Trade in the Asia-Pacific Region

The Asia Pacific Economic Cooperation (APEC)

The Asia Pacific Economic Cooperation (APEC) was created in November, 1989, to liberalize and facilitate trade in the Asia-Pacific region. The rapid and recent economic growth in the region has generated a great deal of interest in APEC�s potential influence and course of development. The members of APEC are Australia, Brunei Darussalam, Canada, Chili, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papau New Guinea, People�s Republic of China, Philippines, Singapore, South Korea, Taiwan, Thailand and the United States. Between 1965 and 1990, the domestic economies of East Asia grew twice as fast as OECD countries and the sheer size of their combined economies is considerable. APEC members account for fifty percent of the global economy, more than forty percent of international trade, and eighty percent of global trade in information technologies. It is expected that APEC will become the world�s largest economic zone by the year 2000. Carl J. Green, APEC and Trans-Pacific Dispute Management, 26 Law & Pol�y Int�l Bus. 719 (1995).

Formal groups promoting commerce in the Asia-Pacific region have existed for at least three decades. The success of the European Common Market and the growing awareness of Asia�s economic potential stimulated interest in the 1960s to create a Pacific regional economic group whose economic ties would engender closer political ties and stability in the region. A Japanese proposal for a Pacific Free Trade Area led to a group known as the "Pacific Trade and Development Conference" which has met annually since 1968. During the same period, a group known as the Pacific Basin Economic Council, consisting of business leaders, began holding annual meetings as well. Despite these initiatives, many Asian countries maintained closer economic ties to their former colonial rulers than their regional neighbors. In 1989, the Australian Prime Minister, Bob Hawke, proposed the creation of a high-level intergovernmental forum to strengthen regional economic ties. That proposal was the genesis of APEC, which had a basic charter two years later and a small secretariat in Singapore within four years. APEC�s very first initiatives focused on business issues -- harmonizing rules on customs and visa matters, establishing a human resources program and encouraging small- and medium-size enterprises.

APEC�s potential influence grew considerably when the U.S. hosted the first Leaders Meeting. Prior to this meeting, the highest government representation at APEC gatherings had been at the ministerial level. At the Leaders Meeting it was agreed to begin building a "Pacific Community." This commitment was given substantive meaning a year later at the summit in Bogor, Indonesia, where APEC members set specific goals of "free and open trade and investment" in the region by the year 2020, with industrialized nations reaching that goal by 2010. Fulfilling this ambitious goal will require significant changes in national laws to equalize tariffs and remove non-tariff barriers to trade across a range of commercial sectors. APEC meetings now regularly take place at ministerial level to discuss issues ranging from telecommunications and fisheries to transportation and tourism. A key question, still unresolved, is the role environmental protection will play in APEC�s march toward open trade and investment.

A number of APEC country leaders, including the President of China, Jiang Zemin, and President Clinton of the United States, have called on APEC to take the lead in addressing regional environmental issues. Despite this encouraging rhetoric, however, efforts to integrate environmental protection into APEC have been quite modest to date, undertaken under the category of "economic and technical cooperation." Andre Dua and Dan Esty, APEC and Sustainable Development, in Whither APEC: The Progress to Date and Agenda for the Future 151 (1997).

At the first APEC Summit in 1993, the leaders agreed to hold an Environmental Ministerial meeting in Vancouver in 1994. That meeting produced an Environmental Vision Statement for APEC and a Framework of Principles for integrating the economy and the environment. The Environmental Vision Statement calls on APEC countries, working together, "to promote sustainable development, trade and investment in the region, through a vision for APEC that encourages members to integrate environmental considerations into their policy." Id. at 169. The Framework of Principles provides nine principles that should guide APEC�s progress toward economic and environmental integration, including sustainable development, cost internalization, technology transfer, the precautionary principle, and the need to make trade and environment policies more mutually supportive. At the Sustainable Development Ministerial held in Manila in 1996, APEC members agreed on three priority areas for further action: (1) sustainable urbanization; (2) clean production and clean technology; and (3) sustainability of the marine environment. To date, there has been little progress toward these goals. APEC�s long term agenda also includes an initiative to address food, energy, environment, economic growth and population issues (FEEEP Initiative).

Thus, while APEC declarations committing its member countries to achieve sustainable development have been impressive, to date there have been no concrete results. The key environmental questions for APEC are which goals the organization is best positioned to accomplish and whether the political will exists to achieve meaningful results. Ironically, APEC�s greatest weakness, its youth as an international institution, is equally its greatest strength. It has the opportunity to take new measures to implement environmental concerns into its regional economic policies. These could include capacity-building in the member countries with weak environmental institutions, establishing regional standards of environmental protection, and ensuring future growth in the region more closely follows a trajectory of sustainable development.

The need for action is clear: rapid economic growth in Asia Pacific has led to severe environmental problems, particularly in urban areas. As national economies make the transition from an agricultural to more industrialized base, the scale of environmental threats magnify. Some of these problems are regional in scale, spilling across borders, and region-wide problems would likely benefit from a region-wide strategy. Acid rain, air pollution and overfishing are prime examples. Indeed, the need for regional environmental norms is already evident in the failures of recent ad hoc negotiations to resolve environmental disputes among APEC parties. For example, Korea has failed to receive any relief from China in response to its pleas for reduced sulfur dioxide emissions, and quarrels among China, Taiwan and Vietnam have barred the conclusion of the Regional Seas Agreement for the South China Sea. Id. at 165. Even where solutions have been found, as in Japan�s offer to pay for China to install scrubbers on its coal-burning power plants, such "successes" have created the moral hazard of inviting polluters to pollute in exchange for a pay-off, violating the polluter-pays principle to which APEC countries have committed themselves.

The following excerpt by Andre Dua and Dan Esty discusses the environmental challenges facing APEC and the the potential of the organization to protect the environment.

Andre Dua and Dan Esty

APEC and Sustainable Development

Whither APEC: The Progress to Date and Agenda for the Future (1997)

 

Foreign investment does not guarantee good environmental results. Some companies set up operations abroad with the hope that they will be able to reduce costs, including environmental compliance expenditure. In other cases, FDI [foreign direct investment] recipients seek to eliminate pollution control measures from projects to reduce the capital cost of their investments. In China, for example, provincial governments and local entrepreneurs often agree to build stripped-down, low-cost (and thus highly polluting) power plants that generate the maximum amount of electricity per dollar of capital invested. American companies that have included pollution control technologies in their proposals for electricity generating facilities have been told to eliminate these features and cut the cost of their bids accordingly, or lose the chance to be chosen for the project. Because other foreign investors are ready and willing to build the no-pollution control version of the project, any company, which wishes to remain a competitive bidder must heed the demand to remove pollution control measures from their bid specifications.

Understanding the importance of FDI as a source of possible environmental degradation and alternatively, progress, is an important insight. Indeed, finding ways to channel private capital flows -- to promote public environmental infrastructure projects and to ensure that every private facility has appropriate environmental controls folded into its design -- stands as a central policy challenge for all countries, especially for those that are rapidly industrializing. The risk of intercountry, and even intracountry, competition for foreign investment that manifests itself in a welfare-reducing cycle of dis regard for pollution impacts is an important reason for regional environmental policy coordination, which APEC may be well situated to provide. In brief, while private capital can be -- and must be -- the primary engine of sustainable development, governments must create incentives that direct private actors toward socially constructive forms of competition.

A significant feature of APEC�s performance has been the increasing economic integration of its members, reflected in growing intra-APEC trade and investment, and the increasing prevalence of border-spanning subregional economic zones. This integration can be expected to increase as APEC�s members reduce at-the-border barriers - both tariff and nontariff - to freer trade and investment. One of the major results of economic integration and the related dismantling of at-the border barriers is that policies previously considered within the sovereign authority of domestic officials -- including environmental standards -- have come under increasing international scrutiny. The major reason for this is that as traditional barriers to trade are reduced or removed and international competition becomes more intense, differences in domestic policies become more significant in determining competitiveness and, thus, the pattern of trade and investment flows.

Given this dynamic it is easy to understand why APEC countries are demonstrating an increasing interest in trade "facilitation." In particular, the fear of a regulatory "race toward the bottom" -- in which countries compete for industrial activity by lowering their environmental standards, failing to enforce their existing rules, or refraining from shifting their requirements to optimal levels -- has created intense interest among APEC members in each others� environmental policies.

Many of the public health and ecological problems in APEC countries can be traced directly to environmental policy failures that derive from regulatory incapacity. Even if environmental officials are trying to maximize social welfare and implement appropriate environmental programs, they may lack access to the science and technical resources necessary for appropriate problem identification, data collection, fare and transport analysis, epidemiological and ecological studies, risk assessment, policy design and alternatives development , cost-benefit analysis, policy implementation, enforcement and evaluation. Many of APEC�s developing countries - Chile, China, Indonesia, Malaysia, Mexico and Thailand - find themselves without sufficient resources to invest in the skilled personnel, technical and scientific infrastructure, or enforcement support required to develop optimal environmental programs.

Beyond the lack of regulatory capacity, the poor environmental record of some APEC countries can be attributed, at least in part, to government failures to accurately and faithfully reflect public preferences in their choice of environmental policies and programs. Such public choice problems are most prevalent in those countries where an insulated ruling elite -- for example in China, and to a lesser extend in Indonesia and Malaysia -- with preferences for economic growth (and the wealth and power this provides) has the ability to disregard deleterious ecological impacts or public health effects on the populace.

What a Regional Environmental Response Offers

We believe that APEC could improve upon the existing institutional responses to environmental problems at the local/national, regional, and global levels. Most obviously, APEC could address the "super externalities" the underlie regional pollution and resource problems, particularly considering the paucity of current efforts to address harms at the Asia Pacific scale. But it could do much more than that. Given that the efforts of many APEC countries to address localized harms are severely hampered by weak environmental programs and limited skill bases, APEC could play an important role in building regulatory capacity across the region. APEC�s influence, we argue, could also extend to the global level. For example, strategic interventions by APEC countries could ratchet-up multilateral environmental efforts in much the same way that APEC has influenced multilateral trade efforts. In sum, the role we envision for APEC has multiple dimensions, but the underlying objective Is clear: use APEC narrowly and wisely to fill gaps and meet deficiencies in the existing institutional responses to environmental harms and, in so doing, provide a strong platform for sustainable economic growth.

Regional Contributions to Local and National Environmental Policymaking

As latecomers to industrialization, APEC�s less-developed members have the opportunity to build upon the experience of those who have gone ahead of them, learning from their technological and policy advances. In many parts of industrializing APEC, the high turnover of the capital stock, significant investments in training and development of human capital , and openness to trade and investment, have enabled countries to take advantage of previously unavailable, relatively low-cost, pollution control technologies developed by their more industrialized counter-parts.

From a policy perspective, they have not yet borrowed as heavily. Although many APEC countries have achieved sufficient wealth to have environmental protection become a policy priority, far fewer have managed to emulate the sophisticated regulatory regimes of their highly industrialized neighbors and thus optimally address ecological and public health problems. Many of APEC�s less- developed countries have received and continue to receive significant support for their environmental programs from the World Bank, The Asian Development Bank, The United Nations Development Program, other international bodies, and bilateral aid donors. While valuable, these efforts are generally uncoordinated, small-scale efforts that do not address the capacity constraint problem in a systematic way.

APEC, with a diverse membership that traverses the development span, offers the opportunity to create a broad, regional cooperative, capacity-building program based on a review of each member�s needs, particular public health and ecological problems, and capacity deficiencies. By helping to set priorities, coordinate assistance, train regulatory personnel, share approaches to the technical and scientific aspects of policymaking, assist in the development of policy responses, and strengthen local enforcement capacity, regional environmental management can facilitate improvements in regulatory regimes across APEC countries.

One of the tensions that APEC countries need to resolve is that between its less-developed members� demands for market access and its more-developed members� desire for the authority to set their own (higher) environmental standards. Indonesia and Malaysia, for example, feel they are reducing their trade barriers at a rate faster than they would otherwise choose, but are doing so on the basis that the US and Japan will offer greater market access and thus greater export opportunities. Developed countries, while cognizant of this concern, are faced with demands that domestic environmental standards not be weakened in the name of market access. Given the tight linkage between market access and environmental standards, the need to address concerns in an integrated fashion is self-evident.

Why choose APEC rather than ASEAN, NAFTA, or the Australia New Zealand Closer Economic Relations Trade Agreement (CER) for siting regional environmental management? In fact, one would not want to have all regional environmental policymaking undertaken by APEC. Some policies might well be better managed at more decentralized levels, particularly when the geographic scale of a problem is more confined and effective structures to address it already exist. For example, given the promise shown by the North American Commission for Environmental Cooperation (CEC), it makes sense to leave US-Mexico border issues to this NAFTA-based body. However, just as certain tasks might better be handled at decentralized levels, others might better be handled by APEC. It would not be optimal, for example, to leave capacity building to ASEAN, because none of ASEAN�s members has sufficiently advanced environmental programs to offer significant capacity improvements in the manner of Australia, Canada, Japan, or the United States. Similarly, it efforts are to be made to ratchet-up environmental efforts at the multilateral level, APEC - with its economic size and political muscle - is best positioned to do so. The nations of ASEAN, or even NAFTA, could hardly be expected, for example, to advance subsidy reform on their own.* * *

APEC�s most obvious opportunity to improve the environment is by tackling the subsidy issue. In particular, the reduction or elimination of agricultural and energy subsidies would not only deliver huge economic welfare gains and dramatically reduce many environmental harms, but could also pave the way for multilateral subsidy reductions. If APEC�s members are serious about ultimately moving full adoption of the polluter-pays principle, then the elimination of pay-the-polluter programs such as subsidies, must be a first step in the process.

An APEC initiative that tackles the difficult issue of environmental standards would provide significant economic and environmental benefits. First, the reduction of differences in national environmental standards would reduce the possibility of a race toward the bottom in which environmental standards are suboptimal. Second, such an initiative would allow APEC�s members to explicitly address the tension between APEC�s less-developed members� need for market access and its more developed members� insistence on being able to set their own (higher) environmental standards. We suggest the following three-pronged initiative:

Enforcement: First, it is critical that all countries - particularly APEC�s developing members - make a renewed commitment to enforce their existing environmental standards and regulations.

Process standards: An effort should be made to reduce cross-country differences in pollution control requirements by convergence, or where appropriate, harmonization of rules among countries at comparable levels of development. This initiative might involve voluntary adherence to APEC "Green Star" standards, permitting companies that met APEC-defined environmental standards - set as baseline levels - to affix an ecolabel to their product.

Product standards: For widely traded goods, APEC product standards could help to facilitate trade and ensure that the environmental impacts of consumption are minimized. Market forces will sometimes provide sufficient impetus for this type of harmonization. Specifically, when large markets employ strict standards, there will be an incentive for producers in other jurisdictions to voluntarily meet the higher standards to insure market access. This dynamic cannot, however, be relied upon when goods are being produced mainly for domestic consumption. Most of the automobiles being produced in China, for example, are not for export but for domestic sale. Given the enormous contribution of automobiles and other transport equipment to atmospheric emissions - causing local, regional, and global harms - APEC should set baseline emissions standards for vehicles, including automobiles, trucks, and the two-stroke engines popular in Asia.

For these initiatives to gain support, they would need to be coupled with a commitment to transparency in standard setting at both the national and regional levels.* * *

"Greening" FDI

As noted earlier, FDI is already accompanied by better environmental technology, the transfer of environmental management systems, and the training of local personnel. However, there is an equally large volume of FDI that is not accompanied by environmental benefits, either because host governments create incentives that discourage optimal environmental investments or because making those investments adds to the costs of production and reduces competitiveness. Given the tremendous growth in FDI in recent years, together with predictions for its continued growth, the need to "green" FDI takes on greater urgency and offers a way for APEC�s developing economies to quickly catch up to their more developed counterparts from an environmental perspective.

There are a number of concrete steps that APEC governments - national and subnational- should take to increase the environmental benefits of private capital flows. First, governments should take steps to increase the financial significance of environmental factors, to make environmental investments more attractive. Second, governments can help to address problems in the functioning of investment market by facilitating information flows on investments and the environment. And third, governments should build environmental considerations into investment projects sponsored or supported by the public sector. If the OECD�s Multilateral Investment Agreement fails to incorporate appropriate environmental safeguards, this proposal takes on heightened importance, not only to ensure that FDI in APEC is "green", but to encourage the rest of the world to follow suit.

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Questions and Discussion

1. APEC�s structure is unique. It has a small secretariat that cannot handle the logistics of the organization, and it does not offer substantive input to summit meetings. The host country takes the initiative in organizing annual meetings and other functions. APEC members have agreed it should avoid the large bureaucratic structure of many other regional and international organizations.

2. The relationship between APEC and the WTO is important to note since all members of APEC are or will shortly become members of the World Trade Organization. As a result, all members of APEC are subject to the rules administered by WTO with respect to trade in goods and services as well as certain trade-related aspects of investment. In particular, trade disputes between APEC members are subject to WTO�s dispute resolution process. Id.

If all these initiatives are undertaken, what will the existing institutional structure look like? A variety of institutions will emerge, many of which will hopefully have an environmental outlook. One such institution suggested by Dua and Esty is an Environment Committee to serve as a secretariat and home for APEC�s environmental policies. Such a committee "would bear primary responsibility for coordinating and managing APEC�s environmental agenda, including managing and providing support for the meetings required to advance the pollution prevention and control and resource management program." Id. at 174. A second suggested institution is an APEC Environment Advisory Group. Such a group would liaise with the NGO community, considering a variety of perspectives that might otherwise not be heard. Finally, APEC leaders noted in 1994 through the Bogor Declaration that an environmentally sensitive dispute mechanism was needed to supplement the WTO dispute settlement mechanism.

Dua�s and Esty�s analysis and recommendations are detailed in their 1997 book, Sustaining the Asia Pacific Miracle: Environmental Protection and Economic Integration.

3. What do you think of the varied proposals offered by Dua and Esty? Which do you think stand the best chance for adoption by APEC? How likely do you think their adoption would be and why?