Many commentators are sceptical of the benefits of association with a ‘soft’ institutional arrangement like APEC, which imposes no binding obligations to free trade or open investment. And many analysts would argue that it’s a task that is too hard, to separate out any effects that APEC might have had on trade, investment and economic growth in the region from other things that contributed to the region’s spectacular success.
This is a region that has, despite two major crises, enjoyed an average real rate of growth of 6.6 per cent over the last two decades and trade growth of 7.5 per cent per year, both way above similar rates of growth for the rest of the world.
Certainly a defining characteristic of APEC is its laissez-faire enforcement mechanism. There is no over-arching supra-national authority that governs APEC or any aspect of its member’s economic policies. The APEC process deliberately avoids impinging on members’ sovereignty. Its importance and influence, and where it lies, derives entirely from consultation and persuasion in order to encourage commitment to regional goals, policy cooperation and convergence. Given the differences in values, rules, economic and political systems, social understandings and national aspirations in the Asia Pacific region, consultative processes and institutions have played an enormously valuable role in the gradual development of consistent and productive regional agendas. The APEC agenda over time coalesced around commitment to economic openness, and that agenda has withstood the test of crises and vicissitudes that may well, without the APEC framework, have knocked it off course.
By some standards, which prioritise policies around binding rules and legal institutions, the structure and the mode of APEC appear weak. One criticism of the Bogor Declaration, for example, is that it is neither legally binding nor precisely defined, and next year, when developed countries are supposed to achieve the Bogor goals, we really won’t be able to tell. Yet, from another perspective, this characteristic of APEC can be considered its greatest strength. It has helped encourage widespread and representative participation in APEC from countries in the Asia Pacific region. It brought China to the table in 1995 on the way to WTO accession, for example, with the greatest unilateral liberalisation of trade in modern history. Considerable progress that otherwise would have been unlikely has been possible by at once both ensuring the economic sovereignty of member states, and promoting the convergence of policy on issues of importance to the regional economy.
Significantly, the APEC mode of international policy cooperation is that around which the G20 has been put in place to deal with the global financial crisis and a host of global issues down the track.
East Asia’s economic diplomacy was, and still is, closely aligned to the multilateral system and the policy priority of non-discrimination in international trade. Notwithstanding increasingly interdependent economic and political interests within the Asia Pacific region, the diversity of economies, societies and polities in the region meant that the theories and methods of economic integration which had served Europe and America so well did not exactly correlate with the East Asian experience. Imitating European or North American foreign economic diplomacy in Asia and the Pacific makes no sense although it has been tried in shallow form with minimalist positive effect in the last decade or so. This is because the Asia Pacific’s economic and political ambitions are ordered around the goal of modernisation, and that members of APEC are located at both ends of the continuum along which politico-economic development is measured. They still are. And APEC continues to handle the politics of this circumstance adeptly.
Do the unique modalities of APEC mean that its effect on member trade and investment cannot be measured? Not easily perhaps, and not without some rigorous analysis, but it is important to try.
One way to think about the effect of APEC is to ask whether its members achieve more of their trade potential because they are APEC members. Trade potential can be defined by estimating a frontier determined by the economic size, economic structure and the proximity of countries and looking at how their actual trade stacks up against the benchmark frontier. This is a neat way of seeing whether there is a beneficial ‘APEC effect’ associated with APEC membership.
In a recent study[pdf], we did just that. It should come as no surprise, though it may to many, that being a member of APEC is associated with both higher trade volumes not only among APEC members themselves but between members and non-members. This is an important result. APEC is also more open to foreign investment than is the world on average. Moreover, we show that the so called ‘hard’ institutional arrangements in North America (NAFTA), the EU and Latin America do not have the same globally positive effects. APEC members’ trade is 32 per cent higher against its potential than that of EU members and 10 per cent higher than that of NAFTA members. These are large numbers in terms of the volumes of trade involved. Unlike the other regional blocs, APEC is outward-looking and does not divert trade. That is by design. Given the diversity in the region and the need to integrate into the global economy, APEC’s open regionalism makes the APEC effect, it seems, a global not just a regional good.
The sceptics might suggest that these results, however robust, are a product not of anything that APEC has done, but the self-selection of a bunch economies that would be trade and investment liberalisers and ahead of the pack in any event. Certainly, some of the causation must run that way. Success by the trailblazers in the region has encouraged imitation of the policies that lay behind that success. But not the lot. The causation at least is positive and likely runs not one way but both. There has been a process of policy re-enforcement at work through the APEC process as anyone who’s been in the trenches and seen where policies have come from among APEC members over the last twenty years will attest.
Over the last 20 years, the relatively open trade and investment environment in East Asia has helped underpin growth and integration into the world economy. There are points of political tension, but underpinnings of political confidence have been steadily deepening. East Asia is now a force of stability dynamism at a turbulent time in the global economy. And it is important to be absolutely clear that the evidence is that APEC has mattered to securing this outcome.
For further reading see the full paper by the authors ‘The influence of economics and politics on the structure of world trade and investment flows’ available here [pdf].