The
2001 Asia Pacific Economic Cooperation (APEC) conference, which
occurred only a few weeks after the September 11 terrorist attacks
in New York and Washington, rightly focused on terrorism and ways
that APEC and member states could cooperate in the war on
terrorism. Now that a year has passed and the global economy is in
obvious doldrums, this year's conference should focus more on
APEC's core mission of lowering barriers to trade and investment in
an effort to spur growth. This year's annual APEC summit meeting of
national leaders in Los Cabos, Mexico, on October 26 and 27
presents an excellent opportunity for President George W. Bush to
help set the global trading system on a firm footing for sustained
economic growth, thereby strengthening the international community
in its campaign against global terrorism.
A
commitment to eliminate barriers to trade and investment in
developed APEC countries by 2010 and developing APEC countries by
2020 has been supported by all member countries and is illustrated
in the organizing principles for the organization's 2002 goal of
"expanding the benefits of cooperation for economic growth and
development."
While much of the rhetoric that
traditionally accompanies the APEC summit meetings is anodyne and
non-binding,
President Bush's participation provides an important opportunity to
use APEC's "bully pulpit" to promote America's economic and
strategic goals.
The
American economy has slowed since the second half of 2000. In
addition to normal variation in the business cycle, contributing
factors include corporate scandals, a stock market "bubble," an
estimated $100 billion in economic losses directly sustained in the
collapse of the World Trade Center Towers alone on September 11, and dramatically
increased government spending for the war against terrorism. In
addition, the United States' economy is laboring under
self-inflicted wounds such as heightened tariffs on steel and
ballooning farm subsidies, all of which affect international
trade.
One
way the President can further the benefits of economic cooperation
in the Pacific Rim is to renew America's commitment to free trade
and investment--and squarely address the forces of inertia that
have stalled bilateral U.S. free trade agreements (FTAs) with Chile
and Singapore. Washington should also move decisively to forge new
FTAs with Australia, Taiwan, and New Zealand. All of these
countries are economically and institutionally ready for a free
trade regime with the United States.
Many
APEC countries have already entered into FTAs, including an
agreement between Singapore and Japan. Those that are potentially
exclusionary, such as the one proposed by Beijing with the
Association of South East Asian Nations (ASEAN) last year, should
be opened to all qualified APEC countries, including Taiwan, which
is APEC's fourth largest Asian trading nation.
Although economic policy must be
reinstated as the prime issue at the economic summit, the war on
terrorism cannot be neglected. This critical matter can be pursued
at the APEC forum through the President's bilateral meetings. Since
September 11, 2001, among APEC members, America's Asian allies and
friends have contributed the lion's share of political,
intelligence, military, and law-enforcement assistance to the U.S.
campaign against terrorism. President Bush has repeatedly
emphasized the need to "show support for our Asian friends and
allies." The
President should devote most of his extremely limited time in
Mexico to bilateral meetings with America's allies to demonstrate
the United States' appreciation for their efforts and to sustain
their commitment to the fight against terrorism.
International Trade
The
global economy is in a slump largely because of sub-par growth in
Europe and the United States over the past year and a decade of
ongoing economic malaise in Japan: As these three giants of the
world economy go, so goes the global economy. Throughout the past
year, the world economy has been flirting with recession.
International Monetary Fund (IMF) calculations indicate a global
GDP (gross domestic product) growth of just 2.2 percent in 2001 and
2.8 percent in 2002--the lowest growth since the early 1990s and
less than half of the 4.7 percent growth registered in 2000.
Low
growth and the uncertainty resulting from terrorism retarded
foreign direct investment (FDI) in 2001, with global inflows of FDI
falling to $735 billion in 2001--less than half the amount in
2000. FDI flows to
economies in the Asia-Pacific region declined 24 percent from 2000
to 2001, according to the U.N. Conference on Trade and Development
(UNCTAD). Trade has
suffered similarly, with growth in merchandise trade falling from
12 percent in 2000 to an estimated 2 percent in 2001. Only China experienced
an increase in FDI inflows in 2001, most of which went to China's
export-processing sector, apparently at the expense of FDI to
Southeast Asian countries.
The
IMF's latest World Economic Outlook, released on September 25,
summarizes the global economic situation:
After a strong first quarter [in 2002],
concerns about the pace and sustainability of the recovery have
risen significantly. Financial markets have weakened markedly....
The recovery is still expected to continue, but global growth in
the second half of 2002 and in 2003 will be weaker than earlier
expected.
The
economic slowdown and pessimism about a near-term recovery have
increased pressure on governments to enact counterproductive
economic policies to protect influential domestic constituencies,
and the United States may be the worst example of this trend. In
March 2002, for example, in direct contrast to its long-standing
leadership in promoting free trade and investment, the United
States imposed tariffs of up to 30 percent on some steel imports
and signed into law an agriculture bill that increases subsidies to
American farmers (predominantly large farms and agribusinesses) by
$80 billion over the next 10 years, for a total of $180 billion.
These beggar-thy-neighbor policies do not
benefit America or the global economy. The steel tariffs are
supposed to phase out by March 2005 after giving "U.S. steel makers
time to become more efficient and competitive." However, they have done nothing to
lead other nations to cut subsidies or output, nor have they led to
significant gains in U.S. industrial efficiency. In the end, these tariffs have only
hurt America's economy by encouraging inefficiency and increasing
costs for consumers and intermediate manufacturers, in addition to
angering America's trading partners, who have threatened
retaliatory tariffs on U.S. goods.
The
farm bill has produced similarly disastrous results, trading
short-term political expediency for long-term trade opportunities
and economic prosperity. As noted in The Wall Street
Journal,
While subsidies protect growers in America
and several other countries from falling world prices, they
generally further depress prices by encouraging continued
production and, thus, cripple growers in less subsidized
countries.... The new farm bill officially returns the country to
the long-term policy of aggressively subsidizing agriculture, and
with far fewer planting restrictions on growers than in the past.
The
net result of government intervention is a drastic hidden tax on
Americans, who may face up to $257 per household in increased food
prices annually in addition to the taxes needed to pay for the farm
bill's subsidies. These subsidies also contribute to the reluctance
of other nations to reduce agriculture tariffs that average 62
percent globally.
The
APEC meeting is a good opportunity to kick off action to revive the
global economy by proposing steps to increase incentives for the
liberalization of trade and investment to further economic growth.
The 1994 APEC meeting in Bogor, Indonesia, established the goal of
regional "free and open trade and investment by 2010 for developed
member economies and 2020 for developing ones." This established goal provides an
invitation for the Bush Administration to advance free trade and
investment policies bilaterally, regionally, and globally for the
benefit of the American economy and the larger global economy.
Some
may question the consistency of pursuing free trade agreements
bilaterally, regionally, and globally, but the nature of free trade
makes such approaches complementary and more expeditious. If one
avenue is not proceeding smoothly, another option may be explored,
with the overall outcome being an expansion of free trade and
investment policies.
Terrorism
The
APEC forum is not a war-fighting institution and issues only
nonbonding economic agreements, so the Pentagon should not expect
too much from the summit in Mexico. Nevertheless, this summit
provides at least a short amount of time in which President Bush
can speak directly and personally to many world leaders about
terrorism and to gain and maintain their support. Photo-ops and
brief bilateral meetings are frequently viewed as "fluff," but with
careful management, they can be used to build personal
relationships, clarify intentions, and increase confidence among
friends and allies.
The
recent spate of terrorist attacks in Indonesia, Kuwait, the
Philippines, and Yemen should be seen as evidence that al-Qaeda
remains active. Moreover, the car bomb attack in Bali, Indonesia,
should be viewed as an attack directed against Australia, America's
closest and most reliable ally in the Asia-Pacific region. Bali is
geographically close to Australia and a popular tourist
destination. Some 200,000 Australians visit Bali every year, and
some 20,000 are on the island at any given time. It is estimated that 75 percent of the
casualties are Australians. Any terrorist group, whether al-Qaeda
working with local extremists or a purely homegrown Indonesian
organization, would be fully aware of the vulnerability of
Australian civilians in Bali.
The
Bush Administration should draw two policy conclusions from this
attack: first, that Washington should be no less unstinting in its
support of Canberra than Australia was in its support for America
following September 11, and second, that since September 11, 2001,
the Indonesian government has been grossly negligent in its efforts
to fight terrorism, and the hundreds of dead and missing in Bali is
the result. The United States is providing investigative and
humanitarian assistance to Indonesia, but the President should
demand substantive action from the Indonesian government.
Country-Specific Issues
The
most important meetings that take place at international summits
attended by the United States have typically been the bilateral
meetings between the U.S. President and other world leaders,
although the President may have only a brief period of time in
which to conduct such discussions. At this year's APEC conference,
the President may have only 110 to 120 minutes available for
bilateral sessions.
A
meeting with Mexico's President Vicente Fox, a strong opponent of
America's position on Iraq, is inevitable, given that he is the
summit's host, but the Administration must prioritize the use of
the President's remaining time for countries that support the war
against terrorism, including Australia, the Philippines, Korea, and
Japan. Because President Bush will have met with Chinese President
Jiang Zemin before the October 25 summit, he presumably will
already have reviewed U.S.-China concerns regarding the war against
terrorism and the disarmament of Iraq. If this is the case, a
U.S.-China bilateral meeting at APEC need not be a priority. The
President of Indonesia should not get a meeting with President
Bush.
Japan
Because of its sheer economic size, Japan
may be considered APEC's principal Asian anchor. As the world's
second largest economy, its economic stability and prosperity are
essential to the future health of the global economy. Because of
Japan's lackluster economic performance in the past decade, one of
the most imperative topics at the APEC summit must be consideration
of a means to restart the country's engine of growth.
Japan's banking system is saddled with
approximately $425 billion in non-performing loans; deflation
continues to be a lingering threat; and the lack of confidence in
the immediate future is reflected by the Nikkei index (Japan's
national stock index), which is hovering at 20-year lows. The crux of Japan's
economic woes lies in the political deadlock in which its leader,
Prime Minister Junichiro Koizumi, is mired. After two years of
attempted reforms in the economic sector, his success has been
lackluster.
President Bush should focus on giving
Prime Minister Koizumi the political support he needs to continue
the reform and restructuring of his nation's economy. Japan's
forthright and valuable contribution to the U.S.-led war on
terrorism throughout the past year confirms that this important
ally stands behind the United States in its security objectives. It
is now time to focus on the vitally important issue of economic
recovery in Japan.
Korea
In
the past year, Washington's ties with Seoul have been strained by a
misplaced emphasis on a divergence in policies toward North Korea.
Attention to such areas of division has served only to exacerbate
misguided perceptions in South Korea regarding U.S. intentions,
fueling a rise in anti-American sentiment as well as frustration in
the United States.
In
fact, South Korea remains one of the United States' most important
allies in Asia, if not the world, and the values and goals the two
countries have in common far outweigh their points of disagreement.
President Bush, therefore, should turn the focus of the
relationship with Korea away from a negative preoccupation with
points of disagreement to emphasize their shared commitment to
peace, stability, and economic prosperity in the region.
Although North Korea remains an ongoing
security issue, it is important to prioritize economic policies at
the APEC summit, given that South Korea is now facing near-term
economic problems. Although the South Korean economy has
experienced a solid economic recovery since its crisis in 1997,
registering an average growth of 5 percent to 6 percent this year,
there are signs that it may be more unstable than it appears. For
example, the spurt of economic growth in the previous three
quarters has been, to a great extent, the result of a tremendous
increase in domestic spending that has resulted in a sharp increase
in consumer debt. This is a worrisome trend for the South Korean
economy because of the under-regulated nature of this increase.
Attention should be paid to the possible
existence of a severe "credit bubble" in the South Korean economy.
The increase in domestic household debt has dramatically
accelerated in the last year to 71 percent of GDP. The increase in
this debt is equal to 229 percent of the estimated increase in
nominal GDP for 2002. Clearly, the debt is growing at a
dangerous and unsustainable rate. Much of the explosion in
consumption debt was spurred by too rapid liberalization of the
banking and credit sector without the commensurate regulatory
measures to guide this growth at a stable rate.
China
On
the political front, China' s representative at APEC will be
preoccupied with the issue of Taiwan. Last year, at the APEC
Shanghai summit, China engaged in a series of unseemly tactics
intended to humiliate Taiwan that, for the most part, eventually
backfired.
Specifically, China initially refused to
cooperate with the Financial Action Task Force (FATF) and the
Asia/Pacific Group (APG) on the issue of money laundering because
Taiwan was already a member of both organizations. Taiwan was
barred from an anti-terrorism ministerial meeting because Beijing
refused to admit that Taiwan had anything to offer. Later, China's
foreign minister shouted down Taiwan's economics minister,
preventing him from speaking. Ultimately, Taiwan was obliged to
abandon the Shanghai leaders' meetings altogether.
This
disrespect for Taiwan is particularly disturbing, given the
contrast between Taiwan's and China's contributions to the war
against terrorism. China has made few substantive contributions to
the war on terror
and has offered little valuable intelligence on money laundering.
Taiwan, on the other hand, has been a quiet but active ally in the
war against terrorism, especially in providing financial and
money-laundering intelligence from Southeast Asia as well as energy
security mechanisms. Taiwan, unlike China, has also
indicated a desire to participate in the U.S. Customs "Container
Security Initiative."
Economically, China is the rising power in
the Asia-Pacific, and its accession to the World Trade Organization
(WTO) at the beginning of 2002 should set the tone for its
contributions in the APEC forum. China's major trade and investment
partners can be expected to focus on China's WTO commitments to
lowering trade barriers, expanding market access into China's
hinterlands, respecting intellectual property, and adhering to a
rule of law and a transparent regulatory structure.
Two
recent reports issued by the U.S. General Accounting Office explore
these and other related concerns in comprehensive detail. These reports
underscore the need for close monitoring of China's WTO-related
reforms and swift feedback responses in order to keep China's
economic liberalization on track.
At
APEC, President Bush will assess whether or not China's efforts to
form an exclusionary free trade zone with the ASEAN bloc enhances
or retards free trade in general, although present indications are
that a China-ASEAN free trade regime is not likely to become a
workable reality. At its summit meeting in November, the
Association of South East Asian Nations may well issue a framework
agreement on forming a regional FTA with China over the next
decade.
ASEAN leaders cautiously welcomed China's
proposal for such an FTA two years ago, as well as the reiteration
of the proposal last year in Brunei, but problems remain. The fact
that China's proposal for the "free" trade zone (FTZ) would exclude
Japan, Korea, and Taiwan leads most observers in the region to
regard Beijing's motivations as largely political. Indeed, most
believe that China sees the FTZ proposal as a way to minimize
ASEAN's anxieties over China's rising power, eclipse Japan's
regional economic leadership, and construct a new economic order in
East Asia that is not dominated by the U.S.
Taiwan
Because of Chinese pressure, Taiwan's
President Chen Shui-bian will not attend the APEC summit of CEOs at
Los Cabos on October 26-27. Even though Taiwan is one of Asia's
economic powerhouses, is the world's 16th largest economy, is
America's eighth largest export market, and holds the world's third
largest foreign exchange reserves, this island nation is regularly
treated like a second-class citizen, even by APEC countries with
tiny economies. Last year, China actively undermined talks on
terrorism and money laundering in an attempt to isolate Taiwan. At
some point, APEC must face up to its commitments to "treat every
member equally" and
welcome Taiwan's participation, including at the "CEO" level.
What the President Should Do
At
this year's APEC summit, the Bush Administration must get back to
basics and emphasize the importance of economics. Armed with trade
promotion authority, the President must push for free trade
agreements at all levels and encourage Japan and Korea to start the
painful, but necessary, process of economic reform.
Although economics must be the centerpiece
of Bush's participation, he can use the "bully pulpit" of an
international summit to demonstrate his appreciation for the
efforts of America's friends and allies in the war against
terrorism. To accomplish these goals, the President should:
- Encourage
economic reform of the Japanese economy. The Koizumi
government has made some progress in this area in recent months
with the appointment of Japan's new "economy czar," Heizo Takenaka,
who has taken a hard-line stance in attacking bad loans. But Takenaka faces an
uphill battle with entrenched political interest groups who will
resist painful but necessary restructuring of the financial sector.
The APEC members' support of the Koizumi government will be of
critical importance to the continuation of these reforms. One
important way to achieve solidarity with other APEC countries is
Japan's participation in regional free trade agreements. Japan is
already showing initiative in this regard through its dialogue with
Singapore.
- Encourage the
economic restructuring and reform measures that Korea's President
Kim began in 1998. While these reforms have done much to
stabilize the South Korean economy and allow it to recover rapidly
from the economic crisis it suffered in 1997, more needs to be
done. President Bush should stress the urgency and necessity of
moving forward with policies such as privatization of key
industries such as telecommunications and power.
- Support
democratic Taiwan. To compensate for the snubs Taiwan has
typically received from APEC members, President Bush should
schedule a working meeting with Taiwan's APEC representative, Nobel
Prize laureate Y. T. Lee, who will be attending the conference in
President Chen's stead. Admittedly, there are substantive issues
that President Bush and Dr. Lee should discuss--notably, the
prospects for a free trade agreement between the United States and
Taiwan. A number of problematic issues present obstacles to
progress on an FTA, including intellectual property rights
questions, Taiwan's rice and livestock import regimes, and
pharmaceutical market restraints. President Bush, simply by
mentioning these issues to his Taiwan interlocutor, would send a
signal to Taipei that Washington is serious about an FTA. Finally,
when speaking of China and Taiwan at the APEC meetings, President
Bush should continue to use the term "democratic Taiwan." Although the United
States' "One China" policy prevents the President from using
Taiwan's formal name (Republic of China) in official settings,
"democratic Taiwan" is a useful compromise with connotations that
should gratify Taiwan while not antagonizing Beijing.
- Demonstrate
appreciation for the contribution of America's allies in APEC to
the war against terrorism. The best way for the President
to show his appreciation of the contribution that APEC friends and
allies have made in the war against terrorism is to prioritize
bilateral meetings with Japan, Korea, Australia, the Philippines,
Singapore, and Taiwan.
- Forge free trade
agreements. Armed with trade promotion authority, the
Administration is better positioned to advance free trade at the
APEC conference than it has been in previous years. Most of the
likely candidates for free trade agreements in the near future are
members of APEC (Australia, Chile, New Zealand, Singapore, and
Taiwan). The Administration is nearing completion of negotiations
with Chile and Singapore. Once completed, the texts of these
agreements should serve as blueprints for agreements with other
APEC member states or, ideally, as the base document for a free
trade agreement with the entire group of APEC member states. The
Bush Administration should seriously consider South Korean
initiatives for an FTA.
- Set the stage
for WTO negotiations. The WTO negotiations at Doha, Qatar,
resulted in a document declaring the intention to substantially
improve market access for agricultural goods; reduce "with a view
to phasing out, all forms of export subsidies"; and reduce
"trade-distorting domestic support." The benefits of free trade are
well-established and should be supported by the member states of
APEC in the WTO. APEC members accounted for 61.1 percent of global
GDP, 41.8 percent of world population, and 39.2 percent of global
FDI inflows in 2001. Consensus among APEC members would
result in a strong negotiating position in future WTO negotiations
and could very well prove to be the cornerstone for future global
policies on trade and investment.
CONCLUSION
Preserving international trade and
globalization promotes the economic security of the United States.
A breakdown of global economic integration, such as the one that
occurred in the 1930s, would undermine the prosperity that is the
ultimate source of America's strength. President Bush can
revitalize the global trading system at the APEC summit by pushing
an aggressive trade agenda and providing political support to Japan
and Korea in their efforts to reform their economies.
The
President must also prepare the ground for future successful WTO
negotiations. If APEC members can agree on a common position on
agriculture, trade, and investment, they will represent a
formidable bloc in the organization that could drive the WTO
negotiations forward.
-- Dana R. Dillon
is Policy Analyst for Southeast Asia, Balbina
Hwang is Policy Analyst for Northeast Asia, and John
Tkacik is Research Fellow in China Policy in the Asian Studies
Center at The Heritage Foundation. Brett D.
Schaefer is Jay Kingham Fellow in International Regulatory
Affairs in the Center for International Trade and Economics at The
Heritage Foundation.