasibility of an FTAAP (APEC 2004). In 2006, the Leaders' Declaration said that difficulties in negotiating an FTAAP existed but APEC should undertake studies on ways to promote REI and FTAAP. The creation of an FTAAP will be a long-term prospect (APEC 2006).

           By 2008, Leaders had mentioned in the Declaration that an FTAAP could bring economic benefit to the region but challenges existed. The Leaders called on Ministers to examine the prospects of an FTAAP through analyzing the economic impact of an FTAAP as well as discussing the capacity requirements that would be needed for negotiations in the future (APEC 2008).

           Afterwards, the support for attaining an FTAAP seems to lose momentum without mentioning a free trade agreement. In the 2012 Leaders' Declaration, Leaders mentioned that they recognized FTAAP to be an important instrument to advance APEC's REI. In addition, they noted that the various regional undertakings could serve as a way towards an FTAAP. The Leaders also maintained that APEC will continue to be an incubator of an FTAAP and will also provide leadership and intellectual input (APEC 2012). APEC Leaders mentioned in the 2013 Declaration that they reaffirmed their commitment to realize an FTAAP. APEC will continue to offer leadership and intellectual input into the REI process (APEC 2013).

           Another related issue is about the meaning of an FTAAP. It was mentioned previously that ABAC had called for negotiating a region-wide agreement in the 2004 ABAC Report to Leaders. In addition, APEC Leaders had stated the need to negotiate a comprehensive free trade agreement in the 2010 Leaders' Declaration. However, the idea of an FTAAP to be derived from a negotiated agreement does not seem to be evident in recent years. There exists the possibility to define an FTAAP to be different from a free trade agreement. For example, an FTAAP could be an expanded form of the Bogor Goals in which the achievement of an FTAAP would mean the further advancement of free and open trade and investment in the Asia-Pacific region.

           Furthermore, it is possible to state that the number of APEC members promoting the Bogor Goals would be different from the number of members joining an FTAAP. There is the possibility that APEC would increase the number of APEC members in the future, so as to strengthen the development of an FTAAP. Since the FTAAP idea comes from APEC, there is certainly the need to ensure that members of FTAAP are also APEC members. In the 2013 APEC Leaders' Declaration, Leaders called for the achievement of a seamlessly and comprehensively connected and integrated Asia- Pacific region to be part of APEC's work to realize the Bogor Goals and the Yokohama Vision of "Bogor and Beyond" (APEC 2013). Therefore, the enlargement of APEC's membership would strengthen the advancement of a seamless regional economy and generate greater benefits from an expanded FTAAP.

Suggestions: Elements of an FTAAP Conceptual Framework

           The development of an FTAAP conceptual framework necessitates the inclusion of ideas that will follow APEC principles of voluntarism and consensus building. The APEC approach of making decisions in a cautious and evolutionary manner will continue to guide the building of an FTAAP. In addition, APEC also recognizes the importance of abiding by views that have been presented previously, so that this tradition should be respected. Therefore, the suggestions presented in the following paragraphs are considered to be able to satisfy APEC beliefs.

           The first suggestion is that APEC promotes the open regionalism idea. The advancement of an FTAAP will also promote the WTO and ensure that non-APEC members are not discriminated. APEC can show the world that the creation of a free trade area can also benefit non-APEC members.

           The second suggestion is that the achievement of the Bogor Goals should come first before the attainment of an FTAAP. If APEC members would like to hasten the realization of an FTAAP, they could seek to reach the Bogor Goals before the final 2020 deadline. The important point is that the meaning of Bogor Goals' free and open trade and investment should be clear and achievable. Furthermore, the setting of the year 2025 to be a potential deadline for realizing an FTAAP will be a positive development because it will exert pressure on APEC. Most importantly, APEC must have an FTAAP conceptual framework to accompany any FTAAP deadline.

           The third suggestion is that APEC membership in the future should be enlarged to enhance the advancement of an FTAAP. The expansion of APEC membership would increase the size of an FTAAP. This means economies that touch the Pacific Ocean should be able to join APEC. Furthermore, economies that border the economies touching the Pacific Ocean should also become APEC members. The result is the building of a seamless regional economy and the generation of greater benefits from an enlarged FTAAP.

           The fourth suggestion is that APEC should promote open membership to link the TPP, RCEP and PA with an FTAAP. APEC members should be able to become members of the three aforementioned FTAs, on the condition that they can adhere to the rules. Members of the three FTAs will become APEC members. Thus the difference in the rules of the FTAs will have less negative impact. In addition, businesses can choose the FTAs that satisfy their needs in terms of less transaction costs.

           The fifth suggestion is that APEC should welcome the development of free economic zones (FEZs) and create an APEC Free Economic Zones Network (AFEZN). The FEZs are effective for assisting with the achievement of the Bogor Goals and an FTAAP through the implementation of economic liberalization measures. A FEZ serves as a model for economic liberalization in an economy and full scale adoption of the economic liberalization measures is possible at a later stage. The AFEZN is a platform for sharing experiences and strengthening linkages.

           

        
       

References

1. ABAC. 2004. "2004 ABAC Report to Leaders." Manila: ABAC Secretariat.
2. APEC. 2004. "2004 APEC Leaders" Declaration. Singapore: APEC Secretariat.
3. APEC. 2006. "2006 APEC Leaders" Declaration. Singapore: APEC Secretariat.
4. APEC. 2008. "2008 APEC Leaders" Declaration. Singapore: APEC Secretariat.
5. APEC. 2010. "2010 APEC Leaders" Declaration. Singapore: APEC Secretariat.
6. APEC. 2012. "2012 APEC Leaders" Declaration. Singapore: APEC Secretariat.
7. APEC. 2013. "2013 APEC Leaders" Declaration. Singapore: APEC Secretariat.
8. APEC ISOM. 2013. "Theme and Priorities of APEC 2014." Singapore: APEC Secretariat.
9. APEC MRT. 2013. "2013 APEC MRT Meeting Statement." Singapore: APEC Secretariat.
10. APEC SOM1. 2014. "APEC Framework of Strengthening Regional Economic Integration." Singapore: APEC Secretariat.
11. Ho, Chen-Sheng. 2013. "Advancing the Attainment of the Bogor Goals: The APEC Way." Paper presented at the 2013 ASCC Conference in Jakarta, Indonesia.
        
        

Joining REI and Securing a Fair Game

Darson Chiu

In the year of 2009, Taiwan's real GDP growth went down by 1.8%. Before then, nobody had seriously expected the global financial crisis could have hit Taiwan's economy so badly. When the sub-prime crisis began in the second quarter of 2007, the markets did not see it coming at all. They even claimed that economies in Asia would be resilient enough to be decoupling from the western economies and immune from the crisis. After the "wrong guess", woe betided. Before the crisis, we had never stopped stressing how globalization would be an inevitable trend. How could we be so naive for even buying said decoupling horse feather?

Significance of Trade for Taiwan's Economic Growth

Nevertheless, Taiwan's growth bounced back in the year of 2010 with a surprisingly 10.8%. How did Taiwan make it? The answer would be trade. In 2009, Taiwan's exports growth declined by 8.7% and imports down by 13.1%. However, Taiwan's exports grew by 25.6% and imports mounted by 27.7% the next year. From the readings, we note that international trade is simply a two-edged sword. The crisis hit Taiwan's economy through trade, whereas trade is also a solution for Taiwan to recover from the ditch.

The 2010 momentum actually lasted for one year as Taiwan had a fine economic performance in 2011 with a 4.2% GDP growth and a 4.5% exports growth. However, it is noteworthy that imports and gross fixed investment of Taiwan both grew negatively by 0.5% and 2.3% in that order. The next two years, 2012 and 2013, the Taiwanese government received more blames than praises. The GDP growth rates of 2012 and 2013 were only 1.5% and 2.2% respectively, and exports failed to serve as the most powerful engine for Taiwan with respect to sluggish imports and fixed investment then.

On top of that, the growth of 2012 and 2013 were both lower than the world average. In exploring potential reasons for Taiwan's economic slowdown, one eye catching explanation pops up, Taiwan have had not enough free trade agreement (FTA) coverage. Many argued that Taiwan had been losing market shares overseas to South Korea due to the fact that South Korea owned FTA coverage of nearly 35%, and Taiwan barely came up with 5%. If that is the case, the solution is pretty much there. That indicates that Taiwan need to join as many as regional economic integration (REI) processes as it can to regain the market shares and push forward its critical exports.

Striving for REI Processes

Because joining the processes of REI has been recognized as the key to revive Taiwan's economy, eyes are on major processes such as the Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP). A more visionary way to put it would be it is so essential to join TPP and RCEP; both tracks might lead to the ultimate Free Trade Area of Asia Pacific (FTAAP) that includes all APEC member economies.

Besides those multilateral processes, Taiwan has also been working hard to strike bilateral deals besides those existing ones with El Salvador, Honduras, Guatemala, Nicaragua, and Panama. The Cross-Straits Economic Cooperation Framework Agreement (ECFA) between Taiwan and China was signed in June 2010. The bilateral agreement for Taiwan with New Zealand (ANZTEC) was signed in July 2013. Another bilateral treaty with Singapore (ASTEP) was also signed in November 2013.

The 5 Central American allies actually do not have very close trade and economic relations with Taiwan. By comparison, China, New Zealand, and Singapore are way more significant trading partners for Taiwan. Therefore, the Taiwanese government did make certain accomplishment in terms of bilateral deals. However, what really matters when it comes to regaining market shares would be multilateral; 4 out of Taiwan's 5 major trading partners are with TPP or RCEP. Does Taiwan stand a chance to become a member of either one?

When TPP was still P4, an agreement between Brunei Darussalam, Chile, Singapore and New Zealand; it is also the very first multilateral FTA linking Asia, the Pacific and the Americas. The P4 came into force in 2006, before the sub-prime crisis taking place. At that time, Taiwan did not pay attention to its great potential until the US decided to attend and dominate it. The first round of TPP negotiation was launched in March 2010. It now has 12 members including Taiwan's major trading partners such as the US and Japan. As part of competitive liberalization, the RCEP was initiated in November 2012 and started its first round negotiation in May 2013. The RCEP also comprises of Taiwan's important trading partners, namely China and ASEAN. It does not take a wise man to even be aware of that both TPP and RCEP are vital for Taiwan's economy.

The Cross-Straits ECFA has not yet been concluded. And we are not sure if joining TPP will compromise the conclusion of ECFA. Joining RCEP requires China's support as it is very obvious that China has been dominating this process. In a nutshell, Taiwan needs a green light from China to become part of both TPP and RCEP. For that reason, a feasible strategy for Taiwan would be to conclude ECFA first. Second, try to utilize the FTA natures of enlargement, docking and merging to join RCEP. Third, use the same format of joining PECC, APEC, and WTO to attend TPP. That is both sides of the Taiwan Straits join TPP in concert.

Will REI Guarantee Economic Growth?

International trade is nothing more than a game of comparative advantage. It will not be a fair game when Taiwan has to play it by facing certain barriers while other players do not need to. However, playing a fair game does not guarantee winning a game. The European Union used to be a role model of REI. Certain EU members even went one step further to forge a monetary union. In terms of depth, EU or Euro zone are more integrated than all FTAs. However, it is very clear that EU or Euro does not assure all members to grow and prosper.

Joining REI processes is not a sufficient condition for Taiwan's economic growth. However, Taiwan will certainly lose exports competitiveness without enough FTA coverage. Taiwan needs to make sure the game will be played fair; nevertheless, trying to win the game should be the next agenda item. And that's another story.

Overview of APEC Regional Economic Integration

Chen Ho

Introduction

          APEC's work toward the advancement of regional economic integration (REI) can be said to truly begin in 1994 with the development of the Bogor Goals. The reason is that the Bogor Goals provide APEC members with the rationale for exerting greater efforts through meetings, initiatives, individual actions and collective actions. Since the final deadline for the achievement of the Bogor Goals has been set for 2020, APEC has had many years to consider the relationship between the Bogor Goals and the strengthening of APEC REI.

          At the same time, the changing international economic environment has affected APEC process, so that APEC members have also begun to examine other ways of enhancing APEC REI. The other important output of the search for alternative means of APEC REI is the realization of a Free Trade Area of the Asia-Pacific (FTAAP). There is the possibility that additional ways for building APEC REI will be promoted for the purpose of maximizing benefits to APEC members. Therefore, the main purpose of this article is to analyze the existing means for taking forward the APEC REI agenda. It must be stressed that the APEC process proceeds in a cautious manner.

Bogor Goals and APEC REI

          After the creation of APEC, the next significant step for building APEC REI is the announcement of the existence of the Bogor Goals in 1994. The Bogor Goals provide the focus for APEC's work and eventually lead to the realization of the idea that APEC should promote REI. In the "1994 APEC Leaders' Declaration," Leaders have stated that they set a vision for the creation of an Asia-Pacific community that is based on the growing interdependence among APEC members consisting of developed and developing economies. Leaders believe that the narrowing of the gap in the stages of development among APEC members will be beneficial and will promote economic progress in the APEC region. In addition, Leaders recognize that APEC has to advance cooperation on the basis of equal partnership, shared responsibility, mutual respect, common interest, and common benefit. Most importantly, Leaders announce the Bogor Goals which are about the achievement of free and open trade and investment by developed economies in 2010 and developing economies in 2020. Furthermore, Leaders state that they seek to show APEC's leadership in advancing global trade and investment liberalization (APEC 1994).

          The 1994 Declaration has not directly brought up integration and the concept of APEC REI. However, the ideas that are stated in the Declaration promote the development of APEC REI. Leaders have provided a clearer view of their thoughts. For example, the mentioning of the development of an Asia-Pacific community among APEC members is supportive of APEC REI. An Asia-Pacific community can be a strong indicator of APEC REI. This means that APEC members have strengthened their integration, in order to build an Asia-Pacific community.

Advancing APEC REI

          APEC's support for REI becomes quite clear when the "2007 APEC Leaders' Declaration" includes "Regional Economic Integration" as one of the headings. In that section of the Declaration, Leaders state that APEC's commitment to open markets and economic cooperation has produced extensive regional integration. Leaders agree to strengthen efforts toward greater economic integration by: 1) Lowering barriers to trade and investment; 2) Enhancing economic efficiency and the regional business environment; and 3) Supporting integration in sectors, such as transportation, telecommunications, mining and energy (APEC 2007).

          In the "2009 APEC Leaders' Declaration", Leaders reaffirm their commitment to achieve the Bogor Goals. In addition, Leaders state that they will continue to find ways to realize an FTAAP in the future. As for specific actions, Leaders direct officials to promote greater convergences among APEC members in areas, such as services, digital economy, investment, trade facilitation, rules of origin and standards. Leaders also call for the utilization of public-private partnership (PPP) to enhance transport infrastructure, so as to strengthen supply chain connectivity in the Asia-Pacific region (APEC 2009).

          It is also important to examine the "2010 APEC Leaders' Declaration", because it provides a detailed description of Leaders' vision regarding an APEC community. Leaders call for the development of an economicallyintegrated community. This means the creation of a community that supports stronger and deeper REI. It is the Leaders' belief that the promotion of REI will build a solid foundation for prosperity in the Asia-Pacific region. The enhancement of REI will be advanced through APEC's work in trade and investment liberalization and facilitation. Additionally, Leaders mention that barriers facing the movement of goods, services, and capital must be lowered and businessmen should be able to travel more smoothly. Leaders also state that APEC should ensure that businesses are able to trade and operate in the Asia-Pacific region cheaply and easily. There is the need for APEC to simplify and harmonize customs procedures. Regulatory cooperation should also be strengthened. Furthermore, the multilateral trading system should be enhanced (APEC 2010).

          In addition to the "2010 APEC Leaders' Declaration", Leaders also announce the document called "Pathways to FTAAP". Leaders instruct APEC to implement concrete actions that will lead to the creation of an FTAAP. Leaders believe that an FTAAP will greatly advance APEC's REI agenda. Furthermore, APEC Leaders mention that the following points should be taken into account in developing pathways to FTAAP: 1) The changing global economic and trade architecture with the rise in the number of FTAs; 2) The progress in reaching the Bogor Goals by 2020; 3) The non-binding nature and voluntarism of APEC; 4) The importance of trade and investment issues, non-tariff barriers, and next generation trade and investment issues; and 5) APEC's support for the multilateral trading system (APEC 2010a).

Present Status of APEC REI

          The "2011 APEC Leaders' Declaration" is also an important document for understanding APEC REI because the United States served as the 2011 APEC host. The United States have consistently supported REI through trade liberalization. According to the Declaration, the core mission of APEC is to integrate APEC economies and expand trade. APEC recognizes that trade and investment are needed to create jobs and advance economic prosperity. In addition, the strengthening of REI will promote peace and stability in the Asia-Pacific region. Furthermore, Leaders state in the Declaration that APEC has addressed next generation trade and investment issues. Specifically, APEC will promote effective, non-discriminatory, and market-driven innovation policy. APEC will also seek to enhance the participation of small and medium-sized enterprises (SMEs) in global production chains (APEC 2011).

          The work to advance REI in APEC continues to proceed in a comprehensive manner as well as specifically. Leaders have stated in the "2012 APEC Leaders' Declaration" that they are cognizant of the significance of the Bogor Goals. Additionally, Leaders reaffirm their commitment to the realization of an FTAAP, since it is an important way to enhance APEC's REI agenda. In particular, Leaders will continue to address next generation trade and investment issues, since they are beneficial to strengthen integration of APEC economies and expand trade in the APEC region. Therefore, APEC has selected transparency as the 2012 next generation trade and investment issue. Leaders say that transparency is important to trade liberalization, businesses, and elimination of trade barriers. Leaders believe that the promotion of transparency will benefit the advancement of APEC REI. Moreover, Leaders recognize the significance of information and communication technologies (ICT) to enhance integration in the APEC region. Leaders further state that it is necessary to ensure cross border flows of information are secured (APEC 2012).

          In 2013, Indonesia is serving as the APEC host. Indonesia has announced that the priorities for 2013 are: 1) Attaining the Bogor Goals; 2) Sustainable growth with equity; and 3) Promoting connectivity (APEC ISOM 2012). It can be seen that Indonesia is also emphasizing the importance of advancing APEC REI. Particularly, the need to ensure the achievement of the Bogor Goals is being focused upon. At the same time, the importance of promoting connectivity is stressed. The deepening of connectivity among APEC economies will enhance integration. Therefore, the work to promote APEC REI in 2013 and in the immediate future will continue to focus on comprehensive REI goals, such as the Bogor Goals and FTAAP. In addition, APEC will also seek to enhance integration in specific sectors.

References:

1. APEC. 1989. "Chairman's Summary Statement-1989 APEC Ministerial Meeting."
Singapore: APEC Secretariat.
2. APEC. 1994. "1994 APEC Leaders' Declaration." Singapore: APEC Secretariat.
3. APEC. 2006. "2006 APEC Leaders' Declaration." Singapore: APEC Secretariat.
4. APEC. 2007. "2007 APEC Leaders' Declaration." Singapore: APEC Secretariat.
5. APEC. 2009. "2009 APEC Leaders' Declaration." Singapore: APEC Secretariat.
6. APEC. 2010. "2010 APEC Leaders' Declaration." Singapore: APEC Secretariat.
7. APEC. 2010a. "Pathways to FTAAP." Singapore: APEC Secretariat.
8. APEC. 2011. "2011 APEC Leaders' Declaration." Singapore: APEC Secretariat.
9. APEC. 2012. "2012 APEC Leaders' Declaration." Singapore: APEC Secretariat.
10. APEC ISOM. 2012. "Translating Common Priorities into Workable Cooperation
for 21 Economies of the Asia-Pacific." Singapore: APEC Secretariat.

(Dr. Chen Ho is the Associate Research Fellow of TIER)