February 2009
Asian Research Report 2008

Reformulating APEC Strategy: No Time to Waste—Enlarge the Sphere of Liberalization: Removing Barriers inAgriculture Is a Must—Shujiro UrataSenior Economist, Japan Center for Economic ResearchProfessor, Waseda University• Expanding the free trade region in the Asia-Pacific has merits• After the crisis, a free trade area will be indispensable for growth• Japan, the host of next year’s APEC meetings, must not lag behind

Back in 1989, when the Uruguay round of the General Agreement on Tariffsand Trade (GATT) had run aground and movement toward regionalism was underwayin Europe, Asia-Pacific Economic Cooperation (APEC) was established with the aim ofpromoting mutual market opening among the region’s countries and contributing toeconomic growth within the region and around the world. Beginning with 12 members
including Japan, the United States, Australia, South Korea, and the Association ofSoutheast Asian Nations (ASEAN), APEC has expanded to 21 members today, withboth China and Russia joining up.
This year, APEC’s twentieth anniversary, will be an important year for Japan,
which has played a leading role in the organization. It is a time for evaluating theaccomplishments thus far and, with eyes on the future, reformulating the nation’s APEC
policy.
Very soon now, in 2010, the developed members of APEC will reach thedeadline for achieving free trade and investment, the goal proclaimed in the 1994 Bogor
declaration. (The developing members have until 2020 to reach this goal.) Because
Japan is to host APEC’s annual meeting in 2010, this year it needs to make careful
preparations for serving in this role. The United States, which still has more influencethan any other country in the world despite the economic crisis it is going through, is
now forming a new administration. This has made it all the more imperative for Japan,
which is working actively to build a regional framework in East Asia, to restructure its
Asia-Pacific strategy.
Over the past three fiscal years (April to March) the Japan Center for Economic
Research (JCER) conducted research on economic integration in East Asia. For thecurrent fiscal year the focus of the research was expanded to the Asia-Pacific region.
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Asia Research Report 2008

The researchers investigated the economic trends in the APEC region and thedevelopment tasks to be addressed, and they presented proposals for Japan’s APECstrategy. (I served as the project leader.)*****The APEC region occupies a weighty position in the world economy. As of2006, it accounted for some 55% of the world’s gross domestic product (GDP) and 40%of its population. Many of the members are in the midst of rapid growth, a feature they
have in common, but in various other respects, such as population size, economic scale,and development stage, APEC abounds in diversity.
There is, for example, a sixty-fold gap in per capita GDP between the UnitedStates at the top and Vietnam at the bottom. The differences in development stage arereflected in disparities in wage levels among APEC’s members, and this has made it
possible for multinational corporations to arrange a division of labor in manufacturing
processes. Regional networks for the manufacture of electronic products and othergoods have come into being both in East Asia, where Japan, China, South Korea, andthe ASEAN members are the main participants, and in North America, where the UnitedStates and Mexico are the lead players, and these networks are propelling economicgrowth. Because the APEC region has some members that are richly endowed withnatural resources and others that are not, it has a combination of exporters and importers
in the trade of foods and energy supplies.
This diversity has brought into being a trade structure characterized bycomplementary relationships, and it has lifted the ratio of APEC’s intraregional trade toworld trade to the very high level of 70%. The rapid economic growth within the region
has been enabled to a large extent by this trade in goods and services and by brisk
investment, but special mention needs to be made of the important position of theUnited States. This country has offered a market for the final consumption of much of
the merchandise trade, acted as a competitive provider in service trade, and served as amajor supplier and recipient of investments.
In the background to the expansion of trade and investment has been a trend
toward liberalization promoted by such organizations as APEC and the World Trade
Organization (WTO). There is, however, ample room for further liberalization in many
APEC members, particularly the developing members. In merchandise trade, tariffs onimports have been lowered or eliminated with certain exceptions, such as agriculturalproducts, but in the area of nontariff barriers, where standards and certification systems
are involved, impediments to trade have increased. In service trade and investment,
moreover, growth is being held back not just by insufficient liberalization but also bydelays in business facilitation, with policies that lack transparency and entail complex
procedures. In all such areas APEC abides by the principle of relying on voluntaryaction, but what this has meant is that while liberalization has progressed where thegoing is easy, protection still exists where it is not.
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Asia Research Report 2008*****
In this context, the concept of the Free Trade Area of the Asia-Pacific (FTAAP)
is being scrutinized. Proposed by the United States at the 2006 APEC meeting, thiswould be a free trade agreement (FTA) encompassing all of APEC’s members. If theFTAAP comes into being, it will create the world’s largest market, surpassing the scaleof the European Union (EU). At the JCER, making use of a general equilibrium model,
we have conducted an analysis of the impact the FTAAP would have on the economiesof APEC’s members. We also investigated three other scenarios: (1) an FTA covering
Japan, China, and South Korea, an idea now under consideration; (2) an FTA for theASEAN Plus Three group (ASEAN plus Japan, China, and South Korea); and (3) anFTA for the developed APEC economies (those belonging to the Organization for
Economic Cooperation and Development [OECD]).
The analyses confirmed that each of these free trade arrangements would workto boost GDP in the participating members and that the effect would grow stronger thegreater the number of parties to the agreement. In Japan’s case, the FTAAP would lift
GDP by 0.8%, an effect considerably larger than the effects of the other FTA
arrangements (see the figure). A breakdown of the liberalization measures reveals thatremoving barriers to trade in services would have a larger effect than removing tariffs.
Because these analyses did not give consideration to foreign direct investment, which
has a strong impact on economic growth, the actual results of FTAs would presumably
be larger.
Impact of FTAs on Japan’s GDP
0.9(%)
0.8
0.7
0.6

Service barriers

0.5

Tariffs

0.4
0.3
0.2
0.1
0
Japan–China–Korea

ASEAN+3

Developed

APEC

FTAAP

economies

Among APEC’s members are some of the world’s leading exporters ofagricultural products, such as the United States, Canada, and Australia, along with someof the leading importers, such as Japan and China. Until the mid-1990s APEC as awhole was exporting more agricultural products than it imported, but then it shifted toan excess of imports, and in recent years the net imports have been expanding. Since astable supply of agricultural products is a necessary condition for human life, mostcountries protect agriculture from imports with the aim of sustaining and expanding
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domestic production. Within APEC, Japan and South Korea in particular have erectedhigh protective barriers. But protection of agriculture prolongs the sector’s inefficiency,
and contrary to expectations, it makes countries even more dependent on imports. Inaddition, it is an impediment to concluding FTAs.
The members of APEC are engaged in cooperation in a variety of fields, suchas fostering small and medium-sized enterprises and developing human resources.
Cooperation is especially active in the energy sector. In a situation of increasing energy
consumption in APEC, particularly among Asia’s developing members, concern aboutclimate change is mounting. At the member level, efforts are going forward to achieveenergy security and combat global warming. Regional cooperation offers a useful meansof complementing these individual efforts and making them more effective.
*****Using exports and foreign direct investment as levers, APEC’s members haveachieved smooth economic growth. The region’s economies are in a slump at present
because of the global financial crisis, but if they can overcome the crisis and return to
the growth track, they should be able to resume smooth growth. Trade and investment
expansion will play a key role, but for this to occur, liberalization and facilitation of
trade and investment will be indispensable. Instead of relying only on voluntary action,
APEC’s members should find it useful to establish the proposed free trade area andprovide it with binding powers.
It is generally agreed that because of agricultural protectionism and otherproblems, the FTAAP cannot be brought into being in the near future. In this situation,some APEC members have begun to establish FTAs demanding high-level liberalization.
Four members including Singapore and Chile have entered into one such FTA, known
as P4. Furthermore, the United States, Australia, and other countries will be joining it
this year and create the Trans-Pacific Strategic Economic Partnership Agreement (TPP).
Some observers expect South Korea to also sign on, after its FTA with the United States
goes into effect. If Japan finds itself unable to conclude FTAs with such APEC members
because of its unwillingness to open its market to agricultural imports, it will suffer
injury in the form of fewer export opportunities. In order to avert such a situation, Japan
must firmly resolve to liberalize agricultural products.
Japan’s service as APEC’s host country in 2010 will offer it a good opportunity
for enlarging its presence in the Asia-Pacific, a region that will have a huge impact onthe nation’s future. On this occasion, Japan needs to play the central role in promoting
assessment of the progress made toward the Bogor goal and securing the selection of
APEC’s next goal. When the degree of the Bogor goal’s fulfillment is assessed,
collaborative studies by industry, government, and academia can be put to good use.
As for the next goal, I believe it should extend beyond trade liberalization tocover other issues, notably investment liberalization, trade and investment facilitation,and economic and technical cooperation. Indeed, I would propose that the goal be the

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Asia Research Report 2008

creation of a “green FTAAP” complete with environmental measures, a field in which
Japan enjoys competitive power. As it prepares for hosting APEC in 2010, Japan should
harmonize its actions with the work underway on the Comprehensive Economic
Partnership in East Asia (CEPEA), a regional economic framework, and it must closely
coordinate strategy with other APEC members, particularly with Singapore, this year’s
host, and the United States, the host for 2011.

(The original Japanese article appeared in the January 19, 2009 issue of The Nihon Keizai Shimbun)
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