Peru Conference

APEC 2008 CEO Summit in Peru

Along with leaders from APEC members, BASC Director
Vinod K. Aggarwal was invited to speak at the APEC CEO Summit in
Lima, Peru on November 22, 2008. Initiated in 1996 as an opportunity for CEOs and high level business executives to participate in the APEC Leaders’ meeting, the APEC CEO Summit has become one of the most prominent annual events in the region. It provides opportunities for business leaders in the Asia-Pacific region to hear presentations from and to engage in discussions with APEC economic leaders, policy makers, academia and other CEOs on issues facing the region. Under the theme "Growth, equity and sustainable development: challenges for APEC", the 2008 Summit brought together 12 Economic Leaders, some 1200 delegates and nearly 600 Chairpersons and CEOs for the interactive event. The Summit concluded with a strong appeal for joint action to deal with the global financial crisis and to facilitate trade liberalization, emphasizing the need to restore confidence and prevent protectionism.

Professor Aggarwal’s remarks to the delegates follow below and are also printed in the Fall 2008 BASC Newsletter:

Thank you for this opportunity to discuss my views on trade policy. I am very pleased that we have both Asia-Pacific leaders and executives of some of the largest global multinational corporations here today. I believe that understanding the links and impact of bilateral and minilateral preferential trade agreements on the World Trade Organization is an essential task for all of us as we move forward to liberalize global trade. And I think that the interaction of political and corporate leaders is essential to the success of APEC’s economic cooperation and trade liberalization efforts.

I would like to make 5 points in my initial remarks:
First, I strongly share the general view that free trade is beneficial to all countries, a perspective that I believe is widespread among most of the audience that is here today.

Second, I do not share the view that a bilateral free trade approach, or more accurately, the bilateral preferential trade approach, which is currently the rage in the Asia-Pacific and elsewhere, will lead us to a world with full-fledged free trade. Such an approach will not be beneficial to both consumers and producers, and will not genuinely opens up markets in a lasting way.

Third, I believe that leadership does not consist of arguing: “The reason we are pursuing PTAs is that everyone else is doing it.” So-called “competitive liberalization” has unwittingly encouraged what I would call “competitive preferentialism.”

Fourth, I believe that APEC can play an important and decisive role in encouraging economic cooperation among its members. But I am skeptical that a Free Trade Area of the Asia Pacific will be a likely outcome in the near future or even the next 5 years.

Fifth, and finally, I believe that the central task for corporate leaders is to help strengthen the coalition for free trade, particularly in the developed countries, where broad-based trade liberalization is increasingly being met with skepticism. This issue is all the more pressing in view of the current difficult economic context.

Turning to my first point, I strongly believe that trade liberalization has increased efficiency, particularly in many countries that long pursued policies of import substitution industrialization or ISI. Although ISI policies had some beneficial effects, they soon led to growing inefficiencies, as firms that were protected by quotas and aided by subsidies became increasingly complacent about competing. They failed to deliver high quality goods to consumers and became advocates of continued protection, even though the original intent of these policies was to provide only temporary protection to these firms. As trade liberalization leads to growing domestic and international competition, we have seen a dramatic rise of economic growth rates. Millions have been lifted out of poverty, resource use has become more efficient, and innovation has greatly accelerated.

But simply repeating the mantra of free trade when workers are displaced and factories close down does little to promote the efficient reallocation of resources. Open market proponents tell us that workers and firms will easily adjust. Yet displaced steel workers don’t immediately go to nursing school, autoworkers don’t become biochemists, and rice farmers don’t become software engineers. Without serious attention to handing the process of agricultural and industrial transformation, both in developed and developing countries, I fear that we will face increasing protectionism, especially in the current context of a global recession. Thus, while we might hope that adjustment will take place smoothly through the market, we have instead seen voluntary export restraints, quotas, health and environmental standards and other approaches to block trade—often without any real rationale besides political expediency. Simply hoping for a smooth transition is politically naïve and plays to the hands of protectionists.

Second, many analysts have become unduly attached to the bicycle theory of free trade. They claim that one must keep moving forward to keep from falling into a protectionist pit on the side of the road. But all trade liberalization was not created equal. Some approaches such as open sectoralism (which is the label John Ravenhill and I have attached to the Information Technology Agreement, the Basic Telecom Agreement, and the Financial Services Agreement), may indeed free up trade in the short-run. Similarly, there is little doubt that bilateral PTAs open up some trade. But unless we pay attention to the potentially deleterious international and domestic consequences of such accords, we will find ourselves with a fragmented and highly inefficient global economy.

Internationally, bilateral PTAs have been used to work around the WTO, to put pressure on countries through the use of asymmetrical power, to find ways around the well-functioning dispute settlement mechanism of the WTO, and to create politically motivated accords. As a political economist, I recognize that trade has important foreign policy implications. But using bilateral PTAs as the key instrument of foreign policy does not serve either foreign policy interests or trade interests in the long run. And domestically, as I will discuss shortly, such a strategy has undermined the coalition for free trade.

Third, the common refrain from trade negotiators around the world is that “we are pursuing PTAs because everyone else is.” The latest game of “we plan to be a hub” in a world of preferential agreements has led countries to sign agreements with multiple exceptions, long phase in periods, and accords with any country willing to sign one—just to increase the number of their partners. But top down, that is, government-driven regional integration efforts have not always been successful. As we have seen in the case of ASEAN, companies often do not wish to fill out the paperwork to prove rules of origin, meet certification requirements, and other procedures and are often willing to simply to pay the duty.

In this context of leadership, it is worth noting that many large members of APEC and other countries in the global trading system have become “heavy riders,” continuing to pursue sectoral protection and neomercantilist policies, and free riding on the liberal trading order. Leadership consists of making political sacrifices to improve the workings of the system as a whole, not simply copying the bad behavior of others. As new countries become powerful in the global trading system, they must share responsibilities and not simply the benefits that derive from open trade.

Fourth, although free trade in the Asia-Pacific is a goal I share, particularly in the context of global trade liberalization through the WTO, a Free Trade Area of the Asia-Pacific is simply a political non-starter at this point. Key countries in the Asia-Pacific simply do not have the political support to open up trade on this basis, and their domestic politics will not support such an approach. With the U.S. running massive trade deficits with many Asian countries, and worries about agricultural liberalization in key Asian countries, the belief that there will be sufficient domestic support for an FTAAP is simply wishful thinking.

I strongly believe that APEC should continue to study a region-wide trade agreement, and its current efforts to bring the current proliferation of bilateral PTAs into some logical order and to set rules for their negotiation is a crucial step towards this objective. APEC economies could make a major contribution to undoing the negative effects of PTAs, not only by putting in place a code of best practice, but also by making a commitment that any PTA they sign will be open to other APEC members. This would be an appropriate implementation of APEC’s commitment to “open regionalism”. The Trans-Pacific Economic Partnership offers a possible model. In addition, working on trade facilitation, financial cooperation, corporate social responsibility, and structural reform are all worthy goals. But choosing some priorities and ensuring that goals are met—and not simply rehashed annually at APEC meetings—must be the highest priority.

Fifth, the issue of building political support for free trade, particularly in developed countries, is more pressing than ever. In recent polls conducted by PEW, the number of Americans who think that free trade is good or very good for the United States has dropped from 78% in 2002 to 59% in 2007. I am quite sure that this number will fall further in the current economic context. In Italy, a major global exporter, support for free trade declined from 80% in 2002 to 68% last year. And there have been similar declines all over Europe. By contrast, support for free trade is at about 90% in India and China.

Yet even in Asia, there are countries such as Indonesia where support for free trade has fallen from 87 to 71 percent. Declining support for trade is not the only problem. Only 45% of Americans, 44% of the French, and 38% of Italians believe that foreign companies have a good impact on the U.S. And in 44 of 47 countries surveyed, majorities agreed that there should be more control of immigration in their countries.

Although there are many reasons for these trends, I believe that the pursuit of bilateral PTAs is fragmenting the coalition for free trade, particularly in developed countries. These agreements lead to competition among firms for promoting agreements in specific countries and with respect to specific sectors. The important trade offs that used to take place across industries and sectors are much more difficult to achieve with bilateral agreements. This means that companies that favor more open markets have dispersed their efforts and no longer can help national leaders t to free up markets on a broad basis and to resist protectionist appeals.

In conclusion, it is fashionable to argue that countries need to pursue bilateral preferential agreements because of problems in moving forward with the Doha Development Round of the World Trade Organization. But I think it more plausible that many countries now believe that by simply covering 80 or 90% of their export markets through bilateral accords, that they have no need for the WTO, and avoid the political pain of comprehensive liberalization. Thus, while they may pay lip service to the importance of completing the DDR, they are preoccupied with becoming a hub for trade in their region. More than one trade negotiator has told me that they have little interest in the DDR or broader based regional agreements because having negotiated preferential access to key large markets, they do not want any agreement signed that would dilute their preferences.

Those who represent global companies know that such piecemeal liberalization impedes their efforts to successfully develop global supply chains. And the increasing complexity in the trading system created by the pursuit of bilateral PTAs harms the very Small and Medium Enterprises that APEC members would like to help.

I fear that without stronger and active participation by the corporate sector to ensure that trade is opened up on global and multilateral basis, countries will face a protectionist temptation that will hurt APEC members and other countries in the global trading system. It is time for companies to join together and actively lobby for comprehensive liberalization in the WTO and also to stand up against protectionist lobbies that are impeding the progress of the Doha Development Round. Simply looking out for one’s own sector will ultimately prove to be a dangerous strategy and allow protectionists to gain the upper hand.

Thank you very much. I look forward to the discussion.