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Why Asia must opt for open regionalism on trade

Author: Jagdish N. Bhagwati, Senior Fellow for International Economics
November 3, 2006
Financial Times

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As the 21-member Asia-Pacific Economic Co-operation organisation (Apec) meets later this month (November 16) in Hanoi, the central question its leaders must confront is their response to the stalemate in the multilateral negotiations launched at Doha. Two options are competing for attention.

First, that Apec should continue to embrace “open regionalism”, acting as a forum where members undertake trade liberalisation in concert and extend it worldwide on a “most favoured nation” basis. Many in the region, led by Ross Garnaut and Peter Drysdale, the Australian economists, argue Apec should maintain this tradition and work actively for the cause of multilateralism by pushing for the conclusion of theDoha round.

Second, that Apec should instead launch a Free Trade Agreement of Asia and the Pacific (FTAAP), converting Apec into a “regional” free trade area. This opposing proposal has resurfaced after being dismissed in earlier Apec deliberations in favour of “open regionalism”. An FTAAP would aim to eliminate trade barriers only for the Apec members while maintaining discriminatory, higher barriers against non-members.

The latter proposal is wrong-headed and the arguments advanced in its favour fail to persuade. The former leads one to ask: how might Apec reinforce efforts to conclude the Doha round?

The proposal to turn Apec into a free trade area runs into insuperable political and technical difficulties. At the political level, the chief problem is that the Asian nations in Apec have a growing Asian identity that is separate from the identity sought around the Pacific ocean. Many preferential trade agreements (PTAs) are already in place and others are afloat that seek to extend discriminatory—often bilateral and sometimes sub-regional—preferential agreements within Asia alone. There are also proposals to include other Asian nations such as Indiainstead, while excluding the western Pacific nations such as the US.

At the technical level, the problem is compounded by the proliferation of bilateral free trade agreements that has now spread to Asia. These create what I have called the “spaghetti bowl” problem of criss-crossing bilateral agreements that create a chaotic system of discriminatory tariffs depending on source. Optimists such as Koichi Hamada, professor of economics at Yale University, believe merging them would turn the bilateral spaghetti into a (regional) lasagna. But lasagna cannot be made from spaghetti: it needs flat pasta! We would face the impossible technical problem of folding several FTAs together that have different tariff rates and innumerable rules of origin (often defined differently by product) for preferences to kick in.

The final argument is mainly emanating from think-tanks in Washington long identified with the embrace of bilateralism. They argue the FTAAP, were it somehow to surmount these difficulties magically, could invigorate the “virtually dead” Doha negotiations. The free trade area would be a threatening alternative to the non-Apec nations—the European Union, India andBrazil—that are refusing to make the concessions necessary to close the round. If that fails, the FTAAP would be the next-best big-scope trade liberalisation option.

But Doha is far from dead. Pascal Lamy, World Trade Organisation director-general, has only “suspended” the talks. Can anyone seriously believe that an FTAAP—requiring free trade among countries as diverse as China, Japanand the US - can be agreed more easily than Dohacan be concluded?

But what can be done by the Apec nations to reinforce Doha? George W. Bush is deeply committed to the success of Doha: it would be a rare multilateral triumph for a US president who never wavered in his support for free trade, even as John Kerry, his opponent in the last presidential election, was condemning US companies that outsource as traitors.

With the elections to the US Congress pending, and with Democrats out to exploit every opportunity, he simply could not make the necessary concessions in agriculture and risk losing his own “farm belt” support. But with the elections behind him, he can return to act forcefully on his convictions.

The prime ministers and presidents at this historic Hanoi meeting need to rally Apec behind his pro-Doha instincts, instead of cutting and running with a hare-brained FTAAP.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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