Regional Trade Agreements in the Asia-Pacific: An Evaluation

The World Bank defines a regional trade agreement (RTA) as a “treaty between two or more governments that define the rules of trade for all signatories.” There has been a substantial increase in the formation of RTAs over the last few decades. While only 50 RTAs were in operation in 1990, more than 300 had come into being in 2020. There is an increasing global interest in RTAs. It is essential to see the commitment and involvement of Asia Pacific countries towards economic agreements to realize the objective of trade liberalization in the region.  In doing so, the Asia Pacific Economic Cooperation (APEC) will be useful as a case study for the reasons that it includes the majority of economies in the region as well as it is easy to maintain the needed data for evaluation.

The Asia Pacific region is no exception. Since 1990, RTAs have been seen to overcome economic isolation and cut costs of trade. Moreover, negotiating as a region with potential trading partners offered greater leverage and better deals. The formation of Asia-Pacific Economic Cooperation (APEC) in 1989 helped accelerate trade liberalization and opened up more economic opportunities for the member countries.

Pertinently, during the Shanghai summitof APEC leaders in 2001, a declaration was made to promote free and open trade. The leaders reached an agreement, which allowed members to proceed faster in their trade liberalization if they chose to do so. Since then, APEC leaders have endorsed RTAs even at sub-regional and bilateral levels.

It is important to note that APEC is akin to a forum. It is not a supranational entity like the European Union. APEC allows member countries to take different perspectives and approaches to trade liberalization. Countries like Singapore and South Korea set strict deadlines to complete discussions of trade liberalization trade process with other nation members. Others take it slow.

In the late 1990s, Japan reversed its position on RTAs and began to pursue bilateral trade deals with several countries in the Asia Pacific. The Japanese tended to strike free trade agreements mostly with other members of APEC, including Singapore, Mexico, the Philippines, Malaysia, Chile, Thailand and Indonesia.

The recent surge in RTAs in the Asia Pacific region indicates a political momentum for APEC economies to accelerate regional and unilateral trade liberalization. APEC member states have a clear intention for extensive trade liberalization that acts in parallel with the World Trade Organization (WTO). Therefore, APEC has the potential to boost global trade and be strategically significant to developed countries like Japan, China, the US and Australia for their trade goals.

Most importantly, during the Shanghai summit of APEC leaders in 2001, a declaration was made to promote free and open trade. The agreement allows members to proceed faster in trade liberalization. As a result, APEC leaders have endorsed RTA strategies — including sub-regional and bilateral — that are already effective in the Asia Pacific. Consequently, APEC economies have joined the global market trend toward bilateral and sub-regional preferential trade agreements. Yet this approach ran directly counter to APEC’s free trade and liberalization that should be open to all members. Even as RTAs proliferate, it worth noting that not one free trade agreement signed in the Asia Pacific region since the foundation of APEC lives up to the Bogor Goals.As per this declaration,signed by APEC leaders in 1994, the Asia Pacific region aims for “free and open trade and investment … no later than 2010 for developed countries and the year 2020 for under-developed countries.”

A real issue has been discussed on the trade agreement functions in APEC. For instance, Australia has different types of agreements with various countries within the region.  The Thailand-Australia deal, under this agreement, Australia is permitted to extend no nuisance tariffs — very low tariffs that are costly to collect — on textiles, clothing and footwear beyond 2010. On the other hand, the Australia-US free trade agreement offers no new Australian market access in sugar and fast ferries for American companies, and it places limitations on other goods that break with the spirit of the Bogor Goals. As a result, APEC’s functions have become more and more unclear as there is no unification of trade agreements among APEC economies. This is to show that some economies within the region still practicing protectionism and in some sorts contradict the free and open trade targets.

Fourthly, it is well known that RTAs are very extensive and often cover many trade bases, like the focus on small and medium-sized enterprises and their role in increasing free trade and cooperation. However, reducing and eliminating tariffs is still the leading indicator of measuring the level of cooperation and free trade. The tariff reduction as a mechanism of realizing open trade can also be seen as a way of measurement in instead to evaluate APEC performance. The table below shows the APEC countries’ tariff reductions from 1995 till 2018.

Table. APEC Progress on Tariffs Reduction, 1995-2018.

Source: Based on the World Bank database(1995; 2010; 2018).

Average tariffs in APEC countries declined significantly from 16.6% in 1989 to 6.4% in 2005. Moreover, average taxes are now less than 5%. Aside from Hong Kong and Singapore, which both have 0% tariffs, there are eight members — Australia, Japan, Brunei, Canada, Papua New Guinea, the US and New Zealand — that have tariffs at less than 4%. On the other hand, six countries — Chile, South Korea, Indonesia, Russia, the Philippines, Malaysia, and Mexico — have a tariff between 5% and 8%.As of 2018, China has the highest tariff at over 9.5%. The Middle Kingdom is still protective of its domestic production. Peru remarkably cut its rate from 13.3% to 2.8% between 1995 and 2018. Thailand also made a noteworthy reduction from 21% in 1995 to almost 8% in 2015. Malaysia reduced its tariffs from 11% in 1995 to 6.2% in 2018.

The above statistics show that protectionism still active in some countries like China, Indonesia and Mexico, Vietnam, Chile and Russia. Therefore, the goals of free trade were not realized as the countries agreed, 2010 and 2020. However, the current situation of coronavirus pandemic cannot be an indicator of economic type or approach as all countries in the world are trying different solutions to protect the whole economy from being collapse. However, the pro-pandemic era can showcase in the Asia Pacific that can change the bilateral and regional relations as countries may cooperate more and open their economies to overcome the cost of COVID-19.

Even the reduction on tariffs and free trade, however, the free trade objective is not fully complete for the bilateral relationships between economies where there are FTAs in force. According to Inter-American Development Bank “When the criterion is expanded to include all applied advalorem tariffs of 5% or lower, the shares expand to 82 percent and 56 percent, respectively, a significant improvement, but still well short of all trade.” Therefore, APEC economies need to work more on bilateral relations by engaging the advantages of FTAs.

The simple average applied dutieson all products have fallen from 6% to 4% in the five APEC industrial economies and from 13% to 7% for the 16 APEC developing economies. Moreover, these reductions in applied rates do not take into account some of the multilateral trade successes over the last few years. For example, the conversion of non-tariff barriers to import duties and increases in binding coverage contribute to trade predictability. As a result of that, this can increase the trade among the countries in the Asia Pacific, as well as; it can give more opportunities for Direct Investment. The smooth movement of investment and non-tariff barriers have increased the level of employment in the region. For example, a lot of companies have moved from China, Japan and Australia to Singapore, Malaysia and Thailand. This movement has allowed more job opportunities to be fixed on receiving countries.

On the other hand, the ongoing trade liberalization in the Asia Pacific countries has been progressively moving to access RTAs in the region. The reduction of tariffs is the central feature of APEC’s progress toward trade liberalization. For instance, APEC economies have pursued tariff reductions by implementing commitments made in RTAs since the Bogor declaration in 1994. They have been successful in accomplishing the agreement despite differences between countries in implementing tariff reductions based on different approaches used.

Not only have achievements been made in cutting tariffs, but countries have also increased the proportion of goods imported tariff-free and reduced non-tariff measures. Furthermore, countries in the Asia Pacific are trying to open up more services, expand trade and liberalize investment through facilitation initiatives.

Yet new challenges could derail the process. The COVID-19 pandemic and the ensuing lockdowns, in particular, could potentially harm the future of RTAs and trade liberalization as it will increase the protectionism approach among some countries like China, Indonesia, Vietnam, Chile and Russia. However, the current situation can also be an opportunity for more open trade to overcome the economic cost and issues raised during the pandemic, as well as, it may give a new direction to RTAs and cooperation in APEC region…