Since China’s reform and opening-up policies began in the 1970s, the country’s average annual economic growth rate has hovered around 10 per cent.

Currently, China’s gross domestic product is second only to the United States; it is the world’s largest exporter and importer and the largest holder of foreign exchange reserves. Along with China’s remarkable economic rise comes an increase in China’s role in both regional and global development and governance.

With the economies of the US, the EU and Japan reeling from weak growth and burdensome debt levels, China is a key driver of global economic growth, contributing, along with other major emerging economies, nearly two-thirds of new global economic output. According to many projections, China will surpass the US as the largest economy in the world by 2030.

As its power emerges China will naturally become a more important player in shaping regional and global development and governance. Likewise, with its economy moving into a new phase through steady technological innovation and an explosion of domestic demand, China will play a bigger role as a major market and capital resource for regional and global economic growth.

China’s economy is highly integrated into the global market, so the country should participate actively in initiatives to reform the international economic system. While a stable and evolutionary reform process is important to China, the desired outcome should see structural changes that produce a new, more effective international system.

China is active in promoting efforts to improve regional governance through various forums involving the Asia Pacific region as a whole, East Asia, Central Asia and Northeast Asia. The goal is clear: to help create a favourable environment for economic cooperation, enhanced political trust and regional security.

It is significant that China’s strategy is focused broadly, encompassing more than just economic issues. An important part of these efforts are free trade agreements, whether bilateral or sub-regional, such as the FTA between China and the Association of Southeast Asian Nations (ASEAN). They are different from market-driven integration, because in addition to being compliant with the rules of the World Trade Organization, they provide a broader framework for cooperation among governments of different countries. Experience shows that FTAs can have a profound impact on improving governance in individual economies and regional systems.

In the past decade, China took the initiative to establish the China-ASEAN Free Trade Agreement (CAFTA) and played a leading role in the feasibility study for the East Asia Free Trade Agreement. China also actively sought to promote trilateral cooperation with Japan and South Korea. For China, CAFTA is more than just a trade agreement. It helps to provide a comprehensive framework for cooperation between China and the ASEAN countries. China is now the largest market for ASEAN exports, but relations go well beyond trade to include infrastructure, connectivity and capacity building for human development.

Although China participates in all regional arrangements, it views ASEAN +1 as its core regional relationship followed by ASEAN+3. China worries that the recent enlargement of the EAS from ASEAN+6 to include the US and Russia may weaken the cooperative spirit of East Asia because of different strategic interests.

Recently, the Trans-Pacific Partnership (TPP) led by the United States has received a lot of attention. Although China is the second-largest economy in this region, it is excluded from the TPP negotiations. China’s view is that the Asia Pacific Economic Cooperation (APEC) forum is the more appropriate for regional issues of the kind envisioned for the TPP.

While the United States is touting the TPP as a kind of high-level FTA for the 21st century, it will fundamentally change the nature of the APEC approach to regional relations. It can also be seen as a move by the United States to weaken East Asian integration and co-operation. This should worry ASEAN for two reasons. First, many member states aren’t included in the TPP. And second, it could have a negative impact on ASEAN’s central role in building an East Asian community.

In this context, a great concern is how China manages its relations with the US. That relationship today encompasses both economic prosperity and political security. By focusing on common goals such as global growth and prosperity, China and the US can establish and promote a partnership that will benefit both countries, as well as the rest of the world.

But promoting economic interdependence requires creating common interests and reducing incentives for conflict or instability. This is difficult in the current climate, where structural trade imbalances between China and the US are fuelling tensions. The US is pushing hard for China to allow the renminbi to appreciate quickly, while China is insisting on a gradual appreciation of the currency. With the US now part of the East Asia Summit, hopefully the two countries can use this framework to manage their interests and relations in a collaborative way.

The rise of China will end the current Western-dominated world order, but it will not end the Western world, as some alarmists in the West fear. In a highly interdependent world, human society’s future rests on true co-operation from all sides.

Zhang Yunling is Professor of International Economics, and Director of International Studies, Chinese Academy of Social Sciences.

1. Asia’s global responsibilities: Delivering through global and regional arrangements
2. A regional solution to global imbalances: We need a Beijing Accord
3. China’s Soft Power v America’s Smart Power

The euro crisis hijacked the G20 Summit in Cannes — even by late December Europe’s leaders still had not fully diagnosed the problem, but without an accurate diagnosis how can there be an effective prescription?

This missing link accentuates two challenges that Asian integration will face in 2012: the consolidation of regional architecture and the need for deeper structural adjustments. The prevailing crisis prescription in Europe focuses on regional architecture: Germany insists on fiscal union and the implied centralised power over national budgets. This is in return for giving the European Central Bank more room to apply the tools of lender of last resort. But this focus comes at the expense of essential attention to the structural adjustments necessary to restore growth impetus in the deeply indebted southern members. Growth and restructuring are the only acceptable ways to reduce debt. Faced with shrinking economies and rising unemployment, and lacking exchange rate flexibility to restore price competitiveness in external markets, how will they grow? Other countries have successfully dealt with such situations; Canada, for example — which in the late 1990s faced a serious fiscal imbalance — restored its books to balance with a depreciating exchange rate and by focusing on trade with strongly growing international markets. Clearly Europe’s prospects for export-oriented growth do not lie in the OECD countries, but in emerging markets like those in Asia.

But external expectations of Asia are growing much faster than Asia’s capacity to meet them. Of course regional architecture is required for cooperative action. Yet with some notable exceptions, Asia’s focus remains on the architecture rather than the domestic and regional economic adjustments required to sustain growth momentum in the face of potentially serious external shocks from renewed European recession and near-stagnation in the US.

Following the Cannes Summit (3–4 November), Asian leaders participated in a series of summits: APEC in Honolulu (12–13 November), the ASEAN summit (17–19 November) and the East Asia Summit (EAS) (19 November). Despite the Cannes fiasco and Europe’s continuing troubles, the prominent feature of the Asia Pacific meetings was the ‘return’ of the US: as host at APEC, where President Obama re-launched the Trans-Pacific Partnership (TPP) negotiations, targeting a 12-month completion date; and as one of the newest members of the EAS, which some see as the forum most likely to link regional and global strategic issues.

The immediate problem remains global rebalancing: current account surplus countries should rely more heavily for growth on domestic demand and allow greater exchange rate flexibility. Yet the issues were at best tangentially discussed at these summits, which were mainly focused on trade and integration. The EAS came closest with its emphasis on connectivity, among 10 other issues.

What, then, should Asia’s priorities be in 2012? Two stand out: macroeconomic rebalancing and trade liberalisation.

To carry out macroeconomic rebalancing, discussions among ASEAN+3 governments should take place in the multilateralised Chiang Mai Initiative, yet little has been seen or heard of the secretariat’s activities. In its inaugural year this silence may be understandable, but it is troublesome when viewed in the context of potential risks from the global economy.

In terms of trade liberalisation, recent indications of interest in the TPP by Japan, Canada and Mexico ignited debate about a possible US hidden agenda of excluding China. Additional entrants will not be invited to join — they must apply. And the TPP’s uniqueness is its refreshingly explicit admission bar: applicants must be prepared to talk about everything. Just as in any serious trade agreement, the outcome is based on bargaining over potential gains and losses, with phase-in periods for sectors that must adjust. China should apply while the negotiating parameters are still up for discussion. Otherwise it faces the prospect, as do other latecomers like Canada, of being a policy taker rather than a policy maker.

It is understood that Asian economic integration is a long-term process based on consensus decision making. But a lot of bad things can happen while this long-term process is unfolding. The likelihood of new external shocks from Europe through financial markets and trade flows is not declining. The shocks of the 2008 global financial crisis revealed the vulnerabilities of continued reliance on export-led growth strategies and created, at least for a time, incentives to rebalance the sources of domestic and regional growth. But has enough progress been made?

Asia’s growing economic weight brings with it growing responsibilities within cooperative responses to the global imbalances that weigh so heavily on our collective growth prospects. But will it take another crisis to catalyse the emergence of Asian leaders and institutions as champions of a stable and open global economic system?

Wendy Dobson is co-director of the Institute for International Business in the University of Toronto’s Rotman School of Management and a former Associate Deputy Minister of Finance in the Canadian government.

This is part of a special feature: 2011 in review and the year ahead.

1. Asia, Europe and regional cooperation in 2012
2. The 2012 G20 Summit: facing down global challenges in Mexico
3. G20: step towards a new global architecture

The unfolding euro crisis makes clear the difficulty of managing a single monetary policy among a group of countries that retain separate fiscal policies and regulatory rules over national banking systems. The lessons for Asia are profound.

In order to help save the euro, in December 2011, European leaders agreed to impose binding limits on national budgets and borrowing, with penalties for those who violate them. The only EU country to reject the deal was the United Kingdom, which, in so doing, highlighted what most of us do not always appreciate about the nature of any regional economic cooperation.

When defending his decision, British Prime Minister David Cameron characterised the proposed European treaty as tantamount to the loss of sovereignty. In an ensuing parliamentary debate, he also claimed to be protecting the British national interest.

One should not be deceived into thinking that sovereignty and national interest are the same thing. The phrase ‘give me liberty, or give me death’, famously uttered by Patrick Henry prior to the American Revolution, may have been good war-time rhetoric, but it cannot serve as a sensible guide to peace-time economic decision making. Which is better, to live free but impoverished, or to prosper but with some limitations on freedom? A related question is, how could retaining sovereignty be in the national interest if it makes the country worse off?

Britain has already given up considerable sovereignty by being a member of the EU. Regional economic cooperation rests on the premise that some sovereignty is best exercised at the regional level. In the language of economics, this is because the actions of one economy can produce externalities that affect others, particularly as neighbouring economies grow closely connected. Some democratic societies (including Japan, not to mention Greece) have proven totally incapable of providently exercising sovereignty over fiscal policy at the national level, by being too ready to spend but too reluctant to tax. For them, some loss of sovereignty would be a good thing.

Europe has been a model of regional economic cooperation to which other regions, like Asia, look for inspiration. Its approach was to create regional institutions to which member countries yield sovereignty in specific areas. But the strengthening of sovereignty at the supra-national level (supra-nationalism) is counterbalanced by the parallel principle of inter-governmentalism, allowing each ‘sovereign’ member country to veto a decision to move supra-nationalism a step further. The latter operates by majority rule, while inter-governmental decisions require unanimity. Cameron’s decision to reject the deal was within this established mode of decision making, and so those outside the United Kingdom should not be critical of Cameron for his decision.

But if giving up some sovereignty over fiscal policy is so vital to Europe, what took them so long to come to this decision, even after the first signs of the crisis were apparent almost two years ago?

The euro crisis has revealed how inept Europe’s supra-national institutions are in dealing with a regional problem of this proportion. Instead, inter-governmentalism is currently centre stage as the mechanism of crisis management. Indeed, it is French President Nicolas Sarkozy and German Chancellor Angela Merkel who appear to be calling the shots for the rest of Europe. For better or worse, France and Germany are providing critical leadership when, despite over half a century of regional institution building, the huge Brussels bureaucracy proved little more than a paper tiger.

The surrender of sovereignty is an essential aspect of any economic cooperation, whether regional or global. Nearly 70 years ago, Harry Dexter White, articulating the United States’ proposal for a United Nations Stabilisation Fund, recognised a need to suspend ‘certain economic elements of national sovereignty in favor of international collaboration’. Otherwise, there would be ‘no hope that any international instrument can be devised to help bring about the kind of collaboration among nations essential to a prosperous and peaceful world’ and the world would ‘revert to the barbaric international relationship of the “twenties and thirties”’.

This is easier said than done, but we must always remember that this is the crux of any regional economic cooperation, whether in Europe or in Asia.

Shinji Takagi is Professor of Economics at the Graduate School of Economics, Osaka University.

This is part of a special feature: 2011 in review and the year ahead.

1. Asia, Europe and regional cooperation in 2012
2. The euro crisis: lessons for East Asia
3. The East Asia Summit and regional financial cooperation

The weather was awful outside the WTO Ministerial Conference in Geneva last week, but there was some sunshine within the convention centre.

Russia acceded as a member, along with Samoa, Montenegro and Vanuatu (the club still attracts new members, and as one minister said: ‘as far as I know, nobody has asked to leave’).

The Plurilateral Government Procurement Agreement was revised — after 10 years of negotiations — further opening up procurement markets to give foreign economies better access. China is also en route to joining, having agreed to do so on its accession to the WTO, after further negotiations took place.

But there were some strange decisions, like giving countries the option to waive most favoured nation (MFN) provisions, so as to allow least-developed countries preferential access to services markets. It is not yet clear how this will happen or how it would help resolve constraints in developing countries, which hinder reforms in their own service sectors. There were some non-decisions as well. No conclusion was reached on a set of principles for food security, for example, although the WTO’s Director-General rebutted a protectionist report from a UN official.

Why the lack of progress at this year’s Ministerial Conference? Here are five suggestions.

One factor is that ‘development’ has been mixed with trade. On the face of it, having a ‘development round’ seems positive, but lumping these two areas together complicates the process, and introduces new items for debate. The WTO should remain focused on the resource allocation gains from international business.

Another reason for the lack of progress is that the WTO cannot deal with the barriers that have now become relatively more important to business. This includes the rules and processes affecting international business which are not managed at the border. These barriers create significant rents — and those who currently gain from the arrangements resist their removal. Analytical work on these barriers is more and more important.

The third factor involves the uncertainties faced by policy makers when removing such barriers. Some were put in place for genuine public policy purposes, and policy makers are not confident about the likely consequences of their removal. Capacity building programs focused on this issue could help address the problem, and the EU and APEC, in particular, could work well together on this.

Fourth, the use of preferential agreements does not make the process any easier. Rents are created for local business, which are then shared with a state’s ‘favourite partners’ when preferential trade agreements find a way of allowing market access. In this way, the grand bargain once represented by the WTO has been diminished.

The US is the fifth reason why progress has stalled, although the US would likely say that other leading members were the problem. The US wants to create more domestic jobs — and good ones — which it associates with more market access, especially in countries like India, China and Brazil. These economies are not offering enough, and the US is therefore pursuing other options like the Trans-Pacific Partnership, or negotiations with the EU, to flush out some response from recalcitrant members. Meanwhile, this tactic promotes the use of FTAs and depreciates the political capital available to the WTO.

What will happen now?

Within the WTO, fundamental principles including MFN provisions and the ‘single undertaking’ will be challenged in the name of pursuing more-achievable — or less-ambitious — goals. Australian Minister for Trade Craig Emerson said the situation ‘argues for breaking the round into its component parts … instead of waiting for some grand bargain, magically, like a bolt from the blue, to strike us from the sky’.

Tension will be regarded as a plus, and created by excluding trading partners from special deals. Plurilaterals will proliferate, both within and without the WTO. We will move to a world in which there are clubs within clubs, and in which they all overlap. There is also the possibility of great tension in the Asia Pacific as ‘a line is drawn down the middle of the Pacific’.

It is not clear what the circuit breakers will be in this situation. Whatever happens, small group negotiations within the WTO could be okay if guided by the right principles. Some will call for new leadership at the top, in order to consolidate and multilateralise small groups outside the WTO. Others hope that the situation will be resolved from below, via competition; some clubs will exit (in effect, if not in name) or amalgamate, and what remains will be (hopefully) efficient. 

Our best chance is to build confidence in reform led from within economies. This requires transparency and benchmarking (via strong trade-policy reviews in the WTO, good peer reviews in APEC and clones of Australia’s Productivity Commission). It will also require us to demonstrate the real linkages between policy and performance, and the ability to translate that work into compelling public commentary. We then have to think through where world trade policy is at now, and develop a new, more coherent global strategy.

Christopher Findlay is Executive Dean at the Faculty of the Professions, University of Adelaide.

1. Implementing the G20 commitment to World Trade Reform
2. World trade policy in crisis
3. Trade policy needs to go global

With the conclusion of the APEC meetings in Honolulu in November, another yearly cycle is about to draw to a close.

Soon all eyes will turn to Russia as the next host, with the 2012 summit scheduled for early September in Vladivostok. Leading APEC will be Russia’s most significant multilateral undertaking since hosting the G8 in 2006. Observers are curious to see what a Russian agenda will entail and what goals will be set for APEC in 2012. Adding to this significance, APEC is the first — and only — major Asia Pacific forum where Russia can hold the chair.

The WTO Ministerial Conference is expected to confirm Russia’s accession to the organisation before the year’s end. By securing WTO membership just prior to hosting APEC, Russia appears to be taking a big step toward fully fledged integration into the global economy. With strong support from the US and the European Union, accession to the WTO will finally enable Russia to speak the common language of trade liberalisation with its Asia Pacific partners. Yet there is evidence to suggest that Russia may be unlikely — or unable — to fully capitalise upon the benefits that chairing APEC provides the host economy, partly as a result of Russia’s weak economic engagement with the Asia Pacific region.

First, Russia is not an intrinsic part of the region’s complex production networks, also known as supply chains. Unlike many other APEC economies, Russia does not add value to the variety of manufactured goods circulating throughout the region. Accordingly, its trade agenda is limited to boosting exports of raw materials and energy products directly to consumer countries, primarily China, the US, Japan and South Korea. Russia’s role in supporting sophisticated supply chains throughout the Asia Pacific in the form of services trade or investment is also negligible. In other words, Russia is not really a part of the de facto economic integration in the region.

Second, Russia is excluded from de jure economic integration in the form of trade agreements in the Asia Pacific. Although Russia has never explicitly articulated its trade policy, a set of old-generation FTAs exists with all Commonwealth of Independent States (CIS) members. Outside of the CIS, FTAs are largely ignored as a trade policy tool. Only recently in 2010 did Russia begin to show interest in FTA negotiations with the European Free Trade Area, made up of Iceland, Liechtenstein, Norway and Switzerland; and in early 2011, Russia started FTA negotiations with New Zealand. The Russian government perceives both of these endeavours as ‘pilot negotiating projects’. A feasibility study of an FTA with Vietnam is also in progress but the expected outcome is unclear. APEC economies may expect announcements of Russia’s intention to negotiate more agreements in 2012, but further opening up of the Russian market to the industrialised economies of the Asia Pacific may prove difficult.

Finally, throughout its 13 years of APEC membership, Russia has failed to clearly outline the economic interests it wishes to pursue with its regional APEC partners. Nor has it utilised numerous APEC opportunities to articulate its strategic trade vision. This is well indicated by its limited participation, and lack of submissions, to APEC committees and groups, including an indifference toward the agendas of important APEC fora such as the Economic Committee and the Committee on Trade and Investment. The only APEC forum with which Russia has recorded engagement is the Counter-Terrorism Task Force, further indicating that Russia’s participation seems not to be driven by economic considerations.

Consequently, Russia will likely focus on a number of more narrowly defined initiatives in drafting the 2012 APEC agenda. Russian President Dmitry Medvedev’s remarks in Honolulu and a recent APEC meeting in St.Petersburg suggest the topics of interest will be energy, transport and food security. Russia apparently sees APEC as an opportunity to assert its role as a premier energy supplier, a transport ‘bridge’ between the Asia Pacific and Europe and a competitive food exporter to the region. This self-perception is not new and rests partly on domestic assumptions that the Trans-Siberian Railway and the Northern Sea Route will be feasible alternatives for commercial cargo travelling between the Asia Pacific and Europe. In order to fulfil at least some of these ambitions, huge investment in the physical infrastructure of Russia’s Far East is required. Translating these complex and mostly unilateral interests into the APEC language of concerted multilateralism will require a lot of creativity.

In the absence of any real business interests to fuel the agenda for the Asia Pacific, APEC 2012 may exemplify Russia’s imaginary engagement with the region. Hence, APEC deliverables for next year are likely to draw substantially on the contributions of the previous chairs — Japan and the US. There is no strong reason to expect that Russia will seize the opportunity and reinvent itself as a contributing actor in the region. The underlying fact is that Russia remains outside the Asia Pacific’s real process of economic integration.

Kirill Muradov is Research and Education Programs Coordinator at the International Institute for Education in Statistics, Higher School of Economics, National Research University, Moscow.

An earlier version of this article was first published here on the East-West Center website.

1. Russia in Asia and the Pacific
2. Institutional architecture in Asia: Challenges for the US and Russia
3. APEC to tackle the Doha round?

In Washington and Beijing last week there were important meetings that are likely to be influential in where the Trans-Pacific Partnership (TPP) negotiations on regional trade arrangements lead down the track.

In Washington, the US administration called in ambassadors from the eight negotiating partners to up the ante on an early deal. USTR Ron Kirk had declared on 30 November that the US wants a deal by the end of next year, much to the incredulity of Washington observers who doubt that the White House will want a full-on debate about the TPP and the necessary Trade Promotion Authority in the middle of an election year. Now Congressman Kevin Brady, Chairman of the Subcommittee of Trade of the House Committee on Ways and Means, has called Hearings on TPP from Wednesday, 14 December, saying that ‘it is vital that we complete an ambitious and comprehensive 21st century agreement as quickly as possible’.

China has not been invited to join the negotiations; Indonesia sees the risks of regional division and does not want to. In the end this may not matter, and both China and Indonesia have cause to be relaxed since, given the way it’s being prosecuted, the TPP may not have a substantial impact after all.

Peter Drysdale is the Editor of the East Asia Forum

1. Are there real dangers in the Trans Pacific Partnership idea?
2. The India-China Strategic Economic Dialogue
3. China and global economic governance: History matters

The global financial crisis forced East Asian nations to get serious about regional architecture.

As global trade entered a precarious decline during the height of the crisis in 2008–09, one of the obvious areas of focus for East Asia was trade regionalism, aimed at making East Asia a more efficient production network and, over time, a final market in its own right. At last, these initiatives are starting to bear fruit.

This year has seen significant progress in negotiations. This was revealed at the November ASEAN+3 summit which saw the heads of state agree to bureaucrat-level negotiations outlined earlier in the year.

Early indications that agreement on an East Asian trade area might finally be reached occurred in August at the 14th ASEAN Economic Ministers Plus Three (AEM+3) Meeting in Indonesia. The final communication welcomed a joint proposal by China and Japan, declared as the ‘Initiative on Speeding up the Establishment of an East Asia Free Trade Area (EAFTA) and Comprehensive Economic Partnership in East Asia (CEPEA)’.

Until this joint proposal the whole process had been held hostage by Sino–Japanese strategic rivalry. But the deadlock was broken by the worsening global economic situation and Washington’s bid to boost its flagging growth through exports, driving a return to Asia via the under-negotiation Trans-Pacific Partnership (TPP) agreement.

For China, the TPP is a potentially threatening arrangement, as its intellectual property and investment protection requirements will pose formidable barriers to joining. That’s if China was invited — which it has not been. And it seems this reality has been enough to shift China’s priorities towards reaching a regional trade agreement in East Asia, even if it means moving towards Japan’s position on issues of coverage and membership.

The outcome of all this is the joint proposal by China and Japan calling for the East Asian Free Trade Area to cover goods, services and investment — that is, an agreement which brings in Japan’s WTO-plus interests. Since the outset of negotiations on the EAFTA, Japan has focused on the investment-related issues (in contrast to tariff liberalisation). As Japan has few tariffs left to cut — and those that remain are in the politically-sensitive agricultural area — any EAFTA which focuses solely on tariff measures would be of little political interest to Japan.

Japan is also unwilling to enter into agreements with China that fail to address Japanese firms’ concerns about investing in the growing Chinese market. It is partly for this reason that the bilateral China–Japan FTA remains frozen. But outside the bilateral negotiations, and in the context of the EAFTA, China is now willing to discuss Japan’s wider set of economic interests. This year Japan and China have jointly sponsored setting up three working groups to deal with trade in goods, services and investment which will begin work in early 2012.

More importantly, the joint agreement is a promising step toward resolving long-standing disagreement over the grouping’s membership. While China had been adamant about the EAFTA being limited to ASEAN+3 members only (the ASEAN 10 plus Japan, South Korea and China), it appears that the final agreement will be expanded to include the ASEAN+6 grouping, adding Australia, New Zealand and India.

It is likely that these three countries would be brought into the new trade area via the so-called ‘ASEAN + +’ institutional mechanism. The framework is being negotiated at the ASEAN Plus Working Groups, and under consideration are rules of origin, tariff nomenclature, customs procedures and economic cooperation. These will feed into the working groups on trade, services and investment to provide a single template agreement.

Still, there remain hurdles. First, the terminology is not yet settled, with ‘EAFTA’ and ‘CEPEA’ still being bandied around. This suggests there do remain some tussles over membership — with China favouring an East Asia–Southeast Asia-only grouping. Second, while the Japanese and Chinese leaders have directed the bureaucrats to start negotiations, political leadership will be required to sign the agreement into force. However, the Heads of Government only enter the process next year, and in the meantime another flare up in Sino–Japanese relations could put everything back into deep freeze.

Notwithstanding those issues, the halting trend towards the realisation of an EAFTA is progressing. There will no doubt be more setbacks; but an EAFTA now seems more a question of when than if.

Joel Rathus is an EAF postdoctoral scholar and a regular contributor to the East Asia Forum.

1. A closer look at East Asia’s free trade agreements
2. The TPP, APEC and East Asian trade strategies
3. The de facto ‘free trade area’ in East Asia

Barack Obama championed high-quality growth as a key focus of this year’s APEC Summit in Hawaii.

But this goal can only be realised if APEC members choose to jump the hurdle of behind-the-border barriers.

Official tariff barriers within APEC have reduced dramatically; an APEC report noted the average applied tariff rate in APEC’s industrialised economies had fallen to 3.9 per cent as of 2008. But plenty of work still confronts APEC leaders — expanding trade and investment, and boosting trade flows are each a matter of urgency. APEC economies have also shown unbalanced growth and are still affected by the sluggish rate of world economic recovery. Despite this present context, decisive action — and in some cases dramatic reform — can put APEC economies on a faster path to recovery and combat some odd paradoxes, too.

Some developing economies are generating excess domestic savings, which are being diverted and invested overseas in industrialised economies. This paradox arises from unseen, informal barriers, known as ‘behind-the-border’ barriers. APEC members need to address this reality if they want to expand trade and investment. Behind-the-border barriers are increasing costs, increasing risk and discouraging competition. And reducing tariffs to zero per cent serves little purpose if behind-the-border barriers prevent investment and trade, and thus restrict poverty-reduction efforts.

Infrastructure reform can help remove such barriers. This includes reforming large monopolies in the electricity sector.

In APEC, around 35–40 per cent of members have made little to no progress in removing barriers to competition throughout their electricity provision. But these necessary changes are too important to be ignored. Inability to reform can impede investment in critical infrastructure and the adequate provision of electricity, with the ultimate losers being consumers and businesses, while jobs and trade also suffer.

In light of these hazards, leaders are restructuring, privatising and improving regulatory oversight. Structurally unbundling competitive activities from natural monopoly elements encourages competition and investment. Competition is often the catalyst for innovation and productivity increases. Conversely, monopoly situations have allowed state enterprises to neglect innovation or cost retention. Politicised operation of state enterprises has also seen electricity being purposely under-priced, leading to underinvestment in some cases. A World Bank report shows that intentionally under-priced electricity imposed a US$90 billion fiscal burden on developing nations’ budgets in the 1990s. But the high costs of provision are eventually passed onto consumers and businesses in such a scenario.

APEC members that have pursued reform have seen significant benefits. For instance, labour productivity and service quality has improved in Chile, Peru and New Zealand. The performance of existing-generation plants has improved, and wholesale prices have fallen. Retail prices now better reflect the true costs of production.

But widespread reform has been blocked for various reasons. First, influential unions may oppose the sale. Second, there could be a sentimental attachment or communities may fear the sale of public assets. Or third, the government may lack the technical capability or insight to successfully carry out complicated reform.

Australia is an APEC member that has set a fine example in reforming electricity infrastructure provision. There are elements of partial to full reform in most of the country’s states and territories, except the Northern Territory. This includes unbundling the supply chain and the introduction of competition, which has led to greater investment in the industry. This sequencing and experience of reform should be shared with other APEC members. Short-term politics should not prevail over the long-term interests of APEC, its people and its future.

Andrew Fragomeli is a student at the University of Western Australia and was a Global Voices delegate to APEC 2011. 

1. APEC meeting: New policies for Indonesia?
2. India’s political economy: classic strategies no longer apply
3. Why America no longer gets Asia

The G20 Summit in Cannes probably made its most important contribution to global financial stability and economic growth before it even commenced.

The summit, held 3–4 November, became a deadline for European leaders to deal decisively with the economic and financial crises in the euro zone.

Europe is experiencing at least four deep, structural, overlapping and mutually reinforcing crises: a crisis of institutional design; a fiscal crisis; a crisis of competitiveness and a banking crisis. None of the four crises can be solved in isolation, and there does not currently seem to be any single comprehensive solution that will end the crisis promptly.

At the Cannes summit, euro zone leaders agreed on a new set of measures to try and tackle these problems. Though inadequate in scope to bring the crisis to an end and calm financial-market volatility, these measures will help prevent further economic deterioration in Europe. Consequently, the risk of catastrophic spillovers from Europe to the rest of the G20 was reduced.

Ahead of the G20 Summit, euro zone leaders agreed on three principal strategies to contain the crisis: reduction of Greece’s debt; a bank recapitalisation target and new options to leverage the European Financial Stability Facility (EFSF).

First, the planned debt reduction takes the form of a voluntary bond swap with private holders of Greek government debt, resulting in a 50 per cent reduction in the nominal value of their debt. While urgently needed, this will not independently restore Greek fiscal solvency, and additional financial support for the country will be needed. As future support will undoubtedly involve the IMF, G20 members will also have the opportunity to discuss potential approaches to restoring Greece’s fiscal solvency. This voluntary debt swap is unlikely to trigger sovereign default swaps, and it removes a potential short-term source of dislocation in the financial markets. But the lack of payout after a 50 per cent reduction in debt may ultimately lead to the demise of sovereign credit default swaps — at least for industrialised nations — which may lead to increased financial-market volatility.

Second, euro zone leaders agreed to raise capital requirements in banks to 9 per cent Tier 1 equity, and adjust for the effects of market prices of sovereign debt. Although superficially helpful, the imposition of a capital ratio target runs the risk that banks will shrink their lending to businesses (due to denominator effects), rather than raising new capital. Regulators must be vigilant to avoid aggravating a building credit crunch.

Third, two options were agreed on to boost the financial firepower of the EFSF. Both are almost certain to fail. Option one, providing credit enhancement to new state-issued debt, is meaningless; the significant overlap between the insurer and the insured in the euro zone means any stability the measure achieves will be minimal. Option two foresees attracting investments from private and public financial institutions and investors. But few, if any, such investors exist — and possess the willingness and ability to make a material difference for European financial stability.

Fortunately, this does not matter, as both options are a smokescreen to provide cover for the European Central Bank (ECB) to remain directly involved in stabilisation measures. This is critical, as ultimately it is only the ECB, as a central bank with the ability to create new money, that commands the financial resources to stabilise Europe. By creating a distraction in the form of a ‘leveraged EFSF’, the ECB can continue intervening directly in the European debt markets to avoid a catastrophic rise of Italian and Spanish interest. Ironically, by supporting this ruse, G20 leaders will reduce the need to offer money themselves by helping the ECB keep the spread between, on the one hand, Italian and Spanish interest rates, and on the other hand German interest rates.

Usually, international gatherings like the G20 Summit in London in April 2009 deal with large crises by restoring confidence through the credible commitment of large sums of government money. Europe cannot do this. As was evident ahead of Cannes, Europe and the ECB rely on the economic pressure exerted by financial markets to push reform-reluctant leaders into ‘doing the right thing’.

Indeed, were the ECB to publicly declare its intention to act as a ‘lender of last resort’ for Europe, or the G20 to cobble together €2 trillion for the EFSF, the financial market pressure on such leaders to implement reforms would abate. Paradoxically, with Europe’s fundamental economic problems requiring years of tough reforms, Europe can only ultimately solve its economic crisis by prolonging it.

This logic will easily trump anything in the G20 Communiqué calling for enhanced global financial stability and strong balanced global growth. Instead, we can expect high levels of uncertainty and volatility.

Jacob Kirkegaard is a Research Fellow at the Peterson Institute for International Economics, and a Senior Associate at the Rhodium Group.

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The US recently participated in the East Asia Summit (EAS) for the first time — a decision that has wider implications for US–ASEAN relations.

The decision to join the EAS is part of a recalibration of US foreign policy vis-à-vis ASEAN-led multilateral institutions. This shift in policy reflects a broader attempt by the US to re-engage with Southeast Asia — after years of perceived indifference — and is equally related to China’s growing influence in the Asia Pacific region.

The current US policy toward ASEAN also represents an attempt at complementing and deepening bilateral ties with Southeast Asian countries — especially Indonesia and Vietnam. The Obama administration wants to encourage the formation of a multilateral security architecture in Asia that will include the US and complement its bilateral defence and foreign policy commitments.

Unlike Obama, the Bush administration was seen as being largely uninterested in actively fostering East Asian cooperation, and the US was not invited to join the EAS when it was established in 2005. At the inaugural EAS summit in Kuala Lumpur, the latest ASEAN Plus institution was pitched as a predominantly Asian forum concerned with community building and regional issues. And before its formation, the Bush administration repeatedly indicated its preference for flexibility and mobility rather than formal and institutionalised arrangements.

But the Obama administration signalled a renewed interest in East Asian regionalism as driven by ASEAN. The US held summit meetings with ASEAN leaders during the APEC forum and the opening of the UN General Assembly in November 2009 and September 2010 respectively. The Obama administration also acceded to ASEAN’s Treaty of Amity and Cooperation by presidential decree in July 2009, opening the door for US membership of the EAS.

And in April 2010, the US’ possible inclusion in the EAS, along with Russia, was discussed at the 16th ASEAN Summit in Hanoi. Significantly, US Secretary of State Hillary Clinton made clear America’s willingness to join the EAS to her ASEAN counterparts. This message helped overcome a split within ASEAN between those who supported the expansion of the EAS, and those who proposed an ASEAN+8 meeting every two years to coincide with the APEC Leaders’ Meeting. The latter proposal was to address concerns about the difficulties involved in having the US president visit Asia more than once a year.

The ASEAN states all believed the US and Russia’s inclusion would enhance the value, weight and influence of the ASEAN Plus bloc. This reflects ASEAN’s desire to engage outside powers peacefully within a framework where it remains centrally engaged in the development of Asia’s regional architecture.

By joining the EAS, the US is seizing an opportunity to reverse the perceived American disengagement from the region, which has allowed China to play a larger role in East Asian regional platforms. In contrast to the Bush years, the Obama administration is demonstrating a clear interest in multilateral organisations, based on the premise that deepening key bilateral ties and engaging multilateral institutional structures go hand in hand.

From the Southeast Asian perspective, US participation in the EAS serves to balance China’s increasing assertiveness in regional affairs, and ASEAN capitals have welcomed signs of more active US participation in East Asian regionalism. An active US participation — combined with an accommodative Chinese involvement — may be the best possible scenario for ASEAN in the years to come.

But US participation in the EAS raises the important question of how the summit can complement existing cooperative arrangements and contribute to the emerging security architecture in East Asia. Specifically, there is a risk that the EAS and APEC could end up competing or even cancelling each other out, which would benefit the ASEAN+3 grouping — a forum involving China, Japan and South Korea — but which would exclude the US. The challenge for Southeast Asia will be to continue leading the EAS in such a way as to make it both acceptable to Beijing and relevant to Washington.

Dr Ralf Emmers is an Associate Professor and Head of the Centre for Multilateralism Studies at S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University.

An earlier version of this article was first published here on the S. Rajaratnam School of International Studies website.

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