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APEC and the Osaka Summit.



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Contents

Major Issues

Introduction

APEC since 1989

The Bogor Declaration: November 1994

After Bogor: The Eminent Persons Group and the Pacific Business Forum

The Osaka Summit: Major Issues

Achieving a 'Down Payment' on Trade Liberalisation

The 'Comprehensiveness' Issue

Comparability and Consultations

APEC Beyond Osaka: Longer Term Issues

'Open regionalism' or 'preferential trade area'?

Membership

Dispute Mediation

The Role of Development Cooperation

Defining 'Developed' and 'Developing Economies'

Australia, APEC and Osaka

Endnotes

Major Issues

The eighteen members of the Asia Pacific Economic Cooperation (APEC) group meet in Osaka from 16- 19 November. APEC was established in 1989, largely at Australia's initiative, as a response to widespread perceptions that the rapidly growing trade and investment in the Asia Pacific region called for greater cooperation among the major regional economies. APEC has been able to identify many areas in which impediments and barriers to trade and investment could be reduced or removed. APEC is seeking to develop a new kind of regional group which builds cooperation while avoiding complex or expensive bureaucratic structures.

APEC has brought together annually senior economics ministers and, since 1993, the members' heads of government to establish its goals and guide progress. At the second APEC leaders' meeting in Bogor (November 1994) the members declared their commitment to achieve free trade and investment between members by 2010 (for the developed economies) and 2020 (for the developing economies). The Osaka meetings will focus attention on APEC's capacity to develop concrete proposals and plans for the realisation of this goal.

At Osaka APEC faces several immediate challenges. APEC members need to take a credible first step to begin to implement the Bogor commitment: this should involve a series of liberalisation offers by members. Members also need to deal with some contentious issues which have attracted controversy in the lead up to Osaka. These include the question of whether APEC is to pursue trade liberalisation on a comprehensive basis or whether certain sectors (notably agriculture) may be given special consideration or temporary exemption, and the issue of how to establish procedures that will ensure that all members share equally in both the benefits and the costs of the liberalisation process.

Beyond Osaka, APEC also faces some important medium term challenges including differences in emphasis among members on whether the benefits of its liberalisation should be extended openly to other economies or on a preferential basis, the need to handle demands for entry by potential new members while keeping the group cohesive, and the long term need to be able to agree on which members will be required as 'developed economies' to complete their liberalisation of trade and investment by 2010 while the remaining 'developing economy' members implement this goal by the later agreed date of 2020.

Australia, as a founder member of APEC with a strong orientation towards the Asia Pacific economies, has a major interest in the outcome of the Osaka meetings. The Australian government values APEC not only for the concrete economic benefits its cooperation measures can bring but also because it sees APEC as making a valuable contribution towards major power relationships and regional security in the post Cold War era in the Asia Pacific.

The paper concludes by arguing that while APEC has been successful so far in gaining a solid start as a new kind of regional economic association, it needs more time to work on the areas of existing and potential accord among its diverse membership. Securing the members' agreement on an agenda which will give APEC this time is perhaps the most important challenge for the Osaka meetings.

APEC and the Osaka Summit

Introduction

The meeting of the eighteen members of the Asia Pacific Economic Cooperation (APEC) group in Osaka from 16- 19 November will be a further important stage in APEC's efforts to consolidate its identity and role. The meetings will include discussions by senior ministers and a third informal 'summit' of the member econonics' heads of government.

At the last APEC leaders meeting in Bogor (November 1994), the members declared their commitment to achieve free trade and investment between member economies by 2010 (for the developed economies) and 2020 (for the developing economies). The Osaka meetings will focus attention on APEC's capacity to develop concrete proposals and plans for the realisation of this goal.

APEC has continued to attract support as the premier grouping of Asia Pacific economies and there are strong incentives for members to maintain the group's cohesion. APEC nonetheless faces some substantial challenges at Osaka. There have been some notable recent bilateral tensions in trade relations between prominent APEC members (particularly between the United States and both Japan and China). There has been controversy in the lead up to the Osaka meetings over several aspects of the agenda, particularly the sensitive issue of protection of agriculture and the need for this to be dealt with in APEC's trade liberalisation programs. The Osaka meetings also will focus attention on Japan and its capacity to play a leadership role in Asia Pacific economic dialogue and to help maintain a sense of community and common interest among the major Asia Pacific economies.

As a leading proponent and founder member of APEC, Australia has a strong interest in the success of the Osaka meetings. Australia sees APEC as a focus both for achieving concrete progress in removing barriers to trade and for encouraging cooperation between the United States and its major economic partners in the region, especially Japan and China, at a time when the US has experienced bilateral tensions with both. A successfully developing APEC also gives Australia a direct role in regional dialogue with our most important trading partners.

This paper reviews APEC's evolution since 1989, discussions in the lead up to the Osaka meetings, the immediate and longer term challenges and problems facing APEC as it seeks to implement its Bogor commitments, and Australia's approach to the Osaka meetings.

APEC since 1989

APEC was initiated in 1989 to help protect and advance the striking pattern of economic growth already underway in the Asia Pacific region. The APEC region has a population of some 2.2 billion people and a total GDP of about $US 14.6 trillion, or almost half of world output. The Economist Intelligence Unit has estimated that of the 16 APEC economies it surveys, half are expected to grow at annual rates exceeding 5 percent up to 1999. APEC's share of world trade has risen from 36.2 percent in 1980 to over 45 percent in 1994, largely as a result of East Asia's strong export performance. In the five years to 1994, APEC exports grew at a trend rate of 9.6 percent annually, compared to total world exports which have increased at an annual rate of 5 percent. Much of this growth in trade has occurred between APEC members themselves, especially among the East Asian economies. This continuing economic growth is expected to lead to the APEC group's inclusion of seven of the world's ten largest economies by the year 2020, compared with only three (the US, Japan and China) today. 1

This pattern of growth has been driven by the business sector and by unilateral reforms by regional states with relatively little assistance from formal inter- governmental structures in the Asia Pacific region. Indeed some of the most notable economic relationships have developed without any accompanying political framework, as in the case of China and Taiwan. Nonetheless, there are clearly a large number of impediments to the development of trade and investment in the Asia Pacific region which could be reduced by concerted cooperative action. It was this realisation which was the impetus for the development of APEC.

After years of debate on the need for cooperation in the Asia Pacific, APEC was inaugurated in January 1989 at the initiative of Prime Minister Hawke and the first meeting of 12 economies was held in Canberra in November 1989. In 1991 at APEC's third meeting in Seoul, the Republic of Korea was able to negotiate the entry of China, Hong Kong and Taiwan, in 1993 Mexico and Papua New Guinea joined and at the Seattle meetings in 1993 Chile was accepted, joining in November 1994 and bringing the membership to its present level of eighteen (for a list see Appendix A)

APEC has been seeking to establish a character and role different from those of other regional and international groupings concerned with economic and trade cooperation. Unlike the European Union it has not been conceived as a preferential free trade area and has no ambitions to establish elaborate supra- national institutions. Unlike ASEAN, APEC is seeking to bring together both developing and industrialised states of widely varying size in both Asia and the Americas. APEC is also distinct from the General Agreement on Tariffs and Trade (GATT) and its successor the World Trade Organisation (WTO) in that it does not have a charter to pursue formal trade negotiations on a global basis.

APEC's basic principles were agreed at the first ministerial meeting in 1989, particularly that:

. The objective of APEC is to sustain growth and development in the region to contribute to improving living standards and also to contribute to the growth of the world economy

. APEC should seek to strengthen an open multilateral trading system and not to be directed towards creation of a regional trading bloc

. APEC should focus on economic rather than political or security issues, to advance common interests and foster constructive inter- dependence by encouraging the flow of goods, services, capital and technology.

Since 1989, APEC has developed substantially but has sought to keep its activities flexible and minimise the development of a bureaucracy (for an outline of APEC's structure see Appendix B). APEC has been directed primarily by the annual ministerial meetings (Osaka will be the seventh). Following a suggestion by Prime Minister Keating in 1992, the APEC heads of government met in Seattle in November 1993 and in Bogor in November 1994, adding greatly to APEC's profile. APEC's ongoing activities are overseen by a small secretariat in Singapore and its major work is carried out by a series of working groups (see Appendix C) and by the Committee on Trade and Investment (CTI) which is the main forum within APEC for pursuing the liberalisation and expansion of trade and investment flows in the Asia Pacific region. The Committee has been pursuing work in a wide range of areas to help secure APEC's aims to both facilitate and liberalise trade and investment.

. APEC is seeking to simplify and harmonise customs procedures by achieving consistency in the classification of products, streamlining regional customs procedures, cooperating in implementing customs aspects of the Uruguay Round. agreements, and increasing use of electronic data

. Standards and Conformance issues are significant to members: a recent survey indicated that nearly 30 percent of the non- tariff barriers of concern to members related to technical standards and issues. Closer alignment of members' standards is being sought in four priority areas: electrical products, food labelling, plastics and rubber products. Other efforts are directed towards increasing areas of agreement on acceptance of conformance with requirements of products, services and procedures.

. Investment is being promoted through surveys on the regional investment environment, a guidebook on investment regulations and a set of non- binding investment principles.

. A Tariff Database has been compiled for 15 of the members and an online database is being explored.

. Uruguay Round Implementation is being encouraged and facilitated through seminars on common regional approaches on implementation.

. Small and Medium Sized Enterprises (SMEs) have been encouraged through an APEC work program on market access, access to information, finance, human resources and technology. Two meetings of ministers responsible for SMEs have been held in Osaka (1994) and Adelaide (1995).

. Trade Impediments are being examined for APEC by the Pacific Economic Cooperation Council (PECC), with a report to be given to APEC at Osaka. APEC members are also maintaining lists of the non- tariff measures they are most concerned about.

. Deregulation in APEC countries has been considered in a comparative way at the request of Indonesia.

. Competition policy and its interaction with trade is being examined through a survey of members' competition laws.

. Rules of Origin (which are significant in relation to goods involving inputs from more than one country and which are eligible for preferential entry or are subject to quantitative restriction) often vary and are often used as a protectionist device: they are being considered in association with an international inquiry established by the Uruguay Round agreements.

. The CTI has also been active in maintaining a Trade Policy Dialogue on major policy issues of concern to APEC members. The Committee has also begun investigating issues relating to government procurement and business mobility.

The Bogor Declaration: November 1994

The first meeting of APEC heads of government at Blake Island in November 1993 adopted a vision statement for APEC and the region. This was followed by a more explicit statement of aims at Bogor when the APEC leaders adopted the goal of free and open trade and investment in the Asia Pacific region no later than the year 2020 (full text at Appendix D). This commitment is to be supported by:

. a 'standstill', under which APEC members agreed to refrain immediately from using measures which would increase the existing level of protection in the region

. continuing efforts in APEC to facilitate trade and investment by harmonising and simplifying customs procedures, standards and other regulations

. steps towards establishing an informal disputes mediation mechanism for the APEC region.

The APEC leaders agreed that the liberalisation process should begin immediately with detailed proposals to be presented at Osaka. They also endorsed a wide range of other ongoing APEC activities and invited the Eminent Persons Group and the Pacific Business Forum to contribute advice on the implementation of the Bogor commitments.

The Bogor commitment came after much speculation about whether the APEC leaders would in fact be able to agree to a definite target for liberalisation. It raised sharply APEC's profile and has naturally directed close attention on APEC's capacity to follow through in a convincing manner.

After Bogor: The Eminent Persons Group and the Pacific Business Forum

The lead up to the Osaka APEC meetings has included two major inputs to debate on implementing the Bogor commitments, from the Eminent Persons Group and the Pacific Business Forum.

The latest report from the APEC Eminent Persons Group (EPG), released in August 1995, set out a strategy for APEC to implement the Bogor commitments. The report noted with satisfaction APEC's development to date but expressed concern about the continuation of trade disputes among major members:

The region is experiencing a growing number of rancorous trade conflicts, including several between its largest economies. There is a dangerous tendency to ignore multilateral norms and mechanisms despite a growing pluralism of political and economic capabilities that clearly calls for collective leadership. It is a matter of urgency for APEC to move promptly and decisively to implement the vision embodied in the Seattle and Bogor initiatives. 2

The APEC leaders, the report argued, need to make a meaningful 'down payment' at Osaka and made several recommendations.

. Promotion of liberalised trade and investment: Both the industrialised and developing member economies should apply a '50 percent rule' that would double the pace of reductions of tariffs, subsidies, quotas and enhance measures to protect of intellectual property. APEC should address the problems associated with the abuse of anti- dumping measures, agree to improved coordination in competition policies and launch a study to work towards eliminating unproductive differences between members' competition policies, and make an immediate contribution to trade facilitation by speeding cooperation on harmonisation of products standards and testing. Members should also strengthen the non- binding guidelines on investment and apply them in practice.

. APEC should adopt immediately a Dispute Mediation Service to provide a multilateral means of dealing with disputes that are not covered by the World Trade Organisation or other existing arrangements.

. On the issue of subregional trading arrangements in the Asia- Pacific region (such as the ASEAN Free Trade Area and the North America Free Trade Agreement) the EPG argued that these were acceptable if they were conducted on an 'open subregional' basis, ie if they did not erect any new barriers and extended as far as possible the liberalisation benefits to other APEC members.

. To help APEC members reach their agreed goals and avoid any financial 'shocks' like that experienced by Mexico in 1994, the EPG recommended that APEC deepen cooperation on monetary and macroeconomic issues including more extensive publication of data on individual countries, support the Group of Seven's initiatives on this issue and give additional funding to the International Monetary Fund's proposed Emergency Financing Mechanism. APEC members should also increase emphasis on development and technical cooperation.

Adopting these measures, the EPG argued, 'will place APEC firmly on the path to success and credibility, both in the region and around the world'.

APEC's Pacific Business Forum has also provided a set of proposals for Osaka. The Forum's proposals stress both the need to develop a clear set of policies to implement the Bogor commitments, especially in the next four years, and also the importance of the Osaka meetings delivering some concrete benefits for business. Their ten 'action points' include the suggestion that the APEC leaders endorse visa free travel in the APEC region by 1999, and as an interim measure, an APEC business visa by 1996. The Forum also proposes the creation of a permanent APEC Business Council to provide ongoing business input to APEC. 3

The Osaka Summit: Major Issues

APEC's Osaka meetings focus attention not only on APEC's will and capacity to follow through on the Bogor commitments but also on Japan's capacity to provide effective leadership. Indonesia and President Suharto were able to gain substantial credit for the successful outcome of the Bogor Summit but Japan is likely to have greater difficulties in 1995. As Christopher Johnstone (Japan Economic Institute, Washington DC) has argued:

In many ways Japan's 1995 APEC chairmanship has come at the worst possible time for Tokyo. Japan has been criticised in the past for a failure to demonstrate international leadership. Observers have looked to the Osaka summit as an opportunity for Tokyo to shed this stigma. The unwieldy coalition government headed by Prime Minister Tomiichi Murayama, however, has clearly undermined Japan's capacity to manage the APEC process. Analysts suggest that Mr Murayama's political weakness has forced personal attention to coalition politics at the expense of more active involvement in the nation's foreign policy. Without leadership from the top, preparations for the Osaka summit largely have been left to the bureaucracy. But, with several agencies - in particular the Ministry of Foreign Affairs and the Ministry of International Trade and Industry - competing for influence over the agenda, the problem of coordination reportedly has been acute. 4

These problems are especially significant given the range of difficult issues APEC must confront.

Achieving a 'Down Payment' on Trade Liberalisation

Most observers agree that to retain credibility, particularly among the business community, APEC needs to take initial action to begin to implement the Bogor commitment. As we have noted, the Eminent Persons Group has recommended that APEC members halve the period in which they plan to phase out tariffs and subsidies, but this is unlikely to be supported by many members. Prime Minister Murayama has dismissed the proposal as unrealistic and the United States President does not at present have the authority to commit the US to 'fast track' reductions in trade barriers.

Some APEC members do appear likely to propose packages of tariff cuts, including Indonesia, Malaysia, the Philippines, and possibly Australia. 5 Japan is reported to be likely to propose to reduce tariffs on 100 raw material and manufactured items and to announce steps to improve consistency with international standards and inspection procedures on a range of industrial and agricultural products. Japan may also propose that all APEC members cut tariffs on a range of chemicals and metal products two years earlier than required under the 1993 Uruguay Round agreements. Agreement is also likely on a range of trade facilitation measures including harmonisation of customs procedures, a move towards consistent technical standards in APEC members and possibly an APEC business visa, to facilitate business travel. The major question will be whether business considers the package of agreements to be a credible first step towards the Bogor commitment.

The 'Comprehensiveness' Issue

The most contentious area of dispute in the lead up to Osaka has clearly been the question of whether APEC is to pursue trade liberalisation on a comprehensive basis or whether certain sectors (notably agriculture) may be given special consideration or temporary exemption. The Bogor declaration stated clearly a commitment to achieve regional 'free and open trade and investment'. However, in drawing up an action plan for Osaka, Japan is understood to have proposed that 'flexibility be exercised in allowing differential treatment of economic sectors'. This has been seen as a way of allowing Japan - with the support of China, Taiwan and South Korea - to exempt agriculture from APEC discussions.

This Japanese attitude has been reasserted by a number of Japanese figures in recent weeks. On 1 November, for example, Katsuhisa Uchida, Ambassador for International Trade and Economics, said in relation to liberalisation of Japan's agricultural market that Japan 'simply cannot make a commitment. If we did so it would be irresponsible to the Japanese people'. The political sensitivity of the issue of agriculture has been heightened by the occurrence of a by- election in the rural constituency of Saga, to be held just one day after the APEC summit. 6

The issue of agriculture has drawn heated comments from other APEC members, notably the US and Australia. US Ambassador Designate to APEC, Sandra Kristoff, said at the end of October that the US would not accept attempts by Asian countries to exclude 'sensitive sectors' such as agriculture from the proposed APEC action plan: she added that 'I think the US certainly shares the views of others in APEC that if there's an effort to create sectoral exclusions, that will only result in each of us taking something off the table, and the value added that APEC would give to trade liberalisation would be diminished' 7 . Prime Minister Keating warned on 26 September that, 'The effect of any APEC member excluding one sector from coverage of the free trade would be that others would also look for exceptions. This would paralyse APEC'. 8

At the time of writing (3 November) this issue remained unresolved. There will clearly be great pressure on Japan and all APEC members to arrive at an acceptable resolution of the question of comprehensiveness. One proposal canvassed by American analysts is that the deadlines of 2010 and 2020 could be applied on a sectoral and not just a country basis so that developed countries could have up to the maximum deadline to liberalise agriculture. 9

Comparability and Consultations

An additional complex issue for APEC at Osaka is how to ensure that all members share equally in both the benefits and the costs of the liberalisation process without settling for only the most minimal market opening measures. As Christopher Johnstone has noted:

APEC economies exhibit a wide range of tariff levels and nontariff barriers. Representatives from member countries openly recognise that these differences make a tit for tat approach to collective liberalisation impossible. American tariff levels, for example, are much lower than in most developing APEC economies. Any APEC sponsored US tariff cuts thus by definition will be less substantial than those of Indonesia, for instance, and Washington will face pressure to implement other market opening measures to compensate.

Measuring the equality of very different market access actions will prove difficult. Domestic political considerations dictate, however, that such equality be demonstrable. While some APEC members hope to develop a detailed system for measuring comparability, most officials admit that it will be nearly impossible to do so. Negotiations after the Osaka meetings will be necessary to guarantee that the liberalisation efforts of all APEC members - particularly each country's 'concerted unilateral' measures - are comparable. 10

The issue of comparability will be significant as APEC members develop detailed individual plans for liberalisation and it may well be a continuing source of contention.

The draft action plan for Osaka reportedly calls for liberalisation plans to be considered in a 'consultative process'. This may be another contentious area. APEC members differ substantially on their relative openness to consultations about trade and economic issues. Some members, including the US, Canada and Australia, would be willing to see a well organised and formalised approach. The US' chief APEC negotiator Sandra Kristoff, for example, has commented that,

Leaders have to be able to leave the annual leaders' meeting and go home and say "I'm getting as good as I'm giving"... At the moment there's a major problem with this. There's no clear definition of this. It isn't spelled out with precision. 11

However other members, including China and Malaysia, would prefer a more informal approach, which is voluntary in character and does not resemble a formal negotiation process. Malaysia's Minister for Trade and Industry, Rafidah Aziz, stated this view sharply in early November:

We do not want APEC to be a negotiating process. No way will we allow the APEC process to trading partners to start negotiating trade- offs to liberalisation or even to have negotiations on tariff cuts and demand reciprocity for example. APEC should be an agenda everybody can subscribe to, not an agenda that belongs to a select group. 12

Given these differences in view, developing and maintaining a workable consensus on a consultative process will obviously not be easy.

APEC Beyond Osaka: Longer Term Issues

After APEC gets through its complex agenda at Osaka, it will go on to face a number of other medium term challenges which are likely to be significant in the next five to ten years.

'Open regionalism' or 'preferential trade area'?

One major medium term challenge for APEC is differing views on how its trade liberalisation measures, when developed, should be shared with non- members. The Bogor Declaration stated that 'the outcome of trade and investment liberalisation in [the] Asia Pacific will not only be the actual reduction of barriers among APEC economies but also between APEC economies and non- APEC economies'. However major APEC members do not agree on how these broad principles should be applied.

Japan is a leading spokesman for the view that APEC's liberalisation measures should be shared with all other countries without discrimination. Ambassador Uchida reasserted this attitude on 1 November when he said that 'APEC cannot legitimately discriminate against non- members... As long as APEC wishes to remain GATT/WTO consistent, a logical conclusion is that it has to extend its liberalisation benefits globally and on an MFN [Most Favoured Nation] basis without discrimination'. 13 The United States, by contrast, has been reluctant to see APEC liberalisation benefits shared openly, particularly with the members of the European Union. Sandra Kristoff said in late October that '...it is the belief of the US that it is difficult to sustain the political support for APEC if its liberalisation is extended to those who are not making comparable contributions'. 14 These differences in approach have also been reflected in the work of the Eminent Persons Group, whose 1994 report appeared to be ambivalent on the issue of extension of benefits, endorsing 'open regionalism' but also suggesting that preferential access to benefits might also be acceptable. 15

Given that APEC is at an early stage in developing liberalisation policies, this division of approach is not likely to be a problem at Osaka. Ambassador Uchida commented on 1 November that 'We have decided to postpone discussion on the issue until when APEC becomes more matured and its liberalisation and facilitation make steady progress.' Australia also shares this view (see below). However the issue of extension of benefits is likely to be a complex one for APEC in the future.

Membership

As a high profile regional group with the largest and most prestigious economies in the Asia Pacific region as members, APEC has naturally attracted interest from other regional countries, including Russia, Vietnam, India, Sri Lanka, and other countries in Latin America, including Peru. Vietnam, which joined ASEAN on 28 July 1995, is an obvious potential member. APEC currently has a moratorium in place on consideration of new members until 1996, with many members feeling that the group needs to consolidate before it accepts the challenge of further participants. Senior APEC officials have prepared a paper for presentation to APEC ministers in Osaka which sets out criteria by which potential new members can be assessed. APEC faces the obvious challenge of handling applications while preserving its capacity to maintain coherence and cohesion, already a significant task.

Dispute Mediation

One of the major planks on the proposals of the 1995 Eminent Persons Group report is a call for an APEC dispute mediation process. While the desirability of reducing disputes among members is clear, it will not be easy to gain agreement among members on how this should be done, particularly from those members who have favoured APEC retaining an informal institutional character. There will also be concerns that any APEC process on dispute mediation should be fully complementary with the processes set out through the new World

Trade Organisation.

The Role of Development Cooperation

Japan is keen to see APEC take on a greater role in promoting economic growth in the region through expanded development cooperation activities. Japan is supporting this with a commitment to give about $A 135 million to APEC's central fund for this purpose; this would be a fifty fold increase in APEC's current annual budget. While development cooperation is a worthy goal, some members are concerned that this should not distract APEC from its central purpose. As Christopher Johnstone has argued,

Noting that the Asia Pacific region already has a number of development organisations, many APEC officials argue that the organisation's proper focus is on trade and investment liberalisation. Japan's emphasis on cooperative initiatives is accordingly seen in some quarters as an attempt to avoid the difficult political choices that comprehensive trade and investment liberalisation would entail. 16

Defining 'Developed' and 'Developing Economies'

A further major challenge for APEC will be arriving at mutually agreed categorisations of its member economies as it approaches its goal of regional trade and investment liberalisation towards the two different targets agreed at Bogor: 2010 for developed economies and 2020 for developing economies. The Bogor Declaration did not deal with the issue of which countries should be included in each category. The United States, Japan, Australia, New Zealand, and Canada are clearly in the 'developed' category and Taiwan and Singapore have also volunteered to meet the earlier target of 2010. By that date, two other economies, South Korea and Hong Kong, are likely to be widely considered to be industrialised economies. The big challenge is likely to be how China will be considered. As Gary Hufbauer and Jeffrey Schott have recently argued:

Some parts of China, notably Hong Kong, Guangzhou and Shanghai will clearly be industrial areas in 2010. Other parts of China will not; nevertheless, most APEC members will be reluctant to give the industrial parts of China an extra ten years to liberalise. Conceivably, by the year 2010, China will see its own interests as best served by embracing free trade and investment. 17

Australia, APEC and Osaka

The pattern of growth in the major APEC economies and Australia's increasing orientation toward those economies are major motivations for Australia's strong interest in APEC and in the outcome of the Osaka meetings.

The share of Australia's total merchandise exports going to APEC members has increased from 66 percent in 1984/85 to 77 percent in 1994/95. Among these countries the ASEAN share of Australian merchandise exports has risen in this period from 7 to 15 percent while North Asia's share (excluding Japan) has risen from 13 to 21 percent. Over the same ten year period, the composition of Australian exports has also been changing, with elaborately transformed manufactures rising as a proportion of exports from 8.8 percent in 1984/85 to 17.2 percent in 1994/95, while in the same period services increased from 16.4 percent to 23.3 percent of exports. Australian official estimates have suggested that implementation of the Bogor agreements would increase national income in the entire APEC region by $A 366 billion per year and that, for Australia, the combined benefits of implementation of the Uruguay Round and APEC's proposed liberalisations would be an estimated rise in real GDP of 3.8 percent. 18

To implement the Bogor commitments the Australian government has been pursuing development of an effective Action Agenda for APEC at Osaka: Senator McMullan set out the government's strategy in a background paper on 27 June 1995 and it is based around four major elements (see chart of the approach at Appendix E): 19

Reassertion of guiding principles for APEC; principally that trade liberalisation should be pursued in a comprehensive manner, that members should begin liberalising at the same time, that implementation of the Bogor commitments should proceed in a way that ensures a balance of member interests in sectors and issues, and that APEC liberalisation should be consistent with the WTO framework and agreements.

Development of individual action plans by members which set initial targets for reduction of barriers. These plans should be ready in time for the 1996 meetings and there should be the opportunity for members collectively to establish guiding principles and specific disciplines.

There should be an opportunity for APEC members to review action plans of other members to ensure that real progress is being maintained and that all members are contributing proportionately. The government hopes that the consultation phase can take place in 1997, allowing the Action Plans to proceed and to then be reviewed regularly by meetings of APEC ministers and leaders.

In tandem with the individual plans, APEC should pursue collective action in a series of areas (most already discussed above) including standards, competition policy, protection of intellectual property, and harmonisation of customs procedures.

In looking towards Osaka, Senator McMullan said in June that 'In sum, therefore, an Action Agenda package involving the two implementing mechanisms for liberalisation of concerted liberalisation with the right guidelines and review process together with an agreed collective action agenda, would, in our view, represent a powerful and credible way forward for APEC'.

On the widely discussed issue of whether APEC should proceed on a non- discriminatory or a preferential basis in implementing liberalisation (noted above), Senator McMullan argued that a pragmatic approach was appropriate: 'Australia's first preference is to pursue trade liberalisation on an unconditional MFN basis. Nevertheless, on occasion, Australia may also be able to secure better and speedier market access from a preferential trading arrangement than may be possible from following a strict MFN approach. This was the case with the CER agreement with New Zealand.' However Senator McMullan argued that the issue was not now on APEC's agenda and did not need to be addressed in the near future: 'There has been broad acceptance among APEC members that any attempt to force a decision in 1995 on whether APEC, at some time in the future, should adopt an MFN or a preferential approach to liberalisation would be as pointless as it would be potentially divisive'. 20

Beyond the immediate challenges of the Osaka meetings, the Australian government continues to see APEC as a very important part of Australia's overall foreign policy towards the Asia Pacific region and the role of the major powers in it. Prime Minister Keating emphasised this broader context in a speech to the Committee for the Economic Development of Australia (CEDA) in Sydney on 26 September 1995 when he said:

...a view of APEC which only pays attention to its economic dimensions is incomplete. Because although it is an economic and trade body - and in my view should remain one it also has very significant political and strategic consequences for Australia and our region.

It encourages a continuing constructive American engagement in Asia by keeping open the links across the Pacific. This is important to all of us because in the absence of a United States balancing security role in the region, strategic uncertainties would multiply, especially in North Asia, and the result could be a very dangerous arms race with quite unforeseeable consequences.

APEC also provides a multilateral framework for regional engagement with China, whose 1.2 billion people and rapidly growing economy guarantee that it will be a central factor in regional, indeed in world, affairs into the next century.

A regional organisation like APEC which engages the three Chinese economies of China, Chinese Taipei and Hong Kong could probably not be replicated again. It is certain to be a valuable asset for the region in the years ahead.

APEC also gives Japan the opportunity to assume some of the higher international and regional profile to which Australia believes its economic weight entitles it. 21

The Australian government thus has a strong interest in a successful outcome to the Osaka meetings which sees APEC able to maintain credibility and cohesion in pursuing the direction set at Bogor in 1994.

After little more than six years of existence APEC is still evolving and defining its role. In a relatively short period APEC has established a high profile and the range of interested potential new members is one indication of this. APEC's leaders have been able to agree on broad goals but APEC now faces a substantial range of both short and medium term challenges to turn broad principles into policies and procedures that will be accepted by some of the world's most diverse economies. As APEC members' officials and leaders begin to explore policy changes that will affect entrenched domestic interest groups it is not surprising that the optimism of Bogor has given way to a more sober and sometimes acrimonious atmosphere in the lead up to Osaka.

APEC's future depends on the achievement of consensus on the issues identified above. The prospects for APEC will also be affected by issues outside the influence of economic policy- makers, including the process of change on the Korean peninsula and the prospects for Korean unification, the outcome of leadership transition in China and the maintenance of stable relationships among the major states of East Asia in the uncertain post Cold War environment.

APEC has been successful so far in gaining a solid start as a new kind of regional economic association. It needs more time to work on the areas of existing and potential accord among its diverse membership. Securing the members' agreement on an agenda which will give APEC this time is perhaps the most important challenge for the Osaka meetings.

Endnotes

1 'The Economics of APEC: the Implications for Australia', Speech by the Minister for Trade, Senator Bob McMullan, International Business Asia Lecture Series, Melbourne, 4 October 1995; 'Australia and APEC', Fact Sheet , Department of Foreign Affairs and Trade, October 1995.

2 Implementing the APEC Vision: Third Report of the APEC Eminent Persons Group, APEC Secretariat, Singapore, August 1995, p i.

3 The Osaka Action Plan: Roadmap to Realising the APEC Vision, Report of the Pacific Business Forum 1995, APEC Secretariat, Singapore, September 1995.

4 Christopher B Johnstone, 'An Awkward Dance: The Osaka Summit, Japanese Leadership and the Future of APEC', Japan Economic Institute Report, Washington D C, 20 October 1995, p 6- 7. This paper has benefited greatly from Johnstone's excellent analysis.

5 ibid, p 9.

6 'Japan digs in its toes on Asia- Pacific Trade', Sydney Morning Herald, 2 November 1995.

7 'Critical Issues Face APEC Leaders at Osaka Meeting, US Official Says', BNA Management Briefing, 1 November 1995.

8 'PM to push Asia on Trade', Sydney Morning Herald, 27 September 1995.

9 Johnstone, p 10.

10 Johnstone, p 11.

11 'APEC Future in Balance', The Age, 3 November 1995.

12 'Malaysia Supports Mahathir on APEC' The Weekend Australian, 4 November 1995.

13 'Japan Favours APEC Benefits MFN Extension to Non- Members', Tokyo, Kyodo, 1 November 1995.

14 'No Free Riders, US Warns APEC' Australian Financial Review, 26 October 1995.

15 Greg Sheridan, 'Proposal for advisory group reflects power struggle within APEC', The Australian, 10 November 1994.

16 Johnstone, p 14.

17 Gary Hufbauer and Jeffrey J Schott, 'Toward Free Trade and Investment in the Asia- Pacific', Washington Quarterly, 18, 3, Summer 1995, p 37- 38.

18 'The Economics of APEC: the Implications for Australia', Speech by the Minister for Trade, Senator Bob McMullan, International Business Asia Lecture Series, Melbourne, 4 October 1995.

19 'Australia's APEC Ambition: Background Paper', Minister for Trade, Bob McMullan, 27 June 1995.

20 ibid, p 11.

21 'Speech by the Prime Minister the Hon P J Keating, MP, CEDA Conference APEC and Australian Business, APEC - The Outlook for Osaka', Sydney, 26 September 1995, p4- 5.