The Asia-Pacific Economic Cooperation (APEC) forum represents a potentially large-scale trade area that, when functioning in a concerted manner, could in the future work to shift the axis of global manufacturing and trade away from the North Atlantic–European region toward the Pacific. At its latest meeting in 2016, the group's leaders continued to lay plans for the creation of a dynamic trade area that would draw participants from across the Pacific Rim, including from the Southern and Northern Asian regions and North and South America.
But the future of the bloc, which represents more than 50% of the world's GDP, may be in suspense. A wave of protectionist sentiment and changes brought by elections in the U.S. threaten to determine how trade in the Pacific region will take shape in coming years.
APEC: What Is It?
APEC is a forum of 21 nations aimed at supporting sustainable economic growth in the Asia-Pacific region. The countries in the group are as follows:
|Indonesia||Japan||Republic of Korea|
|Papau New Guinea||Peru||Philippines|
The group was formed in 1989 at the initiative of former Australian Prime Minister Bob Hawke, who sought intensified cooperation among countries in the Pacific Rim. The group, then formed by 12 nations, first met in Canberra, Australia in November of that year.
According to its mission statement, the group seeks "to build a dynamic and harmonious Asia-Pacific community by championing free and open trade and investment, promoting and accelerating regional economic integration, encouraging economic and technical cooperation, enhancing human security and facilitating a favourable and sustainable business environment."
The Asian-Pacific region, meanwhile, has developed into a powerful engine for world economic growth. According to the IMF, the Asian region is set to grow by an average of around 5% in 2017 compared to an average of 3% around the rest of the globe.
APEC nations, which represent about 41% of the world's population, also represent 54% of global GDP and 44% of global trade. By comparison:
- The European Union represents 24% of global GDP and 36% of global trade.
- The NAFTA region in North America represents 28% of the global GDP and 25% of global trade.
Key Issues Discussed in 2016
Leaders and representatives from the 21 member nations met at a Summit in Lima, Peru on November 19-20, 2016 to discuss the theme of "Quality Growth and Human Development."
The summit participants concluded that there has been a "slow and uneven recovery from the economic and financial crisis of 2008, resulting in lower global economic growth, volatile financial conditions, lower commodity prices, rising inequalities, employment challenges and significantly slower expansion of international trade in recent years."
The participants further highlighted inequality and uneven growth in some economies in addition to environmental degradation and the risks posed by climate change, which have been affecting prospects for sustainable development, and increasing uncertainty about the future. They also made note of a growing backlash against globalisation and integration, with the emergence of protectionist trends.
The topics they discussed included the following:
- Global economic growth,
- monetary and currency policy coordination within APEC,
- fighting protectionism,
- improving the investment environment and cross-border trade,
- supporting a digital economy,
- increasing regional connectivity,
- and reducing aggregate energy use and increasing renewable energy.
To address these matters and others, the summit participants pledged to adopt and reinforce a series of commitments to policies aimed at increased global growth and economic integration.
The biggest question looming over APEC remains the fate of the proposed Trans-Pacific Partnership (TPP). It is a major trade agreement deal that has been negotiated between 12 countries, and calls for tariff reductions for most goods and services traded between the countries.
In all, the agreement would cover about 18,000 tariffs, but some goods and services aren't included. Tariffs on most goods like farm and industrial products would be eliminated immediately after the accord is ratified, but tariffs on certain goods deemed sensitive would remain initially and be eliminated over time.
The deal has been agreed upon by the governments of the countries that participated in talks that began in 2005, but it must be ratified by their respective legislatures. If implemented, the TPP would involve nearly 40% of global trade and would likely have significant impact on the markets of countries both inside and outside of the APEC region by increasing the flow of goods and services between the nations participating in it.
According to World Bank data, exports of member countries are seen increasing by between about 5% and 30% by 2030 over their previously anticipated levels. But at the same time, imports could increase by similar amounts, possibly neutralising the effects of expanded trade. However, the more integrated trade relations may boost the value-added potential for countries operating within the bloc, thus attracting more trade revenue and investment capital to them. The GDP of member-countries is seen increasing between 1% and 10% with the TPP.
The TPP is also significant because it's one of the first major trade accords that would include a mechanism to curb possible abusive practices through currency policy manipulation. The agreement on currency is spelled out in a document called "The Joint Declaration of the Macroeconomic Policy Authorities of Trans-Pacific Partnership Countries."
The declaration is not a binding or enforceable document. However, it calls for commitments by each signatory member to "refrain from competitive devaluation" and assure their exchange rate systems "reflect underlying economic fundamentals." It also encourages each member country to make public disclosures on intervention in currency markets, foreign exchange reserves, portfolio investment flows and other items.
Winds Of Change?
While the TPP accord was negotiated with the backing of U.S. President Barack Obama, President-elect Donald Trump has called the U.S. participation in the accord into question. Trump said the agreement will allow a "backdoor" for the entrance of exports from China into the North American market.
China was not a participant in the initial negotiations of the TPP, but its structure is a docking agreement that could allow the future participation not only of China, but of some other economies such as India, Russia and Korea. Initially, the TPP was promoted in part by the U.S. as an answer to China's growing participation in trade throughout the Pacific and a manner to force China to follow a trade model agreed to by APEC members.
One fear caused by Trump administration's threats to abandon the accord is that China could take advantage of the vacuum left by the U.S. withdrawal to mold trade in the APEC region according to its own convenience.
Chinese Ambitions: Alternative Arrangements
The potential U.S. withdrawal from the TPP would be significant, because the nation's economy represents about 60% of the deal's total GDP. Meanwhile, China has shown a willingness to push for an alternative arrangement for the Asian-Pacific region should the TPP initiative fail. Chinese President Xi Liping attended the 2016 APEC Summit and pushed for its preferred vision of building a Free Trade Area of the Asia-Pacific (FTAAP).
"China will not shut its door to the outside world but will open them more," Xi said in his keynote address to the summit participants in Lima. "Building a free trade area of the Asia-Pacific is a strategic initiative critical for long-term prosperity."
China's formula for the future FTAAP would be to build on its proposed Regional Comprehensive Economic Partnership, which would include the Asian-Pacific nations of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam, Australia, China, India, Japan, South Korea and New Zealand. The initiative, at least initially, wouldn't include the U.S.
In the past 30 years, China has become a weighty trade partner for nearly all participants in the APEC forum. Its appeals for the formation of a new trading bloc in the absence of the TPP may be hard for other APEC forum members to resist.
The trade model adopted by the Asian-Pacific region will have significant impacts not just on exchange and prices of goods produced there, but also on capital markets across the globe. As it was negotiated, the TPP includes specific provisions discouraging competitive currency devaluations and requires reporting on currency policy matters such as central bank interventions and portfolio investment flows. It's unclear whether a future substitute agreement negotiated by China would demand similar controls or the same levels of transparency regarding capital flows.
The outcome of negotiations on any of the existing multilateral trade agreements will have important consequences for investors and traders, because it will determine the level of volatility and returns seen in markets such as currencies, commodities, equities and debt.
Questions remain whether the Asian-Pacific region will become the promised new dynamic axis and engine of global economic growth; whether it will come under the dominance of China; or if it will simply remain a mixed bag of powerful Asian "tigers" and struggling runners-up. Much of this may depend on the integration that can take place through APEC.
For the world economy, the stability of the Asian-Pacific region could be a key ingredient in determining the general level of global trade, growth and prosperity in the coming decades. The change of administrations in the U.S., meanwhile, has cast some doubt about the continued consolidation of Asian-Pacific regional trade under the model proposed through APEC.
The evolution of U.S. policy and the response of other important players in the Asia-Pacific region in the coming year will be crucial in determining whether it can come to fruition.
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