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Policy Brief 01-1

Brunei: A Turning Point for APEC?

by C. Fred Bergsten, Peterson Institute for International Economics

February 2001

© Institute for International Economics.

The author is director of the Institute for International Economics and has authored 27 books on a wide range of international economic issues. He was formerly assistant secretary of the Treasury (1977-81) and assistant for international economic affairs to the National Security Council (1969-71), and chaired APEC’s Eminent Persons Group (1993-95) throughout its existence. A slightly edited version of this policy brief first appeared in the February 2001 issue of Asia, Inc.

 

The eighth annual APEC leaders’ meeting in Brunei in November 2000 may have marked a turning point in the life of the organization. It clearly set the stage for major progress at the October 2001 summit in Shanghai during the year of Chinese chairmanship of the APEC.

The first four APEC summits produced spectacular results. At Seattle in 1993, the leaders of the Pacific Rim countries gathered for the first time in history and decided to create “a community of Asia-Pacific economies.” At Bogor in 1994, they commited to “free and open trade and investment in the region by 2010/2020.” At Osaka in 1995, they laid out a detailed action agenda for realizing those plans. At Subic in 1996, their Information Technology Agreement (ITA) freed trade in the world’s most dynamic sector and produced a corresponding global accord 3 weeks later in the World Trade Organization (WTO).

More recently, however, the APEC summits have been much less successful. The Vancouver summit in 1997 failed to address the burgeoning financial crisis. The Kuala Lumpur summit in 1998 broke the momentum of trade liberalization by terminating the effort to open up additional sectors. At the Auckland summit in 1999 hopes were staked on APEC leadership of a new multilateral round in the WTO. But APEC’s own disarray contributed largely to the debacle at Seattle 3 months later.

The Brunei summit thus took place at an inauspicious moment in the history of the APEC. As a result of the recent unhappy record, the meeting faced an enormous and crucial challenge: to at least halt the negative momentum of APEC’s decline and, hopefully, restart the engine of progress.


Leaders and ministers
[at the Brunei summit]
candidly recognized the failure
of their Auckland initiative
toward launching a
new multilateral round
in the WTO and
took several remedial steps.

There were no spectaculars at Brunei. There were, however, a number of solid achievements that together may mark a new era of positive progress for the institution and hence for cooperation across the Asia-Pacific region.

APEC now operates across a wide range of topics. It holds hundreds of meetings every year—many at the ministerial level—on virtually all subjects of economic interest to its members. It is making steady, if slow and unspectacular, progress toward forming the “community of Asia-Pacific economies” called for by the leaders at their first meeting in Seattle.

But APEC, from its outset, has made its reputation primarily through trade liberalization. Its initial summit, in Seattle in 1993, galvanized a successful conclusion of the Uruguay Round negotiation in the GATT by demonstrating to the Europeans, who had held those talks hostage for almost 3 years, that the countries of the Pacific Rim had an alternative if the global system faltered. The APEC leaders set the most ambitious trade goal in history at Bogor by aiming for free trade in the region. Their ITA freed over $500-billion worth of trade in goods and services. The credibility of APEC turns largely on its ability to maintain its momentum in this central area of activity.

Brunei marked an important milestone on this path for two reasons. First, the leaders and ministers candidly recognized the failure of their Auckland initiative toward launching a new multilateral round in the WTO and took several remedial steps. Lead by Trade Minister Rafidah Aziz of Malaysia, they acknowledged that it would be fatuous to simply renew their call to launch a round without addressing the sharp differences between them that helped torpedo the prior effort to do so at Seattle. Hence they agreed that it was essential to work out an agenda for a new round before it could be credibly initiated.

The leaders then took that agreement a step farther, providing a valuable reminder of why the annual summits are so vital to the success of APEC. They concurred with their ministers that substantive agreement on an agenda had to precede the launch of a WTO round but, as keen politicians, also recognized that a failure to renew political momentum for the launch itself would be widely viewed as a step backward for APEC’s traditional strong support for the multilateral system. Hence they strongly called for the acceleration of the timetable, seeking agreement on “a balanced and sufficiently broad-based agenda…as soon as possible in 2001” and then on the launch of the round before the end of 2001.

The Brunei meeting did not resolve the substantive differences that divided the APEC governments at Seattle. It did, however, create a process and a schedule for doing so. It thus neatly “teed up” the issue for rapid resolution during this year. This schedule is particularly important because the new administration in the United States has indicated that trade will be central to its foreign policy. Its emphasis on initiating serious negotiations to create a Free Trade Area of the Americas must be linked to similar steps at the multilateral level in the WTO and with its Asia-Pacific partners in APEC.

Brunei’s second major trade initiative, which may have been more important in the short run, related to the spate of subregional trade agreements (SRTAs) that are now being pursued throughout the Asia Pacific (and elsewhere in the world). The leaders at Bogor, immediately after setting their goal of “free and open trade and investment in the region,” recognized that it was essential that all SRTAs—of which there were already three: AFTA, Australia–New Zealand, and NAFTA—needed to be fully consistent with the broader APEC (and WTO) systems if conflict was to be avoided. They in fact asked our Eminent Persons Group to remain in existence for another year largely to address this issue. We suggested a set of principles for “open subregionalism” in our final report in 1995.

This issue has become more important with the historic shifts of trade policy in the three leading



Brunei’s second major trade
initiative…related to the spate
of subregional trade
agreements (SRTAs)
that are now being pursued
throughout the Asia Pacific
(and elsewhere in the world).


Asian economies. Japan, after relying solely on the multilateral system throughout the postwar period, has now begun to aggressively negotiate bilateral FTAs, starting with Singapore, Korea, and Mexico. Korea has made a similar move, negotiating actively with Chile as well as Japan. China, in addition to joining the WTO, proposed an FTA with ASEAN at the latest “ASEAN + 3” summit in Singapore, just two weeks after Brunei. The proposal was quickly converted into a study of a full-fledged East Asia Free Trade Area that would include Japan and Korea as well. Any such entity would of course immediately rank alongside the European Union and any Free Trade Area of the Americas and transform the global economy into a three-bloc world for the first time in history.

It has thus become crucial for APEC to credibly address the relationship between its own vision and the new SRTAs, whether small and bilateral (like New Zealand-Singapore) or large and plurilateral (like a possible East Asia Free Trade Area). A failure to do so would, at a minimum, create a misunderstanding in the United States (and elsewhere) of the East Asian steps. One may recall the concern of Secretary of State James A. Baker III that such initiatives might “draw a line down the middle of the Pacific” and undermine the most basic principles of APEC.

The SRTAs could, however, play a very positive role in the future of APEC. At the outset of APEC’s trade strategy, a number of key observers believed that the best route to “free and open trade in the region” would in fact be a series of SRTAs—perhaps centered on the extension of the North American Free Trade Agreement (which had just come into effect at that time) to East Asian countries—through which liberalization in the region would be ratcheted up until the full Bogor goal was achieved. That approach was rejected at the time but the three strategies that APEC subsequently tried—“concerted multi-lateralism” and the Individual Action Plans, a generalization of the ITA success through Early Voluntary Sectoral Liberalization, and championing a new multilateral round in the WTO—have all failed.



It might be time to go
“back to the future,” using
the SRTAs as a means to reduce
barriers seriatim across the region
as individual countries feel compelled
to join one or more of the growing
array of agreements to avoid
new discrimination against
their own trade.


Hence it might be time to go “back to the future,” using the SRTAs as a means to reduce barriers seriatim across the region as individual countries feel compelled to join one or more of the growing array of agreements to avoid new discrimination against their own trade.

For both defensive and offensive reasons, it is thus critical for APEC to address these interrelationships. A major success at Brunei was that the leaders reportedly did address them quite extensively. They did not come to any formal agreements, nor could they be expected to do so at this early stage, but they again “teed up” the topic for further attention at Shanghai—perhaps on an agreement on “nonbinding principles on open subregionalism” along the lines of the ideas offered by the EPG in 1995.

There was also useful discussion of SRTAs on the side during the official meetings at Brunei, especially on the distinction between those that were fully consistent with broader APEC norms (such as Singapore-New Zealand) and those that appeared to be heading in an inconsistent direction (such as Japan-Singapore, whose initial draft violates the principle of “comprehensive coverage” by excluding agriculture and fails to adopt a 2010 deadline). Many of those discussions took place at the APEC CEO Summit, which brought together several hundred top business leaders of the region to interact with the official delegations and participate actively in the proceedings. Such business involvement is of great importance for APEC, both to point it toward pragmatic “deliverables” that provide tangible support for trade and investment and to generate constituencies that will support APEC within the member economies’ domestic political processes. Brunei’s CEO session was extremely successful and represented another valuable contribution to the evolution of the APEC process.

The first APEC summit of the 21st century could thus have been an important milestone in the history of the institution and of Asia-Pacific cooperation more broadly. The smallest of the member economies performed admirably and well above expectations. Brunei set the stage for China—the largest member economy—to chair the institution in 2001, as it has already begun to do with its characteristic vigor and creativity. After the hesitations of the late 1990s, APEC may now be back on track.