THE FREE TRADE AREA OF THE ASIA-PACIFIC (FTAAP): MECHANISM, ACHIEVEMENTS AND CHALLENGES

THE FREE TRADE AREA OF THE ASIA-PACIFIC (FTAAP): MECHANISM, ACHIEVEMENTS AND CHALLENGES

Nguyen Quoc Phong

Student of Faculty of World Economy and International Affairs, National Research University Higher School of Economics,

Russia, Moscow

ABSTRACT

This paper outlines the formation roadmap and key points in the implementation mechanism of the Asia-Pacific Free Trade Region (FTAAP), analyzing the milestones achieved and the obstacles in the way of this initiative's realization. This paper argues that the economic benefits of FTAAP would be significantly greater than those of any existing regional trade agreement; however, potential trade conflicts between member countries, cultural and political diversity, and gaps in economic development are hurdles that must be acknowledged.

Keywords: APEC, FTAAP, free trade agreement, mechanism, challenges.

Nowadays, the Asia-Pacific region's economy is undergoing rapid growth, resulting in an increase in economic and trade ties within the region. In response to new development trends, proactively expanding and strengthening world economic links, the idea of a Free Trade Area of the Asia Pacific (FTAAP) has been accepted by APEC as a long-term option.

1. Overview of APEC and FTAAP

The Asia-Pacific Economic Cooperation (APEC) is an international organization of countries located in the Asia-Pacific region. It was established in 1989 in response to the growing interdependence of Asia-Pacific economies. The organization's fundamental objective is to establish a community of open and dependent economies, thereby enhancing its capacity to grow cooperatively in global markets and bring prosperity to the people. APEC currently has 21 members accounting for about 52% of the territory, 59% of the population, 70% of the world's natural resources, as well as about 60% of global GDP and more than 50% of world trade [6]. The association's activities revolve around the main directions of trade and investment liberalization, economic and technical cooperation with collective action programs (CAP), and individual action programs (IAP) of each member. Since the end of the Cold War, a series of free trade agreements have emerged in the Asia-Pacific region. According to the Asian Development Bank, as of June 2021, there were 271 proposed free trade agreements, of which 174 were signed and came into force in this region [4].

The trend of globalization in all socio-economic areas makes the countries of the world increasingly dependent on each other, and this gave rise to the idea of establishing the "Asia-Pacific Free Trade Area". Meanwhile, the Uruguay round within the framework of GATT still had some issues that had not been fully resolved, which further promoted the process of regionalization with the formation of other major regional trade blocs in the world in the following period such as the EU, NAFTA, and AFTA. In Asia, especially East Asia, many dynamic economies entered the 1980s with a relatively high average growth rate of 9 –10% annually [10]. However, there was no effective form of economic and trade cooperation in the Asia Pacific region to promote economic development. Moreover, emerging countries, such as ASEAN nations, also wanted to strengthen their voices in the region to promote economic development but did not want to overshadow existing political cooperation mechanisms.

The desire to connect Asia-Pacific economies through a single free trade agreement is not a novel concept. Indeed, the concept was introduced during the 1994 APEC summit in Bogor, Indonesia. Member economies agreed at the conference on liberalizing trade and investment in 2010 for developed economies and 2020 for developing economies. In 2004, the Asia-Pacific Free Trade Area initiative proposed by the APEC Business Council became relevant as the Doha Round of Global Free Trade, launched by the World Trade Organization (WTO) in 2001, came to a standstill. Many were concerned that APEC's goal of liberalizing trade and investment in the region was losing momentum. By 2006, 21 APEC members had agreed to consider the long-term prospects of the FTAAP. Economist Fred Bergsten suggested that the Asia-Pacific Free Trade Area could be the catalyst to help revive the global trading system: "The Asia-Pacific Free Trade Area initiative may well turn out to be the best, or perhaps only, way to catalyze a substantively successful Doha Round" [5]. Bergsten also reiterated that the commitment of the APEC Economic Leaders' Meeting in 1993 contributed to the success of the Uruguay Round, so the Asia-Pacific Free Trade Area could have similar implications for the successful conclusion of the Doha Round. The proposal to establish the Asia-Pacific Free Trade Area came at a fairly favorable time. Numerous bilateral free trade agreements have been signed in the Asia-Pacific region over the last decade. Indeed, most APEC members are now parties to one or more FTAs. The Asia Pacific Free Trade Area is viewed as a chance to establish a comprehensive regional free trade agreement. However, establishing the Asia Pacific Free Trade Area would not be an easy task given the disparate economic development levels of the 21 members of APEC.

In 2010, APEC leaders jointly laid out a "Pathway to The Asia Pacific Free Trade Area" (Pathway to FTAAP) that stated that APEC member economies would pursue a comprehensive free trade agreement in the region, either through the development of existing agreements or agreements in the process of negotiations. Theoretically, the vast free trade area would eliminate import tariffs on a wide variety of goods, from vehicle parts to food, and would cover all participating countries, which account for more than half of global economic production and 40% of international trade. In 2016, the APEC leaders pledged that the Asia Pacific Free Trade Area would be built on the back of future agreements such as the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP). Furthermore, at the APEC 2020 meeting, leaders affirmed that FTAAP could be achieved through these interim steps. Not only should the FTAAP be based on liberalization of trade and investment, but also on a comprehensive, high-quality, and tightly integrated agreement that addresses "new generation" trade and investment issues.

2. Mechanisms, achievements, and challenges of FTAAP

2.1 Mechanism of Action

The Asia-Pacific Free Trade Area is necessary for regional economic integration among APEC economies. When fully implemented, the agreement will be the world's largest and most diverse trade agreement. Additionally, the Asia-Pacific Free Trade Area is recognized as a comprehensive initiative capable of not only achieving trade liberalization but also resolving future complex trade issues. FTAAP is conducted in a step-by-step and consensus-driven manner. By pledging to implement free trade, the 21 members would bring about prosperity to the region. APEC economies are committed to contributing by turning the FTAAP's vision into concrete steps while launching and promoting this process comprehensively and systematically towards the eventual realization of FTAAP [2]. In other words, members' collective action plans should be pursued in conjunction with the assistance of the multilateral trading system. Unlike other purely free trade agreements, the Asia-Pacific free trade area is expected to achieve a higher-quality level of liberalization, in particular, key matters such as international trade and foreign direct investment need to be removed from existing barriers. More precisely, members conducted strategic research on critical issues relating to the Asia-Pacific Free Trade Area's implementation, thereby identifying possible routes for economies to take.

As mentioned, there have long been many bilateral and regional trade agreements in the region before the FTAAP. However, they are not working effectively, nor do they optimize regional economic activity, even overlap and hinder each other's activities. Moreover, with the rise of economic activity, increasing global integration, and the complexity of those agreements, member economies are difficult to cooperate with and even costly to maintain and control trade relationships. Therefore, FTAAP is expected to be a free trade agreement with precise and effective collective and individual mechanisms for regional convergence.

APEC leaders have played an essential role in advancing FTAAP's vision forward. In order to pursue FTAAP, many actions have been taken at common Forums through negotiations, contacts, and meetings. The APEC Member States jointly study a comprehensive strategy on issues related to the realization of FTAAP: "Analyzing potential economic and social benefits and costs, various paths towards FTAAP; Assessing the impact of the "spaghetti bowl" phenomenon on the Asia-Pacific economies, identifying trade and investment barriers, and challenges that economies may face in realizing the FTAAP; Considering recommendations based on the study results" [2].

APEC Member States continue their work to improve their capacity to pursue FTAAP within the framework of "the Action Plan Framework of the Capacity Building Needs Initiative" (CBNI) for the second (2015-2017) and the third time (2018-2021) [7]. The results of the programs implemented within the framework of CBNI are periodically evaluated with the goal of improving the capacity of economies to participate in the ongoing activities of the region towards the realization of the expected FTA. APEC members also committed to accelerating efforts to liberalize and facilitate trade "at the border", improve "behind the border" business environment, and enhance "across the border" connectivity [2]. This includes improvement initiatives in areas such as international trade, investment, e-commerce, rules of origin, etc.

APEC affirms that the FTAAP would be established on ongoing regional integration policies and adopted a variety of avenues such as the Regional Comprehensive Economic Partnership (RCEP) and the former Trans-Pacific Partnership (TPP) or the current Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Moreover, the Beijing Roadmap for APEC’s Contribution to the Realization of the FTAAP also states that the FTAAP would be built and developed on these existing initiatives.

2.2. Achievements of FTAAP

The pursuit of "the Bogor Goals" of APEC has played an essential role in promoting the Asia-Pacific economic integration process, and the FTAAP would contribute to the implementation of "the Bogor Goals" as well as serve as a means of promoting regional economic integration after 2020. The most significant benefit that FTAAP can provide is the establishment of an Asia-Pacific economic community, which promotes the region's sustainable economic growth and prosperity. Over the past 30 years, APEC has implemented a series of solutions, including trade and investment liberalization, and made great progress in this area. One of the prime examples of such progress is that the most favored nation tariffs in the region had nearly halved, from 11% in 1996 to 5.5% in 2014. The proportion of product lines entitled to 0% tariff rates in APEC increased from 27.3% in 1996 to 45.4% in 2014 [8].

Estimates suggest that FTAAP would deliver much greater economic benefits than any existing regional trade agreement. Per the estimates, FTAAP would provide significantly more potential advantages than any current regional agreement. RCEP members, and all APEC members would gain the most from FTAAP accession. According to Petri et al., by 2025, their income would increase by 2.3%, 3.5%, and 3.5% relative to 2013 levels [9]. Additionally, Kawasaki (2014) estimated that the incomes of APEC economies as a whole would rise by 2.1% under RCEP, and 4.3% under FTAAP [7].

According to the preliminary phase 2 report on APEC's progress towards "the Bogor Goals of the APEC Policy Support Unit", by the end of 2015, APEC economies had participated in 152 free trade agreements or regional trade agreements; of which 61 were signed among APEC member economies [3]. On the one hand, the proliferation of free trade agreements or regional trade agreements creates momentum for trade and investment liberalization in the region, but on the other hand, it is hindering the process of regional economic integration. The impact of trade diversion would worsen the economic well-being of non-member economies of major regional free trade agreements such as RCEP, while FTAAP could prevent the impact of trade diversions among APEC members.

FTAAP would greatly benefit businesses by rationalizing the Rules of Origin, allowing them to participate in regional manufacturing hubs and value chains that are at risk of fragmentation due to the rise of free trade agreements and regional trade agreements in the Asia-Pacific.

2.3. Challenges for FTAAP realization

FTAAP's implementation also faces numerous obstacles. While the Asia-Pacific region is rich in economic potential and offers significant development opportunities, there are also many ethnic and religious conflicts, territorial disputes, competition for natural resources, separatism, terrorism, and the threat of nuclear proliferation.

There may be a trade conflict between member states. For instance, the ongoing dispute over alleged intellectual property rights violations has sparked a trade war between the United States and China, both of which are potential FTAAP members. Numerous tariffs and sanctions have been imposed on businesses in the two countries, rather than trade barriers being loosened. As a result, regional trade conflicts will have an adverse impact on the FTAAP's implementation.

Although FTAAP promotes regional economic growth, it also makes some stakeholders in member countries vulnerable. Agricultural producers are an excellent example. Because the FTAAP facilitates the entry of foreign goods into a country, the price of some imports will be lower compared to domestic goods. Agricultural producers could suffer immensely in a fiercely competitive agricultural market, exerting significant political pressure on the government as it attempts to advance FTAAP. Only when these potential obstacles are adequately addressed or compensated for can governments confidently continue to support the implementation of FTAAP. Additionally, the Asia-Pacific region contains numerous potential "hot spots" that could jeopardize regional and global security and stability. Maintaining a safe, stable, and cooperative environment, it is said, has been the "key" to the region's development in the present as well as in the future.

In the long run, the FTAAP provides an overarching prospect for the Asia-Pacific region, as it involves all APEC members, including three critical countries: the United States, China, and Russia. As a result, the FTAAP will account for 56% of global GDP ($42 trillion), approximately 45% of global trade ($21 trillion), and 39% of the global population ($2.8 billion) [11]. However, another difficulty of FTAAP is addressing the needs and interests of all parties involved. This challenge is particularly acute for APEC economies, which are highly diverse in terms of politics, economic development, history, culture, trade capacity, and interests. All these factors may pose obstacles to each economy's readiness to participate in a comprehensive and high-quality FTAAP. FTAAP can also cause disparities in the economic interests of FTA countries that do not participate in FTAAP. For example, the ASEAN region has three non-APEC members, respectively, Cambodia, Laos, and Myanmar; or the case of India when this country has not yet been accepted to become a member of APEC.

3. Conclusion

To conclude, it should be noted that regional economic integration would remain a central pillar of APEC cooperation, with the goal of completing the Asia-Pacific Free Trade Agreement. Efforts to implement the FTAAP require an atmosphere of genuine collaboration and mutual trust between member economies. All APEC members should work cooperatively to expedite the implementation of FTAAP, transforming it into a powerful economic tool for connecting the dynamic Asia-Pacific region and contributing to the development of the global trading system. However, given the current regional and global economic environment, as well as the impact of the Fourth Industrial Revolution, the issue of maximizing the socio-economic benefits of FTAAP while mitigating adverse effects such as adjustment costs and widening income disparities requires the endeavor of each nation’s leaders. This is the key to the realization and successful implementation of this prospective trade agreement.

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