Open Regionalism in the Asia - Pacific Region

 

Paper for Korean-American Chamber of Commerce, San Francisco, California, September 21, 1992.

 

               Iam always happy to be here in San Francisco not only because it is such a beautiful and pleasant city to stay in, but also because I know that it was the gateway through which many Koreans, as well as many other Asians, came to the United States in earlier days in search of freedom and opportunity. I am particularly pleased to have this opportunity to share with you some of my thoughts on the trading system in the Asia-Pacific region, especially at a time when the Ninth Pacific Economic Cooperation Conference (PECC IX) will be held, starting tomorrow here in this city, where I will be representing Korea's National Committee of the PECC.

The PECC IX will focus on the theme of "open regionalism," examining current interaction among Pacific Basin economies and their relationship to other regional economies. The theme chosen is timely, because the agreement on the North American Free Trade Area (NAFTA) was announced just a few weeks ago by the governments of the three participating countries: Canada, the United States, and Mexico. No doubt the agreement has far-reaching implications-not just for the Asia-Pacific, but for the whole world.

As we all know, the PECC, founded in 1980, brings together government officials, academics, and business people from the 20 national member committees in the Asia-Pacific region to share perspectives and expertise in search of broad-based answers to regional economic problems. The PECC has been operating task forces, forums, and working groups to concentrate on particular policy areas in an effort to identify problems and seek answers in order to promote economic cooperation among the economies in the region. A decade or so may not be long enough for a new international organization to produce many tangible results, yet its impact on regional affairs has been evident in many ways. For example, its objectives, accumulated experience, and tripartite membership structure enabled it to exert considerable influence on the creation of the Asia Pacific Economic Cooperation (APEC) in November 1989 as a forum for regional governments to consult on regional economic issues. Over the last two years, a number of PECC task forces have developed close working relationships with corresponding APEC working groups.

It should also be noted that the PECC from its inception firmly committed itself to the promotion of an open global trading system. That's why the Trade Policy Forum, dating back to 1982, has been focusing its work on the Uruguay Round of trade negotiations to reform the GATT system. The forum has explored areas of Pacific consensus on the Round and sought specific proposals to aid the negotiations, forwarding results to the APEC ministers for their consideration. It is indeed regrettable that in spite of our efforts, the Uruguay Round failed to reach an agreement by the end of 1991 as originally scheduled, and that the GATT negotition currently seems to be at a standstill.

While international efforts to improve the global trading system have been faltering, we have come to realize that our Asia-Pacific region is being divided into several trading blocs. Australia and New Zealand have been linked through Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCER) since 1983; the ASEAN summit agreed to form the Asean Free Trade Area (AFTA) in January this year; and now NAFTA is about to emerge as the major trading bloc in the region. Such being the case, Northeast Asia-comprising Japan, China, Korea, Taiwan, and Hong Kong-alone remains outside any free trade pact on the map of the Asia-Pacific region.

There is a great difference between the three FTAs, actual or planned, in terms of their scale and impact on regional economies. In the case of both AFTA and CER, their trade among members is rather small relative to their trade with nonmembers in the Asia-Pacific region. In 1990, the intraregional trade of ASEAN accounted for less than 20 percent of the total, the corresponding figure for CER being about 10 percent. Thus the impact of the two trading blocks on the Pacific trading system may not be too great.

NAFTA, on the other hand, is an entirely different story. Trade among the three members far outweighs trade with outsiders. Canada and Mexico ship more than 74 percent of their exports to the United States annually. For the United States, Canada and Mexico are the largest and the second largest markets for their exports, respectively. However, Canada accounted for only 21 percent and Mexico for only 7.2 percent of U.S. exports in 1990. Thus the trade within the group is much more important for Canada and Mexico, given the sheer size of the U.S. market, while trade with other Asian countries is equally or even more important for the United States than trade with the two neighbors.

NAFTA, when ratified by the three national legislatures, will emerge as the largest trading bloc in the world, with 360 million people and a $6 trillion GNP. Obviously, the pact will offer both pain and gain to the member countries, but historical experience shows that freer flows of goods and services bring about a net gain to all parties involved. In particular, the state of California, so close to Mexico, is expected to benefit from the increased Mexican demand for its products, such as computers, other high-tech products, and agricultural goods, though a temporary job loss may occur as some manufacturing firms move south of the border to take advantage of the abundant and cheap labor in Mexico. Insofar as a free trade pact brings about net gain to the parties involved, it must be a matter of congratulations for the participating countries.

It is premature to fully assess the impact of the free trade accord on regional and global trading systems. The reactions so far from Asian countries are not very encouraging. The prevailing worry among Asian countries seems to be that the pact could be arbitrarily implemented and might not be consistent with GATT principles. In particular, Japan's major concern is that the agreement will raise the required local content of cars to qualify for preferential tariff treatment from the present 50 percent to more than 60 percent. Asian developing countries are worried that their market share in the United States and Canada will decrease in favor of Mexico, which would enjoy preferential treatment for its exports. The Asian NIEs expect that Mexico will become a powerful competitor in international markets, including North America, as it will develop export industries such as electronics, semiconductors, computers, automobiles, and textiles on the strength of rich natural resources and cheap labor at home combined with capital and technology from the United States and Canada. ASEAN countries fear that the trade pact could lead North American and Japanese businessmen to redirect investment from Southeast Asia to Mexico. Overall, Asian countries appear to fear that the trade pact could divert more trade than it creates for them.

This general tone of skepticism, however, must be tempered by the positive aspects of NAFTA for the Asian countries. When, as is almost certain, economic growth is spurred by the trade pact in North America and Mexico, it would mean more Asian exports to that region in the industries in which they are more competitive than Mexico, as well as to the United States and Canada.

Moreover, the effect of elimination or reduction of customs duties may not be as great as it would appear, because the United States and Canada have already eliminated customs duties on the greater part of their imports. For example, South Korea estimates that roughly 35 percent of its exports to the United States remain subject to import duties, which could be further reduced through the Uruguay Round and other negotiations. From the regional perspective, the trade pact could lead to more investment not only in Mexico but also in China and ASEAN countries because Japan, Korea, and Taiwan will be prompted to make use of the cheap labor in those areas in an effort to maintain the competitive edge of their products against Mexican competition in the world market. In short, it is likely that the growth effect of NAFTA may spill over to the Asian countries.

The real problem with free trade areas and custom unions is that they are inherently discriminatory. They are designed to accord benefits only to goods produced in the pact region-not goods made wholly or in large part in other countries. As such, free trade pacts fundamentally run counter to the principle of unconditional most-favored-nation treatment that has been the foundation of trade negotiations for decades and is stated in Article 1 of the GATT. It is true that free trade areas have long been permitted by special exception in the GATT in the hope that such arrangements would tend to liberalize trade. Yet they are permitted only on the condition that they must not result in barriers to outside countries higher than preexisting levels, and that they must cover "substantially all" trade between the participating countries (Article 24 of GATT). If NAFTA is to meet this test, most of the protectionist deals currently under negotiation would have to be phased out over the next five to ten years.

In theory, NAFTA could move in a positive rather than negative direction in terms of its impact on the global trading system. Hopefully, it could help achieve a breakthrough in the stalemate in the Uruguay Round. The United States is said to have turned to NAFTA because of, among other reasons, its pessimistic outlook on the multilateral trade negotiations in the Uruguay Round. Now that the unified North American market is likely to enhance U.S. influence on international affairs, that influence could be exercised to guide the Uruguay Round to a successful conclusion so that the GATT system will survive. Furthermore, given the present situation, in which the global trading system is facing a great challenge from regionalism, the NAFTA countries could set an example of "open regionalism" by adhering to the principles of the GATT affirmed by the United States and other countries for the last 60 years. From this perspective, it is highly important that NAFTA give GATT full authority to monitor implementation of the agreement. This should establish a useful precedent for GATT review of trade policies and practices in the soon-to-be-created European Economic Space, embracing the EC and EFTA.

The danger inherent in regional trade blocs is that the enhanced bargaining power stemming from regional unity may tend to distort the spirit as well as the letter of provisions of the GATT based on global agreement in favor of the regional interest of the trading bloc. In this regard, we can draw many lessons from the experience of the European Community, particularly before and after the Tokyo Round. Certainly we admire the achievement of the European Community and its contribution to the economic well-being of those outside its borders. Yet there has been much criticism that its impact on the global trading system has not been entirely favorable. One example of the most serious impact on the trading system stemming from this regional arrangement is found in the EC's common agricultural policy that contains measures contradicting GATT principles, such as extensive management and regulation of agricultural trade-including price controls and subsidies for both production and marketing. The European Community, though not the only such offender, has also been criticized by many for its protectionist bias: the propensity toward bilateralism and sectoral arrangements that ignore the global rules, discriminatory practices, particularly for developing countries, and reluctance to support dispute settlement procedures that are a necessary element for a system based on general rules.

The past experience with trading blocs provides a warning to NAFTA. If NAFTA, the largest trading bloc in the world, adopts a protectionist orientation, there will be no hope of maintaining the open global trading system, with the result that the Asia-Pacific region as a whole would suffer from growing trade friction, shrinking trade, and slower economic growth.

One likely reaction to such an unfortunate outcome could be that Asian countries would move toward forming another trading bloc of their own, which would further complicate trade relations in the region. As I have noted, Northeast Asia remains the only part of this vast area not covered by a free trade pact. However, it is unlikely, though not impossible, that the countries in the region will take the initiative to form a free trade area of their own, given the complex political relations among them-even if due account is taken of the recent normalization of official relations between China and South Korea-and the heavy dependence of Japan, South Korea, and Taiwan on the U.S. market, which takes in nearly one-third of the total exports each of those countries.

Yet it is conceivable that the proposal for forming the East Asian Economic Group (EAEG)-embracing both Northeast and Southeast Asian countries-that was aired by the prime minister of Malaysia a few years ago may come to be looked at in a new light given the changing economic landscape of the Asia-Pacific. There might be growing sentiment in Asia that some kind of organized effort is needed to counterbalance not only NAFTA but also the EC-EFTA European Economic Space in order to protect regional economic interests of East Asia as a whole.

East Asia constitutes a strategic market for North America as well as for the European Community. The volume of U.S. exports to this region is comparable to that going to Canada and Mexico combined, as noted earlier. Asia has been one of the major markets for U.S. agricultural exports. East Asia may not be an important market in the short term for Canada and Mexico, with only 10 percent and 7 percent, respectively, of their exports going to that region. Yet from a long-term perspective, East Asia will become increasingly central to the global economy, marked by rapid expansion of trade and high economic growth. If the latest projection of the OECD is right, the center of gravity in the world economy is shifting to Asia, which is expected to account for one-third of world production by 2010, and a half by 2040, compared with roughly one-quarter in 1990. One implication is that East Asian countries will become increasingly self-aware and will gain the confidence needed to play a greater role in the international economic order.

One may argue that the division of the Asia-Pacific region into several subregional trading blocs may not necessarily be a bad thing as long as it helps resolve regional or global issues by consolidating views and interests within each subgroup as a step toward more broad-based deliberation and decision on the regional and global levels. However, there is a danger that free trade blocs can lead to permanent discrimination, if countries do not also pursue the broader elimination of trade barriers worldwide. That's why the success of the Ururugay Round is so important.

At any rate, it is a reality that several trading blocks will coexist within the Asia-Pacific region; the need will then arise for a regional mechanism by which to facilitate communication and dialogue between individual trading blocs as well as between each bloc and nonmember countries. Fortunately we have PECC and APEC for that purpose. The PECC, dedicated to the cause of the open global trading system, certainly has a role to play in promoting a global approach to the trading system in the new regional setting characterized by the proposed NAFTA and AFTA-as well as the CER.

How, then, can PECC respond to this challenge? First, the Trade Policy Forum of PECC can undertake to monitor the progress of implementation of the free trade pacts in the countries involved and analyze their impact on trade relations among the economies in the PECC region, with particular reference to the GATT rules. Second, the Standing Committee of the PECC could make policy recommendations to the APEC on the basis of its findings for reducing trade frictions that might arise from the interaction between free trade blocs and other countries. Finally, since NAFTA provides that other countries or groups of countries may be admitted into the agreement if the NAFTA countries concur, the PECC Trade Forum or a new task force could explore that possibility as a way to minimize discrimination in the short term and to elimintate discrimination in the long run in the Asia-Pacific region.

Let me conclude my remarks by saying that the Asia-Pacific region, and particularly the NAFTA countries, stand at a crossroads: one path leading to a more open global trading system based on open regionalism, the other to a protectionist world trading order made up of closed, mutually competitive trading blocs. At this juncture it is indeed significant that the PECC IX is going to adopt what we call the San Francisco Declaration, which will make it crystal clear that the future efforts of PECC will be directed toward open regionalism in which subregional arrangements are consistent with GATT principles and promote the overall interests of the region.