February 2009
Asia Research Report 2008

The Huge Asia-Pacific Market Comes of Age:Japanese and US Strategies and APEC’s Twentieth Anniversary
Shujiro Urata
Senior Economist, Japan Center for Economic Research
Professor, Waseda University[Main Points]¾ The APEC member economies achieved smooth economic growth with thehelp of exports and foreign direct investment, and they have come to occupy
a very prominent position in the world. APEC’s economies are at present
moving sluggishly because of the ongoing global financial crisis, but if they
can manage to rebound and return to the growth track, the smooth growththey enjoyed before the crisis should resume. For that to occur, however,trade and investment must expand, assisted by liberalization and facilitation.
¾ An agreement on the proposed Free Trade Area of the Asia-Pacific (FTAAP)
would have many merits for APEC’s economies, Japan included. For thisreason, Japan should actively promote the agreement’s conclusion. There is,however, an impediment standing in the way: domestic opposition toliberalization of the agricultural sector. Even so, by properly timing the
introduction of liberalization and providing technical support and temporary
income compensation to the people harmed by liberalization, the damage
can be limited and human resources can be effectively utilized. If thecompetitiveness of agriculture were enhanced at the same time through thepromotion of reform, resistance to liberalization would weaken and theJapanese economy would gain vitality.
¾ With Japan to host the annual APEC summit in 2010, one of the years
targeted by the 1994 Bogor declaration for realizing free and open trade andinvestment in the Asia-Pacific, we wish to propose that the establishment of
the FTAAP be set as the next goal. If Japan becomes actively involved in thenegotiations, an agreement that is beneficial for it can be realized.
Specifically, Japan should endorse a comprehensive agreement, one
providing not just for free trade and investment but also for facilitation andeconomic and technical cooperation. Because Japan and its partners in the
ASEAN Plus Six group are already working on a similar agreement called
the Comprehensive Economic Partnership in East Asia (CEPEA), thought
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must be given to coordinating the FTAAP and the CEPEA. In pursuing
discussion of the FTAAP, Japan must closely coordinate strategy with other
APEC members, particularly with Singapore, the host for 2009, and theUnited States, the host for 2011. Toward the realization of the FTAAP, Japan
should quickly conclude the FTA it is negotiating with Australia and begin
FTA negotiations with the United States.

Introduction
Established in 1989, Asia-Pacific Economic Cooperation (APEC) greets its
twentieth anniversary in 2009. It began with 12 members and has grown into a regional
cooperation organization with 21 members belonging to it. Even as APEC was drawing
in new members, its member economies were achieving dazzling economic growth,with the result that APEC’s importance in the world economy has greatly increased.
APEC’s share of the world’s population rose from 14.9% in 1989 to 40.7% in 2006; its
share of world gross domestic product rose from 50.2% to 55.5%; and its share of trade(exports and imports) rose from 33.0% to 46.3%.
APEC’s aim is to promote regional cooperation for the realization of economic
growth in the region and the world. Because among its members are some with great
influence in the world economy, including the United States, Japan, China, and Russia,
APEC also has come to play an important role in making and revising internationalrules in various economic sectors, notably trade and finance. The member countries andregions hold differing views, however, on how to promote liberalization of trade andinvestment, which is a key means of regional cooperation for the sake of economic
growth. Some observers say that the progress in this area has been insubstantial
compared with what was originally anticipated. It cannot be denied that the discussions
in APEC have sometimes shifted from economic affairs to security matters. While thecause of this is the worsening problems of terrorism, disappointment with the lack ofprogress in trade liberalization has also been involved.
In recent years, because of such factors as the growing interest in regionalism
in East Asia and the rise of the Chinese economy, APEC discussions have again come tocenter on regional cooperation in the economic arena. Meanwhile, the future of theworld economy is becoming harder to discern because of a number of developments,
such as the breakdown in the Doha round of multilateral trade negotiations under theWorld Trade Organization (WTO) and the intensification of the global financial crisis
originating from the United States. In this setting, eyes are once again being turned to
APEC and its talks on regional economic cooperation.

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Japan has played an important role in APEC. On the occasion of theorganization’s birth, it joined with Australia in performing the role of midwife, andsubsequently it has made major contributions in many areas, including organizationbuilding and cooperative activities. It was in Bogor, Indonesia, that APEC in 1994
agreed on what is considered to be its primary goal: the achievement of free and open
trade and investment no later than 2010 in the case of developed economies and no later
than 2020 in the case of developing economies. But it was in Osaka, Japan, that APEC
in 1995 adopted an action plan for achieving this goal, the Osaka Action Agenda. For
Japan, 2010 is a year in which it must, as a developed economy, attain the Bogor goal,
and it is also a year in which it will host the annual APEC summit.
APEC today is a regional cooperation organization dealing with the broad
Asia-Pacific region, which has become an enormous market in the world. With theorganization’s twentieth anniversary soon to arrive, though, the significance and role of
APEC are being called into question. In this context, the present report makes policy
recommendations to the Japanese government based on the results of analyses. These
analyses focused on recent trends in the APEC region in key economic fields, including
trade, investment, finance, and energy, as well as on the results achieved by cooperation
within APEC. Over a three-year period the Japan Center for Economic Research (JCER)
conducted studies on the theme of regional integration and regionalism in East Asia (in2005 covering the ASEAN Plus Three group [the Association of Southeast Asian
Nations plus Japan, China, and South Korea], in 2006 covering the East Asian economic
community, and in 2007 covering the ASEAN Plus Six group [ASEAN plus Japan,
China, South Korea, India, Australia, and New Zealand]). In 2008, with the objective ofdrawing comparisons with this research on regional cooperation centered on East Asia,
the JCER research relating to APEC was directed at the United States, APEC’s mostimportant non-Asian member, soon to have a new administration. As a specific policy,
moreover, the research looked into the proposal advanced by the United States in 2006
for the creation of a Free Trade Area of the Asia-Pacific (FTAAP).
In this chapter, section 1 looks at APEC, explaining the process of its birth, itsfeatures, and issues for it to address. Section 2 introduces the analyses of each chapterof the full report, and section 3 presents the proposals.
1

APEC: History, Goals, Results, and Issues

1.1 History of Regional Cooperation in the Asia-Pacific
The first meeting of Asia-Pacific Economic Cooperation took place inCanberra, Australia, in November 1989. 1 In attendance were the foreign and economic
1

For information on APEC’s origins and early developments, see the websites of APEC and the Japanese Foreign

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ministers of 12 nations (Australia, Canada, Japan, New Zealand, South Korea, theUnited States, and the six members of ASEAN: Brunei, Indonesia, Malaysia, thePhilippines, Singapore, and Thailand). Discussions were held on various subjects,
notably economic development in the world and the Asia-Pacific region, global
liberalization of trade and the role of the Asia-Pacific, the possibilities of regional
cooperation in specific areas, and directions to move in for future cooperation in theregion.
The history of efforts to promote regional cooperation in the Asia-Pacific dates
back to the 1960s. In that decade a proposal was floated to establish a Pacific Free Trade
Area (PAFTA). This was to be a governmental organization for creating an area akin to
the common market of the European Community (EC), with Japan, the United States,
Canada, Australia, and New Zealand taking the lead. In the 1970s, as a Pacific versionof the Organization for Economic Cooperation and Development (OECD), the idea ofan Organization for Pacific Trade and Development (OPTAD) was unveiled. In the end,
neither of these proposals became a reality. With governmental-level efforts to construct
a setup for cooperation making slow progress, two private-level organizations came into
being in the 1960s for promoting regional cooperation. These are the Pacific Basin
Economic Council (PBEC), a gathering of business leaders, and the Pacific Trade andDevelopment Conference (PAFTAD), a gathering of economists and other academics.
But it was another organization— the Pacific Economic Cooperation Council (PECC),
established in 1980—that became the direct impetus for the construction of agovernment-level framework for regional cooperation. PECC began as a conference ofbusiness leaders, senior government officials, and academics, who participated in thecapacity of private individuals.
The second half of the 1980s saw a breakdown in the Uruguay round of theGeneral Agreement on Tariffs and Trade (GATT), the final multilateral tradenegotiations conducted under the GATT framework, while maneuvers to advance
regional cooperation were picking up steam in Europe, North America, and other areas.
People in the Asia-Pacific came to keenly feel the need for the promotion of tradeliberalization in order to suppress protectionism, a barrier standing in the way of
economic growth. To be more specific, countries in East Asia saw the retention ofaccess to the American market, their largest export market, as a vital concern, while theUnited States wished to maintain access to the Asian market, which was expected to
grow dynamically, and to remain politically involved in Asia. Against this backdrop, thefirst meeting of APEC was held in 1989.
The APEC ministerial-level meeting has continued once each year since then.
Ministry, as well as APEC nyumon: Hirakareta chiiki kyoryoku o mezashite (An APEC Primer: Aiming for OpenRegional Cooperation), Ippei Yamazawa et al., eds., 1995.

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At the 1993 meeting in Seattle, the United States, an informal summit of heads ofgovernment was arranged, and this informal summit has also continued to take place
annually. APEC’s membership also increased. China, Russia, and other participantsjoined the organization, giving it 21 member economies today. The themes addressed
have expanded beyond trade and investment and now encompass such matters as energy,
the environment, finance, training of human resources, and security.
Brisk direct investment and trade played key roles in both the high-tempo
growth before the crisis and the swift recovery from it. An inward flow of direct
investment promotes capital investment, production, and employment in the recipient
country, and working through technology transfer, it lifts the country’s technologicallevel, which also plays a key role in economic development. Direct investment works insuch ways to accelerate growth in recipient countries. The inflow of such investment
into East Asia caused a major expansion of trade, which made high-tempo growth
possible.
APEC is a governmental organization, but it recognizes the importance ofreflecting private-sector opinions in its activities. It therefore promotes cooperation withthe aforementioned PECC. In addition, to enhance exchange with the business world, it
set up the APEC Business Advisory Council (ABAC) in 1995, and to enhance exchangewith the academic world, it created the APEC Study Center in 1993.
1.2 Framework for Trade and Investment Liberalization
With its declaration at the 1994 summit in Bogor, APEC adopted the important
goal of achieving free and open trade and investment in the Asia-Pacific by 2010 for
developed economies and by 2020 for developing economies. At the 1995 summit in
Osaka, APEC adopted guidelines for accomplishing this goal in the Osaka Action
Agenda. This agenda specifies principles, frameworks, and actions in the three areas oftrade and investment liberalization, trade and investment facilitation, and economic andtechnical cooperation. Among the general principles for liberalization and facilitation
are comprehensiveness, WTO consistency, comparability, and nondiscrimination. The
economic and technical cooperation is to be implemented by the APEC members assoon as each is ready, making use of action, forums, and other means. The agenda
provides for liberalization and facilitation action in 14 specific areas, including tariffs,
nontariff measures, investment, and trade in services, and it provides for economic andtechnical cooperation in 13 specific areas, including human resources development,
industrial science and technology, and small and medium-sized enterprises.

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To implement the Osaka Action Agenda, APEC’s members plan and executeindependent action individually, and they also participate in plans for collective action.
Each member independently prepares and implements an individual action plan for
activities including liberalization, facilitation, and cooperation, and in order to assurethat objectives are fully attained, there is a peer review for mutual evaluation ofprogress in plan implementation. The evaluation work in these reviews is undertaken
not just by concerned persons of the respective members but also by specialists.
At the 2005 APEC meeting in Busan, South Korea, an evaluation was carriedout just for the developed economies of progress made toward the Bogor goal. This
review confirmed that satisfactory results had been realized in lowering or eliminating
tariffs and removing nontariff barriers and that trade had significantly expanded, but it
spotlighted the need for a response to behind-the-border barriers, a subject that had been
gaining attention, in addition to border measures. In greater detail, the review stressed
the need for more work in a number of areas, including support for the multilateral
trading system, economic and technical cooperation, promotion of high-quality free
trade agreements (FTAs), liberalization and facilitation of investment, and facilitation of
trade.
1.3 Issues
By promoting the liberalization and facilitation of trade and investment andengaging in economic and technical cooperation, APEC aims to realize free and open
regional trade and investment and contribute to economic growth in the Asia-Pacificand the world. The means employed to attain this end are left to the discretion of eachmember, and they do not include legally binding negotiations, treaties, and conventions,like those of the WTO. In addition, APEC liberalization measures are also applied tononmembers, thereby adopting most-favored-nation treatment without discrimination.
Trade liberalization works to stimulate economic growth by improving theefficiency of resource allocation. Over the short term, however, it has a high probabilityof causing injury to producers and workers if increased imports depress domestic
production. People who may suffer damage therefore apply political pressure to blockliberalization. Because of the operation of these political and economic mechanisms,
liberalization is hard to accomplish on a voluntary basis. Particularly when business isin a slump, little can be expected of voluntary liberalization.
Because reliance on voluntary liberalization does not hold high promise,
APEC members deeply interested in promoting liberalization proposed to work on it
jointly with other members, but this idea did not gain favor. The proposal was put
forward at the 1997 ministerial meeting as an initiative for “early voluntary sectoral
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liberalization” (EVSL), or collective liberalization in designated sectors. Opposition
was encountered, however, from those who argued that collective liberalization was notin line with the APEC principle of voluntary action. As a result, the attempt to pursue
liberalization collectively by means of EVSL ended in failure.
Since collective liberalization also proved to be hard to accomplish, some of
APEC’s members moved instead to conclude free trade agreements for the purpose ofrealizing free trade with other like-minded members. All of APEC’s members haveentered into FTAs of one form or another. Bilateral agreements are by far the mostcommon, but agreements among three or more countries are not unusual. Representative
examples of multiparty agreements are the North American Free Trade Agreement(NAFTA) among the United States, Canada, and Mexico, the ASEAN Free Trade Area
(AFTA) among the association’s 10 Southeast Asian members, and separate FTAs
concluded by ASEAN with China, South Korea, and Japan. In addition, an FTA
between AFTA and the Australia–New Zealand Closer Economic Relations Agreement(CER) was concluded on 28th August 2008.
In this context of spreading FTAs among APEC members, ABAC in 2004 put
forward the idea of an FTA embracing all of APEC’s members. This is the FTAAP, theFree Trade Area of the Asia-Pacific. One of the arguments behind this proposal is thatwhen a multitude of separate FTAs are concluded, you are apt to find that trade isrepressed by a spaghetti-bowl effect of complex and confusing trading systems. To
circumvent this problem, a single FTA subsuming all the separate FTAs is needed. The
United States presented this proposal at the 2006 APEC meeting. The organization has
since been studying the concept, but many researchers are of the opinion that it will not
be possible to create such an area in the near future because of not just differences in thedevelopment stages and political systems of the APEC members but also domestic
political obstacles. 2
Among the FTAs concluded among APEC’s members, of note is theTrans-Pacific Strategic Economic Partnership Agreement. This is a high-level FTA
appealing for complete removal of all tariffs within 10 years. Ratified by four founding
members—Brunei, Chile, New Zealand, and Singapore—it was originally known as P4.
At APEC’s 2008 meeting in Peru, it was announced that the United States, Australia,
and Peru would take part starting in 2009, and the P4 designation was changed to theTrans-Pacific Partnership (TPP). This is an agreement among those countries interested
in achieving free trade but believing that it will be hard to conclude the FTAAP for
APEC overall. Their aim is to get FTA arrangements in place at an early date among
like-minded countries. At the same time, they hope that their actions with regard to the2

See An APEC Trade Agenda? Charles E. Morrison and Eduardo Pedrosa, eds., 2007.

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TPP will lead the way to the FTAAP’s conclusion.
FTAs are exclusionary agreements with binding powers, and in this sense they
are not in conformity with APEC’s norms of behavior, which espouse nondiscriminatory,
nonbinding, and voluntary action, but there is nothing to prevent the organization’s
members from entering into FTAs. Even so, there is a possibility of a split in opinion
within APEC among members that join the TPP and those that are unable to do so rightaway. As this presents an argument affecting the most important APEC principle, that oftaking voluntary action to liberalize trade and investment, the organization’s respective
members need to strive for a common understanding.
APEC has drawn up basic principles covering a number of areas including
investment and competition policy. As in the case of the voluntarism applied to tradeliberalization, however, these are nonbinding principles intended for use as a reference,and they do not appear to be making much of a contribution to improving theenvironment for investment and competition. The handling of the principles needs to begiven further thought, and the possibility of providing them with binding power should
be kept in mind.
APEC has made a major contribution by enhancing economic and technicalcooperation in a variety of fields. But while the liberalization of trade and investment
can work effectively to expand trade and investment during economic development, it
will have few merits if taking advantage of the new trade and investment opportunities
that open up is not easy. Economic and technical cooperation paves the way to theutilization of these new opportunities. This cooperation within APEC has significant
content in such areas as developing human resources, fostering small and medium-sizedenterprises, and installing economic infrastructure. It must be noted, though, that theWorld Bank and other international organizations as well extend cooperation of this sort,and it also takes place in bilateral assistance programs. What distinguishes APEC’s
economic and technical cooperation is its close relationship to trade and investment
liberalization and facilitation. A task to be addressed in the promotion of APEC’s
cooperation is placing high value on this distinguishing characteristic while pursuingcoordination with cooperation from other frameworks.
These are some of the topics to be addressed in trade and investment
liberalization and economic and technical cooperation. There are also various otherquestions, such as how to enhance facilitation by, for instance, evaluating the extent of
its advancement, or how to handle APEC’s organization by, for instance, strengthening
its functioning as a secretariat and setting goals to follow the Bogor goal. For lack ofspace, however, these issues will not be treated here.

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The foregoing has been a discussion of APEC issues, but before moving on, let
us briefly note some tasks for Japan. There are two major ones at present: (1) making acontribution to the resolution of APEC issues and (2) fulfilling Japan’s duty as APEC’s
host country in 2010.
2

Chapter Summaries

2.1 Economic and Trade Interdependence among APEC’s Members
There are 21 economies that have joined APEC, which has become a hugeorganization whose member economies account for more than 40% of the world’s
population, more than 50% of its GDP, and close to 50% of its exports and imports.
There are, however, major differences among the members in such respects as
population size, economic scale, and development stage. At the same time, many of theeconomies share the characteristic of being heavily reliant on trade in economic
activities. Another common characteristic is that many of the developing members,
including China, Russia, and Vietnam, have been growing at a blinding pace.
In the field of trade, APEC’s economies are highly interdependent andinvolved in complementary relationships. To be specific, some economies like Australia
and Russia have an abundance of natural resources, while many East Asian economies,
Japan included, are dependent on natural resource imports. In the area of manufactured
products as well, even as competitive relations exist among these economies over, forinstance, electronic products, a closer inspection reveals that complementary relations
also exist in many cases. Economies have come to specialize in certain areas, such asparts or finished products, and even within this division between parts and finishedproducts, trade is going on among items with differing levels of quality. Within this areaof manufactured products, particularly in the sectors of electronic products and transport
equipment, there are numerous transactions among APEC’s economies involving partsand finished products mediated by the production networks of multinational
corporations. These networks have been created by means of foreign direct investment.
The global financial crisis has temporarily slowed the pace of globalization,
but it should pick up speed again when business gets back on its feet. Under thecircumstances, economic growth can still be effectively realized by using an expansionof direct investment and trade as a lever. APEC’s economies have ample room for
mutually expanding trade. Recognizing that the realization of such opportunities willlead to economic growth, they need to undertake activities centered on trade andinvestment liberalization, as stated in the Bogor declaration.

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2.2 Trade and Trade Policy in the Asia-Pacific: Status in Fulfilling the Bogor
Declaration economy
Free trade is a key APEC goal. Exactly what trade liberalization consists of has
not been rigorously defined, but going by the individual action plans that the Bogor
declaration asks each member to prepare for goal attainment, the content includes tariffcuts, nontariff barrier removal, and trade facilitation. Under the WTO and its
predecessor GATT, liberalization has been perceived to center on lowering tariffs, but
APEC targets a broader range of measures and fields. It seeks to create an environment
in which trade that is truly free can take place.
The ambitious content of the Bogor declaration was decided on at a time whenthe member economies of APEC were recording solid economic growth. Subsequent
events created conditions that made trade liberalization more difficult. These included
the 1997 Asian currency crisis, which caused economies to stagnate in the late 1990s,
and the collapse of the information-technology (IT) bubble and the terrorist attacks on
the United States of September 11, 2001, which caused the whole world economy tofalter early in the twenty-first century. Even in these circumstances, however, APEC’s
members made significant progress in terms of cutting tariffs. It is not easy to evaluate
how much credit APEC deserves for this progress, since other factors were also
involved. China, for instance, was strongly motivated to reduce its own tariffs for thesake of its negotiations for admission into the WTO. It may nonetheless be observedthat the individual action plans led to a sharing of information on tariffs and nontariffbarriers among APEC’s members, and this presumably contributed to the lowering andremoval of tariffs through increased awareness of the need for it.
This action on the tariff front made progress in many sectors, but high tariffs
continue to exist in agriculture and other sensitive sectors. In addition, there has been an
increase in so-called technical measures and other nontariff barriers. Even as tariffs
were reduced or eliminated, systems were put in place for inspection, certification, andother procedures, creating new hurdles in the area of importation and customs clearance
and, as a result, limiting or shutting out some imports. Concern about the safety of foods
has been on the rise, and this can be seen as a justification for applying technicalmeasures to food imports. What is problematic, though, is the possibility for theprovision of unnecessary protection in the guise of assuring food safety. In the area of
quality inspections, moreover, imported products and domestic products need to behandled without discrimination.
In this way, much progress has been achieved on the tariff front for tradeliberalization within APEC, but there remains considerable scope for liberalization in
the area of nontariff barriers. Liberalizing trade in some cases causes unemployment

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and compels industrial adjustment because of increased imports, but seen from thevantage point of the economy overall, it energizes business and enhances growth. In
actuality, many APEC economies have realized high growth by taking the path of free
trade. Japan will be serving as APEC’s host in the critical year of 2010. It will be called
on to steer arrangements so as to maximize the interests of all the member economies,
including itself, while keeping a close eye on trends in the United States, China, andother members.
2.3 Service Trade and Movement of People in APEC: Liberalization Measures for Their
Further Promotion
Trade in services, which include transport, communications, finance, education,and tourism, has been expanding over recent years. In the background, the service sector
is accounting for a growing share of economic activity, and the costs of engaging inservice trade are falling. With respect to these falling costs, it may be observed that twoof the primary causes are technological progress and deregulation in the fields oftransport and communications, which provide the main means of conducting service
trade. The scale of the service trade within APEC is large, accounting for close to 40%of the world total, and the United States occupies a prominent position, accounting for
more than one-third of APEC’s service trade. Japan and China come next after theUnited States, but each has a service trade total not quite reaching one-third of theAmerican figure. The United States is highly competitive in service trade, which can beunderstood from the fact that it records a huge surplus in this trade, whereas othercountries and regions are running deficits. The United States over the past few years has
demonstrated keen interest in liberalizing service trade by means of the WTO’s
multilateral trade negotiations and its own FTA negotiations. Behind this policy lies thecompetitive power it commands in this field.
An expansion of service trade will work to enhance economic growth bydrawing the economic relations of APEC’s economies more closely together, but
because in many cases this trade involves movement of people or has an impact on
cultural customs and traditions, it can easily become a cause of friction. Numerous
restraints on service trade have been put in place to prevent friction. Among theserestraints, however, are quite a few that use the preservation of customs as camouflage
for protecting industry. APEC has sought to assist the movement of people through new
systems, which facilitate arrangements for multiple-entry visas and enable theacquisition of an APEC Business Travel Card, but the spread of these systems has notgone far. One task for APEC to address is encouraging wider use of existing systems
through the spread of information and the enhancement of their convenience, while
another is promoting mutual recognition of credentials for specialist occupations. In
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order for the necessary policies to be implemented for realizing such objectives, it will
be important that people share an understanding of the merits of liberalizing service
trade. Toward this end, detailed analyses of the effects of this liberalization need to be
conducted.
2.4 APEC’s Future and Japan’s Role: Possibilities for Further Developing the
Asia-Pacific’s Investment Environment and Production Networks
In the region of East Asia and North America, multinational corporations
working primarily in machinery industries have assembled regional production
networks. Fast economic growth has been realized in this region with the help of these
networks, which enable growth of efficient production and trade. These multinationals
have conducted a site-selection strategy in East Asia, where countries differ greatly indevelopment stage, tailored to fit each country’s wage level, infrastructure availability,
and trade and direct investment policies. Japanese corporations and their overseas
affiliates initially built networks in which production was handled within each corporategroup, but later they expanded the networks by developing business ties with othercompanies, especially local firms in each country. With the construction and expansionof this sort of production mechanism, the region’s countries achieved growth led byforeign direct investment and exports.
In order to promote growth by attracting investment, many APEC countries
and regions adopted a variety of preferential policies, such as tax breaks, for inward
direct investment. At the same time, however, policies were also implemented to protect
and foster domestic industries, and inward direct investment was sometimes restricted
in designated sectors, making it hard for multinational corporations to operate efficiently.
There are also cases in which the employment of foreign workers has been restricted inorder to promote the hiring of local workers. In developing countries and regions, legal
measures like foreign investment laws have placed limits on the operation ofmultinationals, and in the enforcement of these legal measures, a lack of transparency
and inefficiency in application have created major impediments to inward direct
investment. In addition, there are often serious inadequacies in infrastructure andshortages in human resources, problems that hinder efficient operations not just offoreign companies but also of domestic firms.
The members of APEC have acted to liberalize investment and rectify
shortcomings in the application of investment policies. Seen from the standpoint ofmultinationals, though, there is still much room for improving the investment
environment. The problems are especially critical in developing countries and regions.
In order for growth of foreign direct investment and trade to promote economic

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development, a country needs to cultivate human resources for the improvement of its
infrastructure. An effective way to improve the investment environment through theliberalization and facilitation of investment is to conclude FTAs and bilateral investment
agreements. Investment liberalization would be a likely component of any FTAAP
scheme, but regardless of what happens with the FTAAP, progress is required inliberalizing and facilitating investment.
2.5 Currency and Financial Cooperation in the Asia-Pacific: Status and Tasks
Flows of money within the APEC region have been picking up speed in recent
years. Particularly notable has been the expansion of securities investment within the
Asian region excluding Japan. Whereas US outward securities investment has been
directed both at Japan and at the rest of Asia, Japanese outward securities investment
has primarily gone to the United States, with only a small flow to other parts of Asia.
Obtaining information on bank financing is not easy, but it can be said that in the case of
the international financial centers of Hong Kong and Singapore, financing has flowed
into both Asian countries and Western countries on a large scale. There is great
unevenness in the state of development of the money and capital markets of APEC’s
developing economies, with mature markets in places like Hong Kong and Singapore
and very undeveloped markets in places like Russia and China. Under the circumstances,
APEC’s members have come to appreciate the importance of strengthening money andcapital markets for economic development, and they are moving forward on cooperationin the financial sector, especially for human resources development. By contrast,
currency cooperation has not been going on. This is because the interests of regional
currency cooperation are not necessarily in agreement with an international currency
order centered on the US dollar.
In the part of the APEC region consisting of the ASEAN Plus Three (ASEAN
plus Japan, China, and South Korea), active moves to cooperate in currency andfinancial affairs have started up. The original motive behind this cooperation was toprevent a recurrence of the 1997 Asian currency and financial crisis, which had a large
impact on the ASEAN Plus Three group. In concrete terms, the cooperation includes the
Chiang Mai Initiative for currency swaps in the event of foreign currency shortages,
monitoring of economic and financial trends, economic surveillance through exchangesof views, and the creation of Asian bond markets so that the funds of Asia can beinvested in Asia. Stable exchange rates play a key role in the achievement of East Asian
economic development. Recognition of this point has prompted discussion of the needfor currency cooperation, but various constraints are blocking progress. Among these
constraints are insufficient feelings of regional unity as soon as a sense of crisis recedes,
disparities in economic levels and policy goals, the wall of national sovereignty, and a
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lack of political will. In order to loosen these constraints and make progress on currency
cooperation with a beneficial influence on the ASEAN Plus Three, a blueprint of what
this cooperation would consist of needs to be drawn up. After that, the important thing
will be to come up with the political will to turn the blueprint into reality.
2.6 Possibilities for Cooperating on Energy in APEC
The primary energy consumption of APEC’s members has grown fairly
consistently since the 1980s, except during the 1997 Asian crisis and the slump
following the terrorist attacks on the United States in 2001. APEC’s economies saw
their share of world primary energy consumption increase from 57.2% in 1985 to 61.3%
in 2007. The United States is the region’s largest energy consumer, followed by China,
Russia, and Japan, in that order. APEC’s members have generally become increasingly
dependent on imports of primary energy. To be sure, because Canada and Russia areexporters of oil and natural gas while Mexico is exporting oil, APEC’s overall
dependence is relatively low compared with that of the ASEAN Plus Six group. Still,
reliance on energy imports has been tending to grow and is expected to continue to do
so in the future. A characteristic of oil supplies is a pattern of heavy reliance on imports
from the Middle East. Looking at the supplies of oil and natural gas within the region,
we find that Russia can make a contribution as a full-fledged exporter of natural
resources to the Asia-Pacific but that if these exports are to grow, Russia’s supply
infrastructure will have to be enlarged and upgraded.
The members of APEC are becoming increasingly concerned about global
environmental problems and measures for dealing with them. The APEC members
recognize that they have a fragile supply-and-demand structure for energy, and they are
becoming increasingly concerned about global warming. In this context, each of theregion’s major energy consumers is stepping up efforts to implement its energy policy.
But because something of a zero-sum game results when each member formulates
energy strategy separately, an optimum situation cannot be realized in the absence ofcooperation and collaboration with other members.
Cooperation on the energy front in APEC has a longer history than cooperation
within the ASEAN Plus Three and ASEAN Plus Six groups. At the first APEC
ministerial meeting in 1989, the importance of regional cooperation on energy issues
was acknowledged, and agreement was reached on creating a place for experts todiscuss the matter. A work project for dealing with energy was set up in 1990, andcooperation got off to a start. In the ASEAN Plus Three, energy ministers got together
for an informal meeting in 2004, and they recognized the need for efforts to achieveenergy security. An important part of the cooperation content is the creation of forums

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for discussions among experts on each of several energy topics. In addition, concrete
projects including feasibility studies are going gradually forward for the construction ofstate stockpiles. The ASEAN Plus Six framework was only created in 2004 and thus has
had little time to act, but in addition to engaging in discussions, the group has made astart on concrete cooperation. For the sake of energy cooperation within APEC in the
future, it will be important both to share information on international markets and toconstruct and operate a setup for collaborating with other frameworks, including theASEAN Plus Three and ASEAN Plus Six.
2.7 Trade Liberalization and Agriculture in APEC: The Agricultural Issue in FTAs
APEC’s overall trade in agricultural products ran a surplus in the 1980s but
has shifted to an excess of imports over exports since the 1990s. The trend in recent
years has been for APEC’s share of world agricultural exports to decline and its share ofimports to steadily increase. There is great variation from one APEC economy to thenext with respect to agricultural trade. The United States is the largest exporter, and it
accounts for more than 30% of APEC exports. Australia, Canada, and China are also
large exporters. On the import side, again the United States is in first place, with Japan
coming second and China third. The growing volume of imports by Japan, China, andthe United States lies behind the shift in the overall APEC region from net exports to net
imports.
The main factor behind the differences among APEC’s members inagricultural trade competitiveness is disparities in the endowment of farmland, theprimary factor of production in the case of farming. The United States, Australia, andCanada enjoy competitive power as developed nations located on new continents andwith large tracts of farmland per agricultural worker. The situation is somewhat different,
however, in the case of fruits, vegetables, and other horticultural products, which are notheavily dependent on abundant farmland. The position occupied by the agricultural
sector in the economy varies among APEC countries as a reflection mainly of thedevelopment stage. In such latecomers as Papua New Guinea and Vietnam, agriculture
has a large economic share in the 20%–40% range, but in the advanced economies, it
accounts for only a small percentage.
Most economies protect agriculture from imports with the aim of sustaining
and increasing domestic production, reasoning that a stable supply of agricultural
products is imperative for human life. In the APEC region, not just agricultural
importers but also the exporting economies have adopted protective measures in suchforms as tariffs and tariff quota systems. The degree of protection varies widely byeconomy and agricultural product, but in general there is a tendency for protection to be

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light in developing economies and heavy in developed economies. Japan and South
Korea in particular have raised very high protective barriers. Because many APEC
economies have applied protective policies over a long period of time, strong resistanceto liberalizing agricultural trade has developed. The latest round of WTO multilateralnegotiations is stalled at present precisely because of differences of opinion inagricultural talks. In many of the free trade agreements APEC economies haveconcluded over recent years, moreover, agricultural products have either been excluded
from liberalization or accorded special treatment, by, for example, setting long periods
for liberalization to take effect. In the FTAs Japan has entered into, many agricultural
products have been exempted from liberalization.
Discussion has begun in APEC on the possibility of constructing very free andopen FTAs, such as the FTAAP and the TPP. It is said that Japan would have a hard timetaking part in the FTAAP or the TPP on account of stiff domestic resistance toliberalizing agriculture. But this would mean that Japan would be unable to take the lead
within APEC in proposing policies and constructing systems, and it might even be given
the cold shoulder by other APEC members. Opening up the Japanese agricultural
market would be of great service in enabling Japan to assume a trusted position in
APEC, and it would also revitalize and strengthen the Japanese economy. Measures toopen up the market would stimulate exports of agricultural products that enjoy acompetitive edge, but they would be likely to depress production and cause
unemployment in the case of products that are not competitive. To minimize the costs ofthis sort of adjustment, it will be important to exercise ingenuity, such as by slowing the
speed of liberalization, and to promote domestic reform, including revision of land-use
systems.
2.8 Economic Impact of the FTAAP: Analysis Using a Computable General Equilibrium
Model
The Free Trade Area of the Asia-Pacific is a scheme that would eliminate thetrade barriers in APEC’s economies. According to trade theory, trade among APEC’s
members would expand as a result of the removal of these barriers, while trade between
them and countries not belonging to APEC would contract. The FTAAP would thus
have one effect of stimulating economic growth among the members through its
influence on trade and another effect of reducing growth among the nonmembers. In atheoretical analysis using a purely economic model, these are the results that the FTAAP
could be expected to produce, but in the complex situation of actual economies, theanticipated effects of the FTAAP are much harder to predict. This chapter of the reportanalyses the impact of the FTAAP on each of APEC’s economies in a conceptualized
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making use of the market mechanism, which plays the central role in economic
activities, in an explicit manner.
The analysis was performed using the most recent GTAP (Global Trade
Analysis Project) database, which is for 2004. It consists of 19 countries and regions
including 18 APEC members and the rest of the world, and it covered 21 industries. To
assess the effect of the FTAAP, it simulated the results of liberalizing trade of goods andservices for APEC overall, and to make comparisons, it also simulated the results of free
trade agreements covering Japan, China, and South Korea; the ASEAN Plus Three; andthe developed APEC members (the OECD members in APEC). Several scenarios were
postulated for rice liberalization, which presents a stumbling block to Japan’s
conclusion of FTAs, and the influence of each was calculated.
The results of the analysis show that, as expected, the conclusion of FTAs
could be expected to promote growth of GDP and trade in FTA members. For
nonmembers, meanwhile, there would be a small negative impact or virtually no impact
on GDP and trade. The FTAAP’s positive impact on GDP would be largest in sucheconomies as Vietnam, South Korea, Taiwan, and China. Of all the FTA arrangements,
the one that would have the greatest beneficial influence on the economies taking part
would be the FTAAP. In Japan’s case, the FTAAP would boost GDP by 0.83%,
compared with 0.51% for an advanced APEC countries’ FTA, 0.49% for an ASEAN
Plus Three FTA, and 0.42% for a Japan–China–Korea FTA. As for Japan’s liberalizationof rice in the FTAAP, we used a systematic sensitivity analysis to determine theconfidence interval, since there are uncertainties regarding tariff rates on rice andscenarios of liberalization under FTAs. The finding was that the influence of the FTAAP
on Japan’s GDP would be in the 0.36%–0.92% range at the 90% confidence interval.
That is, the impact would be positive.
2.9 The US Strategy toward Asia-Pacific: Focusing on APEC-Wide Integration
The United States has employed free trade agreements as a tool of its trade
policy ever since the 1980s. Its first FTA was a 1985 agreement with Israel. In its
relations with APEC members, it has put into effect NAFTA and FTAs with Chile,
Australia, and Singapore, and it is negotiating other FTAs, notably with ASEAN and
Malaysia. Furthermore, it has completed an FTA with South Korea, a major US trading
partner, and the agreement at present is awaiting ratification by the US Congress. The
United States is pursuing these agreements with other APEC members partly because
APEC has been unable to deliver the kind of free trade it wants. At the same time, in2006 it proposed the FTAAP concept, hoping that this would provide it with a means ofmaintaining and strengthening relations with East Asian countries, which have been

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energetically concluding their own FTAs. The bogging down of the Doha round of the
WTO has also stimulated American interest in the FTAAP concept. However, many
people appear to question the FTAAP’s feasibility for a variety of reasons. For instance,
there is apprehension about the participation of China, which is classified as anonmarket economy, and there is also concern about US trade with the Asian region,
which is responsible for a large portion of the American current account deficit.
In working with East Asia’s developing countries, the United States prefers toconclude trade and investment framework agreements (TIFAs) prior to startingnegotiations on FTAs. TIFAs promote the improvement of systems by, for example,
simplifying customs procedures, establishing agreements on sanitation and quarantine,and standardizing registration and certification for pharmaceuticals. Many TIFAs havecontents comparable to those of FTAs, but the United States treats them as anintermediate step after which FTAs, which put the finishing touches to the economic
reform process in the target country, are concluded. Since the United States in this way
has positioned the FTA as an important trade policy, the agreements it signs have thereputation of being “gold standard FTAs” with qualitatively superior contents forrealizing free trade and economic reform. Among the key components of the FTAs theUnited States has entered into are environmental protection, observance of labor
standards, liberalization of services in which the United States is strong, and removal ofbehind-the-border barriers.
In the background of the US proposal of the FTAAP is the desire to reduce orescape injury from the rise of regionalism in East Asia and respond to the region’s
growing influence, particularly that of China. But while the FTAAP can be seen as theultimate goal of the free trade frameworks in APEC, its formation cannot be
accomplished quickly in an organization with as many as 21 member economies. Under
the circumstances, the United States has expressed interest in participating in the
aforementioned TPP, thereby moving ahead toward free trade with like-mindedcountries. Meanwhile, the foremost US concern in the Asian region is relations with
China, a country with which the United States is running a large trade deficit and
wrestling with problems in the political and security fields as well as the economic
arena. It is possible that the United States will call on Japan to cooperate with it indealing with Chinese issues. Japan will need to proceed carefully when extending suchcooperation, keeping its own relations with China in mind. After all, China is a country
with which Japan must maintain and strengthen a good relationship.

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2.10 APEC as a Regional Institution: American Influence and Changes in Functions
and Norms
The twentieth anniversary of APEC’s creation arrives in 2009. The
organization’s history can be divided into four periods, each with a theme of its own:
period 1 (1989–95), setting the liberalization agenda; period 2 (1996–2001),
implementing liberalization; period 3 (2001––06), addressing security concerns; andperiod 4 (2006– ), building a free trade area. The United States took the lead inestablishing these themes, but on account of opposition from some members, it was
unable to get all the results it wanted.
What the United States desires in the area of free trade is comprehensive,high-level liberalization, including rules for labor and environmental protection, as canseen in the content of the so-called “gold standard FTAs” it seeks to conclude. It has
been unable to realize its desires in the APEC framework, however, because theorganization’s decisions require unanimous consent. In actuality, even thoughliberalization of trade and investment is a key APEC goal, the organization adheres tonondiscriminatory, voluntary, and nonbinding action as behavioral norms, with theresult that those policies that have encountered domestic resistance have made only
slow progress. Because of this, the US interest in APEC as a vehicle for liberalization
receded for a while.
In 2001, the year of the synchronized terrorist attacks on the United States, thethreat of terrorism was on the rise around the world, and security issues became apivotal concern of APEC. Even as the United States sought to stimulate interest in
security measures, however, a growing number of economies centered on East Asian
members countered with the assertion that APEC ought to stick to its original mission ofserving as a forum for discussing economic issues. APEC positioned the adoption of
antiterrorist measures as representing a desirable approach on the grounds that they
were needed for achieving the organization’s goals, since terrorist activities pose athreat to economic activities, but the Asian members uncomfortable with this tilt toward
security began groping their way toward regional integration without the United States.
Early in the twenty-first century Asian member economies began to conclude
FTAs including, ironically, discriminatory liberalization and binding content, principles
they had refused to accept when advocated by the United States in APEC. Fearing that
Asian members might damage American interests out of disregard for them, the UnitedStates proposed the establishment of a free trade area covering all of APEC’s member
economies. To some extent this US interest in the FTAAP was motivated merely by adesire to promote the negotiations in the WTO, or to prepare a fallback measure in theevent these talks broke down. Resistance to the FTAAP concept was weakening in other

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APEC members, as they themselves had gained interest in concluding FTAs with adiscriminatory and binding nature. Nonetheless, there is no way this free trade area canbe created in a short period of time with the participation of 21 members at different
development levels and with differing economic systems. Under the circumstances,
moves have picked up speed to conclude FTAs limited to like-minded members. At thepresent time, such a scheme is the Trans Pacific Partnership, which began as anagreement among Brunei, Chile, New Zealand, and Singapore and has drawn theinterest of the United States, Australia, and Peru.
Japan, for its part, faces the stumbling block of opening its agricultural sector,
and it appears to be watching from the sidelines as other members debate the FTAAP
proposal and move forward on the TPP. But if Japan is to secure a leadership position in
APEC and restore the vitality of the Japanese economy, it ought to take action byproposing and striving for the realization of an FTAAP with the kind of content it sees
as important, such as trade and investment facilitation and economic and technicalcooperation.
3

Proposals

APEC’s member economies have achieved smooth economic growth with thehelp of exports and foreign direct investment. At the present time the region’s
economies are in a slump because of the global financial crisis, which was touched off
by the subprime loan meltdown in the United States. If they can manage to rebound andreturn to the growth track, however, the smooth growth they enjoyed before the crisis
should resume. As they recover and start growing again, trade and investment expansion
will play a key role. To enable this expansion, liberalization and facilitation of trade andinvestment will be indispensable.
APEC’s most important goal is the creation of an environment for free andopen trade and investment. APEC’s member economies adopted the Bogor declarationin order to realize this goal and prepared the Osaka Action Agenda to follow through on
the declaration, and they have pursued liberalization on a voluntary basis since that time.
It is hard to estimate, however, how much credit should go to APEC for the cuts in tariff
rates by its members. They have made progress in lowering and removing barriers totrade and investment, but numerous barriers still remain in many of the members.
According to a simulation performed with a computable general equilibrium model, theestablishment of the Free Trade Area of the Asia-Pacific, a free trade agreement
covering all APEC members, would boost the GDP of every member. The simulation
did not include investment liberalization, but if that also occurs, the FTAAP’s impact
would be even greater.

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The establishment of the FTAAP would have merits for APEC’s members,
Japan included. For this reason, Japan should actively promote the agreement’s
conclusion. There is, however, an impediment standing in the way: domestic opposition
to liberalization of the agricultural sector, which is considered to lack competitiveness.
In order to overcome the resistance to the sector’s liberalization and make progress inconcluding FTAs, the following can be considered. First, Japan can seek approval of
exceptional measures so that liberalization takes effect over time in the case of the
agricultural sector’s uncompetitive products. Even in that case, though, these products
would not be exempted from liberalization, which needs to apply to all products
eventually. Second, Japan can seek approval of the application of safeguard measureswhen a sudden surge in imports causes injuries. Third, for workers who lose their jobs
as a result of import expansion, Japan can provide technical assistance in such forms as
training and education for skill upgrading, and it can provide income compensation overa limited time period. Fourth, Japan should also promote structural reform in the
agricultural sector so as to increase efficiency in land utilization and distribution.
The general view is that it would be difficult to realize the FTAAP in the near
future. In this context, some APEC members have begun work on high-level FTAs,
notably the Trans Pacific Partnership (TPP). The TPP at present consists of the four
members of Brunei, Chile, New Zealand, and Singapore (leading to the original
nickname P4), but in 2009 the United States, Australia, and Peru also plan to take part,and some observers expect South Korea to join too if its FTA with the United States
goes into effect. FTAs of this type centered on advanced countries are growing more
numerous. If Japan is forever unable to conclude FTAs with these countries because ofresistance to liberalizing imports of agricultural products, it will become subject todiscriminatory treatment and suffer damage in the form of fewer export opportunities.
To avert such a situation, firm resolve is required to move forward on opening the
agricultural market.
Before Japan can decide on joining the TPP, it must conclude the ongoingnegotiations for an FTA with Australia. Next, it would be best if Japan also entered into
an FTA with the United States, which is becoming more interested in thesearrangements. When FTAs with these important APEC members are in place, Japan
should find it easier to conclude agreements with other members.
When preparing FTAs with APEC’s members, Japan should preferably aim foragreements including all three of APEC’s primary concerns: trade and investment
liberalization, trade and investment facilitation, and economic and technical cooperation.
A stronger effect on economic expansion can be anticipated when FTAs are framed ascomprehensive agreements. In addition, the implementation of economic and technicalcooperation can reduce the costs of the employment adjustment necessitated by
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liberalization. Japan and its East Asian partners in the ASEAN Plus Six are now
working actively to construct the Comprehensive Economic Partnership of East Asia,
and like APEC, this arrangement also has three pillars of trade and investment
liberalization, facilitation, and economic cooperation. Accordingly, Japan should givethought to coordinating the FTAAP and the CEPEA. While the success of this strategy
will be crucial for realizing a bright future for our nation, it needs to be stressed once
again that liberalizing the agricultural sector will be indispensable.
Finally, all of APEC’s developed members, including Japan, should conduct anassessment of the progress toward achieving the Bogor goal by 2010, a year when Japan
will host the annual meeting. Our first proposal is that Japan take the initiative inpromoting this assessment. If the examination turns up areas where the goal has notbeen reached, the remaining obstacles must be verified, and the presentation of a planfor their removal should be required. In keeping with the APEC spirit, it will be best toallow each member to undertake this work on its own, but thought may be given to
securing assistance from other members and experts. Our second proposal concerns thesetting of a goal to follow the Bogor goal. While this will depend on the progress madein studies of the FTAAP concept, we recommend that Japan urge APEC in 2010 to makethe creation of the FTAAP its next goal. By taking an active hand in the FTAAP process,Japan will be able to realize the creation of a free trade area beneficial to it. For thesetwo proposals to be turned into reality, Japan must closely coordinate strategy with other
APEC members, particularly with Singapore, the host for 2009, and the United States,
the host for 2011.
Bibliography
Ministry of Foreign Affairs：http://www.mofa.go.jp/mofaj/gaiko/apec/index.html
Yamazawa, Ippei, Toshiro Suzuki and Yasunobe Shin （ 1995 ） “APEC nyumon:
Hirakareta chiiki kyoryoku o mezashite (An APEC Primer: Aiming for OpenRegional Cooperation) ” TOYO KEIZAI INC.
APEC：http://www.apec.org/
Morrison, Charles E. and Eduardo Pedrosa ed. (2007) “An APEC Trade Agenda? :The
Political Economy of a Free Trade Area of the Asia-Pacific”, A Joint Study by the
Pacific Economic Cooperation Council and the APEC Business Advisory Council,
Institute of Southeast Asian Studies, Singapore.
Copyright © 2009 JCER―――――――――――――――――――――――――――――――――――――――――――

Japan Center for Economic Research (JCER)
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Phone:81-3-3639-2801 ／ FAX:81-3-3639-2839

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