India and APEC

-Dr. G.V.C. Naidu, Research Fellow, IDSA

 

In addition to the radical changes in the global political and security arena that came about with the end of the Cold War, the post-Cold War era also marked the beginning of a new spurt of attempts at regional economic cooperation and integration. Geo-economics has emerged as the new buzzword which is supposed to replace the earlier theme predominant during the Cold War, i.e., geo-politics. While it may be premature to jump to conclusions as to whether geo-politics has withered away as a dominant component of international relations giving way to geo-economics, there is no denying the fact that international economic relations have come to the centrestage to play a vital role in global affairs. Cooperation through regional organisations is a major trend in this.

The second wave of regional economic cooperation, after the first one in the 1960s and 1970s which was primarily confined to West Europe, in the late 1980s and the early 1990s was stimulated by the attempts at greater regional integration in Europe. However, it soon spread to a number of other regions too. The regional efforts started gaining momentum in part as an alternative to, if not a substitute for, the Uruguay Round of global multilateralism whose progress toward its culmination had become excruciatingly slow. It has to be kept in mind that in addition to the economic benefits that would accrue as a result of regional economic integration and cooperation, it has been acknowledged that potential political gains would be enormous. Thus, most of the regional organisations, especially the successful ones, despite the avowed goal of economic cooperation, have always had a definitive political agenda. There has been a proliferation of regional pacts on economic integration and cooperation since the early 1990s. Some of the prominent ones are: the North American Free Trade Area (NAFTA) signed in 1992; the decision taken in 1995 to set up a Pan-American Free Trade Area by 2005; the ASEAN Free Trade Area (AFTA) to be realised by early next decade; and, the South Asian Free Trade Area (SAFTA) by 2001.

Genesis of the Asia Pacific Economic Cooperation (APEC) Forum

The origin of an Asia Pacific Economic Cooperation (APEC) arrangement could be traced back to the 1960s when Japanese leaders and scholars started talking in terms of creating a pan-Pacific regional economic organisation. This reflected the growing Japanese economic involvement and interest in the region. The establishment of Pacific Basin Economic Cooperation Council (PBEC) in 1967 was the outcome which was complemented by other developments, especially the founding of Association of South-East Asian Nations (ASEAN) in 1967 and the creation of the Development Bank. As the United States started taking more interest in the economic affairs, it resulted in the creation of the Pacific Economic Cooperation Committee (PECC) around the same time. For one reason or the other, both PBEC and PECC could not go very far in concretising regional economic cooperation.

The emergence first of Japan and later, of the four Asian Tigers (called the Newly Industrialised Countries) as economic powerhouses and the new economic linkages that were gradually forged among these countries has set a new trend in Asia which started impacting the rest of the world. However, no attempt was made to create any formal or informal regional bloc with the exclusive objective of economic cooperation. Although one could cite the instance of the creation of the ASEAN in 1967 as one of the first attempts aimed at regional economic cooperation, realistically speaking, political and security objectives far outweighed the economic compulsions for the member states. Nevertheless, ASEAN did strive for economic cooperation in the early 1970s by way of preferential trading arrangements and joint industrial projects, both national and regional.

Not much progress could be made because of a number of reasons. The political atmosphere that existed then was not conducive. There were serious economic constraints as most of these economies were relatively underdeveloped based primarily on agriculture and export of raw materials. Even as these economies started adopting new export-led economic development policies, they began to depend heavily on the markets of the industrialised countries. Because of the nature of the ASEAN economies, intra-ASEAN economic cooperation had a limited scope. The decision to open the Chinese economy in late 1979, the unprecedented success and phenomenal growth rates that the economies of East Asia achieved in the 1980s, massive trade surpluses and accumulation of huge foreign exchange reserves, and a relative decline of the American and other West European economies, brought this region into sharper international focus in the early 1990s. What stirred the hornet's nest was firstly the European attempt to integrate themselves to form a common market, and later, the American initiative to create a North American Free Trade Area comprising the United States, Canada and Mexico. Almost simultaneously, in 1989 Australia came up with the proposal to establish an Asian version of a free trade area under the banner of the Asia Pacific Economic Cooperation forum which included not only the countries of Northeast Asia and Southeast Asia, but also the Pacific Rim nations such as the US, Canada, Australia and New Zealand. Initially there were many misgivings and apprehensions about the effectiveness of such an organisation whose membership spanned such a vast region. The Japanese, who have had enormous economic stakes in these regions, were particularly perturbed by the moves in Europe and North America which were perceived to be attempts at building regional fortresses and in a way, restrict Japanese and other Asian exports to these markets. This prompted some Japanese to think aloud in terms of creating an Asian free trade zone. Hence, Tokyo was readily willing to support an Asia Pacific regional organisation for economic cooperation.

In response to these developments, Malaysia took the initiative by announcing an Asian version of a regional economic grouping which its Prime Minister, Mahathir Mohamad, called the East Asian Economic Grouping (EAEG). Interestingly, in Mahathir's plan, the EAEG comprised countries of Northeast and Southeast Asia and explicitly excluded even the Caucasian countries of the South Pacific namely, Australia and New Zealand. Initially it appeared as though Japan was enthusiastic about this idea, although only some private sector openly extended support, but Japan officially did not commit itself to this idea. It led to wide speculation that if the EAEG idea became a reality, Japan would be in the driver's seat and creation of a "yen bloc" in Asia was inevitable, in which the US might get gradually marginalised. By the early 1990s there were clear signs of a qualitative shift in economic interaction among the East Asian countries, especially between Japan and rest of the Pacific Asia. Japan's economic predominance in Pacific Asia is obvious from the fact that Japan commanded a share of nearly two-third's of the total Pacific Asian GNP. Japan's critical role in the economic development of East Asia is well known, and Japan's own economic future is increasingly being tied to this region. About 70 per cent of Japan's Official Development Assistance (ODA) has been concentrated in the Asian region output, of which the share of Northeast and Southeast Asian countries is nearly 75 per cent.

More importantly, perhaps, it is in trade and investments that Japan has growing stakes in this region. By the early 1990s, Japan's trade relations with Asia had undergone a qualitative and quantitative transformation. The earlier raw material imports and exports of manufactured goods between Japan and rest of East Asia has increasingly been replaced by manufactured and high-value added products. Like trade, Japanese investments have also been headed toward Pacific Asia. Persistent recessionary conditions in Japan since the real estate-driven financial sector bubble burst in the early 1990s have considerably slowed down Japanese foreign investments, though it has not dampened the enthusiasm with regard to the Asia Pacific region. Starting from virtually nothing in the 1950s, by mid-1980s, Japan had emerged as the largest investor in most of the countries of this region. From the initial concentration of developing industries that produced raw material for its own industry, Japan steadily started investing in manufacturing in technology-oriented industries. Also, even as Japanese industry started maturing, it became indispensable to relocate many of its industries, especially the labour-intensive ones, to other countries. The region that has attracted most of these is Pacific Asia.

The intra-Pacific Asian trade too has witnessed a rapid growth in the recent past, outweighing its trade either with Europe or with North America. Continued high-growth rates all across the region and emergence of China as a major global economic powerhouse, along with the growing trend of greater intra-Asian economic cooperation prompted the United States to exert enormous pressure, especially on Japan and South Korea, not to support the EAEG proposal, lest its own economic status be further undermined and its importance in this most dynamic region may further be marginalised. As it became clear that Japan was unlikely to back the EAEG idea officially and whole-heartedly, and because of some concerns within ASEAN, an organisation that has extensive economic contacts with the US and West Europe, misgivings about the feasibility and viability of EAEG, Malaysia had to scale down its earlier ambitious plans of creating an Asian version of a free trade area and reformulate it into a caucus called the East Asian Economic Caucus (EAEC). Even this was not acceptable to the Americans as it once again comprised the same members of the original EAEG. This was the background against which the Asia Pacific Economic Cooperation was formalised.

The then Australian Prime Minister, Bob Hawk, during his visit to South Korea in January 1989 mooted the idea of a meeting of ministers from the region to discuss ways of economic cooperation which, in turn, led to APEC's first ministerial meeting in Canberra in November 1989. Attended by 12 countries of the Pacific Rim, this meeting agreed on some broad principles: (i) to strengthen an open multilateral trading system; (ii) not to attempt to form a regional trade bloc; and (iii) to focus on economic, rather than political and security issues. The second ministerial meeting in Singapore in 1990 identified seven projects for cooperation. The Seoul declaration that was issued at the end of fourth APEC ministerial meeting in November 1991 "set out the scope of activity, mode of operation of, and the principles for participation in APEC. The scope of activity for APEC included:

(a) exchange of information and consultation on policies relevant to common efforts to sustain growth, promote adjustment and reduce economic disparities;

(b) development of strategies to reduce impediments to trade and investment; and

(c) promotion of regional trade, investment, human resources development, technology transfer and cooperation in specific sectors such as energy, environment, fisheries, tourism, transportation, and telecommunications."1

The Bangkok Ministerial Meeting of 1993, in addition to taking a decision to set up a permanent secretariat in Singapore, established an Eminent Persons Group (EPG) which could provide APEC a vision in the coming years. It also adopted trade liberalisation as one of the main priorities for 1993. More importantly, it was also agreed upon to implement four proposals which would provide significant benefits for business in the short term. These included the "establishment of an electronic tariff database for APEC members to facilitate regional trade through better information flows; harmonisation and facilitation of customs procedures and practices, examination of the administrative aspects of market access and recommendations on means of reducing the costs they impose on trade; and preparation of a detailed guidebook on investment regulatory procedures in the region."2 The fifth ministerial meeting declaration further reiterated the role of APEC in trade and investment by engaging its members in both policy and facilitation matters.

APEC was undertaken with the ostensible goals of promoting trade and economic development among the member states. However, APEC ran into rough weather firstly, because of the Malaysian EAEC proposal, which was formally accepted by ASEAN (despite some misgivings), and, more importantly, as a result of a reassessment of American policies, both political and economic, toward the Asia Pacific. Unlike in the past, the Clinton administration was amenable to the idea of regional multilateral mechanism to address the security-related issues. The Americans sounded broad signals that APEC could be one such forum which, in addition to the economic issues, may be used for security discussions too. This, according to some of the ASEAN countries, would once again lead to a dominant American position and ASEAN and its member states would end up playing a secondary role to great power equations.

Despite some initial apprehensions and hiccups, things augured well for APEC for the simple political reason of China not objecting to Taiwan's (and Hong Kong's) membership. Without China's participation in APEC, regional economic integration and cooperation could have been handicapped. Despite considerable euphoria, the region encompassing APEC is not comparable either to North America or the European Union. The Asia Pacific is a vast region with strikingly vast differences in terms of economic development, cultures, religions and political systems. Any attempt at economic cooperation is fraught with its own problems. Perhaps the most important questions that have been uppermost on the minds of the nations outside APEC that are developing substantial economic linkages with this region, are whether APEC runs contrary to the objectives of the global multilateral institutions such as the World Trade Organisation (WTO) on the creation of free trade areas and customs union; and secondly, persisting doubts about the concept of "open regionalism",3 because APEC consists of world's largest economy (the US), the second largest economy (Japan), the third largest economy (China), and some of the fastest growing economies in the world (NICs and other countries of ASEAN).

Some of these apprehensions were subsequently addressed by the Eminent Persons Group that was set up just prior to the First Summit Meeting of the Heads of APEC member states. It clarified that "APEC would become neither a customs union like the European Union nor a free trade area like that covered by the North American Free Trade Agreement (NAFTA)", and APEC would develop a wholly new model of regional economic cooperation: "a steady ratcheting up of trade liberation between the regional and global levels that would confirm its dedication to open regionalism."4 But, doubts persist about the impact of APEC decisions and the future role of the WTO, especially because liberalisation measures that APEC developed at the first Seattle Summit Meeting in November 1993 made an important contribution to the subsequent success of the Uruguay Round. Also, it sent a message to countries outside the Asia Pacific region that "APEC represented a feasible alternative to global progress if the GATT talks were to fail",5 a possibility that could have undermined the global economic multilateral efforts.

By 1995, the APEC economies (excluding the new members admitted in 1997), accounted for about 55 per cent of total global income, 40 per cent of global trade, and a combined income of over 13 trillion US dollars, and was estimated that it would grow by at least 4 per cent in 1996. Thus, given the composition and their economic strengths, APEC could not only become a trendsetter for the WTO, but its decisions would also have far-reaching implications for the rest of the world.

The Seattle Summit

Although by 1993 five ministerial meetings had been held, most of the APEC declarations were merely expressions of intent rather than binding commitments, even if voluntary. The Eminent Persons Group that was set up under the chairmanship of Dr.Fred Bergensten submitted its report entitled "A Vision for APEC : Towards an Asia Pacific Economic Community" in October 1993 which became the basis for deliberations for the first APEC informal summit meeting which was convened by President Bill Clinton at Blake Island near Seattle in November 1993 called the APEC Informal Leaders Meeting. Though many were surprised by the suddenness with which it was called, except Malaysia6 all the leaders of the member states attended the Seattle meeting. The Clinton administration was in part prompted by the rising clout of neo-protectionists within the United States and partly because of the excruciatingly slow progress at the Uruguay Round. The American initiative also stemmed from the fact that the post-Cold War US policies toward the Asia Pacific appeared to be in a disarray and Washington did not want to be merely a bystander to the momentous developments that had been taking place in this region, both in the security and economic fields. As the Uruguay Round was still being debated upon, it was agreed at the Seattle APEC meeting to further liberalise trade in the region so as to facilitate the successful completion of the Uruguay Round. It was also decided to make the APEC summit an annual affair which could lead to effective functioning, quick decision making, close monitoring and proper implementation of the decisions taken. In order to reassure and allay the fears of the ASEAN nations, in addition to setting up the APEC's Secretariat in Singapore, it was agreed that every alternate APEC annual meeting would be held in one of the ASEAN countries. The leaders at the Seattle meeting directed their respective finance, trade and industry and other concerned ministers to meet and work out the macroeconomic and trade-related issues which would not only help in the conclusion of the Uruguay Round, but also set an agenda for the proposed global multilateral trade mechanism, the WTO. Development of an investment code was also agreed upon by the leaders which was especially welcomed by many Asian nations. Thus, the Seattle meeting set the ball rolling for APEC, which led in its subsequent meetings to take several bold initiatives toward trade liberalisation and economic cooperation.7

The Bogor Meeting

The process of regional integration was set into motion at the Bogor (Indonesia) summit meeting in November 1994. The Bogor meeting was significant because the APEC leaders took a decision to commit themselves to achieving the "long-term goal of free trade and investment" in the Asia Pacific region. Given the fact that the member states of APEC are at varied levels of economic development and of vastly differing sizes, the Bogor Declaration adopted a "variable speed" approach to regional economic integration under which the developed countries would remove all the trade barriers by the years 2010 and developing countries by 2020. As far as investments are concerned, "APEC ministers endorsed an extremely weak set of non-binding investment principles but directed government officials to try to improve them. As they now stand, the APEC principles do not (i) include a firm commitment to national treatment; nor (ii) constrain the use of investment restrictions; nor (iii) prohibit investment incentives such as tax holidays and outright grants."8 The Bogor Declaration also agreed on a number of other measures to further carry forward the economic integration plans by establishing a private sector advisory body, called the Pacific Business Forum. It extended the mandate of the earlier Eminent Persons Group to "monitor and assess the progress of the implementation of the APEC commitments; develop further recommendations on initiatives that could be taken to achieve the long-term goal of free trade and investment in the region, and review inter-relationships between APEC and existing sub-regional arrangements (the ASEAN Free Trade Area, Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA), and the North American Free Trade Agreement (NAFTA), and to examine possible options to prevent obstacles to each other and to promote consistency in their relations."9 While underscoring the need to develop regional initiatives to complement and strengthen the global multilateral trading mechanism, the Bogor Declaration resolved that APEC liberalisation should not evolve into an "inward-looking trade bloc that would divert from the pursuit of global free trade", and that APEC reforms should also be extended to trade between APEC and non-APEC economies (particularly developing economies) "in conformity with GATT/WTO provisions."10

Osaka Action Agenda

By the time the third APEC Summit Meeting was held in Osaka, Japan, in November 1995, it was time to turn the commitments into a reality. It was during the Osaka meeting that a kind of time table was fixed for achieving the goal of trade and investment liberalisation by 2010/2020 by mandating the member nations to come up with Individual Action Plans that detailed voluntary, but concrete steps that each nation would initiate with effect from January 1, 1997. From being a forum, APEC in Osaka became an institutional mechanism. The Osaka Action Agenda is significant for the commitments that were made with the objectives of cooperation. A total of 15 areas were identified for cooperation.11 This meeting is also important because some of the middle-level countries of Southeast Asia, especially Malaysia and Indonesia, openly started expressing their reservations on the pace of breaking down trade barriers. They were particularly worried about the impact this would have on their domestic industry, and the long-term growth of their economies. In some quarters it was perceived to be an American attempt to crack open the Asian markets through the backdoor of APEC.12 The onerous task of allaying these fears of smaller nations' that they were being pushed around by the economic giants and at the same time, make sure that APEC would not remain a "talking shop" fell on Tokyo.

Subic Declaration

By November 1996, when the fourth APEC Summit Meeting was held at Subic near Manila in the Philippines, individual action plans were presented and debated upon. They, however, fell far short of the expectations and the earlier euphoria about creating the world's largest free trade/investment area of APEC was conspicuous by its reduced intensity. The two biggest giants, the U.S. and Japan, simply reiterated what they had promised at the Uruguay Round, and many other middle-level nations had developed cold feet to commit themselves by initiating bolder moves. As an independent assessment by the non-governmental Pacific Economic Cooperation Council made clear, the plans were "barely respectable". For instance, "only half the members were willing to reduce tariffs from Uruguay Round levels, while five offered nothing beyond 'down payments' made a year earlier when APEC met in Osaka." As for non-tariff measures "only Australia, Hong Kong, Japan, South Korea and the Philippines submitted offers that liberalised beyond their Osaka undertakings."12 The declaration issued at the end of the meeting, called Manila Action Plan of APEC (MAPA), apart from reiterating the earlier Bogor goal of achieving progressive and comprehensive trade and investment liberalisation by the year 2010/2020, instructed their ministers to "identify the sectors where early voluntary liberalisation would have a positive impact on trade, investment, and economic growth in the individual APEC economies as well as in the region and submit their recommendations on how this could be achieved.

Vancouver Summit

The Vancouver APEC Summit that was held in November 1997 was notable for three reasons. First, it was dominated by the financial crisis that had gripped most of the nations of Asia Pacific and ways to resource these economies from sliding further. Creation of a regional bailout fund, an Asia Fund on the lines of the International Monetary Fund, was hotly debated upon. Secondly, although no fresh commitments were made toward greater economic integration, it was agreed not to dilute the earlier commitments by taking forward the economic cooperation efforts in accordance with the earlier accepted deadlines, notwithstanding the current economic turmoil. Thirdly, the politics of APEC came into the open when three new members were admitted, viz., Russia, Peru and Vietnam, though some of them obviously did not meet the basic eligibility criteria that was set. It appears that the US wants a strong supporter in regional affairs for its agenda in the wake of increasingly assertive Asian nations, and/or the US has a political agenda for APEC in the long-term.

India and APEC

India, along with Russia, Vietnam and Peru, has been one of the leading countries which has striven hard to become a member of APEC. The APEC leaders decision not to admit India in the recent expansion at Vancouver while admitting Russia, Vietnam and Peru, and the imposition of a moratorium for another ten years on inclusion of new members has not only come as a rude shock to New Delhi, but it is a major setback to India's 'Look East policy.' Apart from the South Asian Association for Regional Cooperation (SAARC), India is the only major country in the world which is yet to become a member of a regional free trading club. Given the enormous political problems, especially between India and Pakistan, India's domineering position in South Asia, and a number of other economic constraints, notwithstanding the grandiose plans to create a virtual free trade area in South Asia by the year 2001, SAARC is not expected to make much headway. In any case SAARC would not accrue the kind of economic and non-economic benefits that a forum like APEC offers for a country like India which has targetted large-scale foreign investments and a manifold increase in its trade volume in the coming years. It needs no reiteration that, outside West Europe, most of the capital surplus nations are in the Asia Pacific. Emergence of NICs as major capital exporting countries in the recent years, particularly at a time when there are massive shortages of investible capital and as a result of its ever growing demand in the developing countries is a significant development from the Indian viewpoint. India seeking to join APEC is a natural corollary to its new initiative of 'Look East policy' embarked upon in the early 1990s.

From APEC's point of view, it makes little sense to keep world's second largest country out of its activities, particularly in view of the recent concerted moves by India to integrate itself with global economic dynamics more closely. World Bank has predicted that by 2020 India would be the fourth largest economy in the world and it is already one of the large emerging markets. One way to expedite India's economic reforms would be to admit it into APEC and make it conform to the collective decisions. Thus, a mutually beneficial relationship could be built up between India and the rest of APEC countries. India is already a Dialogue Partner of ASEAN and a member of ASEAN's security forum, the ASEAN Regional Forum (ARF), which is a testimony to the fact that India as an important power could no longer be ignored. Also, a majority of the top investors in India in the last few years have been APEC member countries and these nations have already emerged as the most important trading partners of India.

There are, of course, strong reservations about the sincerity of economic reforms, especially with regard to tariff and non-tariff barriers, quantitative restrictions, implementation of intellectual property rights, politically unstable conditions, etc. There have also been concerns about slow pace of economic reforms, and the much talked about de-regulation of Indian financial sector is yet to take off.

Additionally, India also faces the problem of its image. Somehow the general perception outside is that the Indian economy is still mired in bureaucratic red tape and the Indians tend to be more negative in their attitude. Highly restrictive trade and investment regimes, which had been the norm in the pre-reform era, have theoretically come a long way, but in practice the bureaucratic mindset and political populism have not kept pace with the reform programme. Unfortunately, this image of India looms very large in the minds of most countries that have taken a lot of interest in India. Prevailing political uncertainty has contributed its bit in further dampening the enthusiasm. Unless India urgently undertakes measures which prove that the changes it has brought about in recent years are irreversible and improves its image, it may once again miss the Asia Pacific bus. Secondly, Indian policymakers do not seem to have understood that APEC is as much a political forum as an economic one. Its political agenda became obvious when Russia was included. Each nation in APEC, especially the major ones, has a political objective and unless this is understood New Delhi would be groping in the dark. For instance, for Japan, APEC is a forum to underpin its economic interests with long-term political strategy, to demonstrate that it would not translate its economic might into military might and to pursue a larger political role commensurate with its economic strength through multilateral fora. For China, APEC is an organisation which enables its leadership not only to participate in APEC summit meetings and thrash out political differences and problems with other members, but also to get politically and economically closer to this vital region. It has also successfully pushed through its concerns about APEC and its long-term objectives. Taiwan's membership of APEC has a number of political connotations. For ASEAN, APEC is a conduit to assert its own separate identity and political significance in the regional affairs.

Indian entry into APEC would be determined by how far it has gone and is willing to go in further liberalising its trade and investment regimes. Although there was a wide divergence in the Individual Action Plans of APEC members, but most of them have far fewer barriers than India. India should have brought out an Action Plan of trade and investment liberalisation on its own a long time back by bringing down its barriers to the average level of APEC states and demonstrated its sincerity in further reducing these barriers in the coming years.

 

 

 

NOTES

1. Hadi Soesastro, "ASEAN and APEC: Do Concentric Circles Work?,"

2. Pacific Review, vol. 8, no. 3, 1995, p. 480.

2. Ibid., p. 481.

3. Herbert Dieter, "Asia Pacific Economic Cooperation and World Trade Organisation," Aussen Politik, vol. 47, no. 3, 1996, p. 275.

4. See C. Fred Bergensten, "APEC and World Trade: A Force for Worldwide Liberalisation," Foreign Affairs, vol. 73, no. 3, May-June 1993, p. 20.

5. Ibid.

6. Mahathir Mohamad of Malaysia was the only head of government who refused to attend the Seattle meeting because it totally undermined his own EAEC initiative.

7. Bergensten, n. 4, pp. 21-23.

8. Gary Hfbauer and Jefery J. Scholl, "Toward Free Trade and Investment in the Asia Pacific," Washington Quarterly, vol. 18, no. 3, 1995, p. 40.

9. Ibid., p. 40-41.

10. Ibid., p. 41.

11. See the Special Advertising Supplement on Asia Pacific Economic Cooperation Forum to the Far Eastern Economic Review, November 21, 1996, p. 44.

12. Asian Wall Street Journal, November 25, 1996.

13. Asian Wall Street Journal, November 29-30, 1996.