APEC hits 25 as the region’s free trade grows

A harbinger of Asian free trade, APEC is celebrating 25 years of economic cooperation as it meets in Beijing this week. Our Head of APAC looks at the importance of the organisation to the region.

APEC was established amid the fall of the Berlin Wall and the end of Cold War. Its vision was to eliminate trade barriers and strengthen economic cooperation in the Asia Pacific (APAC) region as international trade started to expand rapidly. The forum was founded on the basis of non-binding commitments and all agreements are reached by consensus among its members.

APEC refers its members as "economies" instead of countries due to the presence of Taiwan (known as Chinese Taipei) and Hong Kong (referred to as Hong Kong, China). Its members also include Australia, Brunei, Canada, Chile, China, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, South Korea, Thailand, the United States and Vietnam. Together, they represent 40% of the world's population.

The region consists of some of the most dynamic and promising economies in the world. It is widely known as the engine of world’s economy as it accounts for 57% of total global GDP and 46% of world trade. APEC’s members are not only the world’s “factory floor” but they are also its most important sources of service, technology, investment and product markets.

For its first 25 years, APEC has been primarily focusing on facilitation of trade policy. As APEC’s members slowly taking the centre stage of the world’s economy, it is the right time for it to play a more active role in economy integration and financial cooperation for the common good of its members and the rest of the world.

This year's APEC meetings are expected to achieve major breakthrough on two topics; let’s look at them in more detail.

Advancing Regional Economic Integration

As the host country, China is taking the lead to push for the establishment of the Free Trade Area of the Asia-Pacific (FTAAP) by 2025. The vision of the FTAAP is to integrate APEC’s 21 member economies and create a single “free and open” market for trades and investments. It aspires to open up new opportunities and create important scale benefits for companies looking to invest in the region. It is estimated that the FTAAP would lift the global economy by US$2.4tn and lead to a 12% increase in world trade.

The FTAAP is seen as China’s counter measure for the Trans-Pacific Partnership (TPP), a US-led free-trade agreement being negotiated by 12 of APEC’s 21 members excluding China. However, the exclusion of China from the TPP is considered impractical for many as APAC’s economies are getting more and more integrated with China. The International Monetary Fund (IMF) notes that more than 50% of the region’s economic growth is actually driven by China (with every one percentage point of China's growth driving the region’s economy by 0.3 percentage points). In 2013, 60% of China's total foreign trade was with its fellow APEC members, while 69% of its outbound foreign direct investment (FDI) flowed to in-region too.

Currently, up to 46 FTAs have been implemented in the APAC region while more than 12 are being negotiated.Some commentators consider the FTAAP as the solution to the region's "spaghetti bowl" of overlapping FTAs that is harming trade with growing complexity and costs for exporters and importers. Although it is undeniable that FTAs are boosting regional growth, it has also brought complication including different tariff schemes, complicated rules of origin and even trade discrimination over countries excluded from the agreements.

Strengthening Comprehensive Development in Infrastructure and Connectivity

The majority of APEC’s economies are developing nations; the growth rate of their economy is heavily dependent on the connectivity of their physical infrastructure while the most pressing problem is a lack of funds. In view of this, 20 Asian countries agreed to set up the Asian Infrastructure Investment Bank (AIIB) to work alongside the World Bank and the Asian Development Bank (ADB) in improving investment flows to regional infrastructure.

The establishment of the AIIB is viewed as a challenge to the regional role of the ADB. But in reality ADB’s current capacity is insufficient to support Asia’s dire need of funds for infrastructure development and investment. Asia needs to invest around US$8trn on physical infrastructure over the next 10 years to sustain its growth. However, the ADB can only furnish about US$13bn of fresh funds in new lending every year. As a result, the region’s infrastructure financing is facing continuous and growing deficiency despite 48 years of hard work by the ADB.

Also, financial cooperation in the APAC region has been heavily focused on disaster emergency support and poverty eradication instead of national development.

The AIIB is founded with the mission to fill the gap as it would focus mainly on infrastructure financing. Unlike the ADB and the World Bank, AIIB’s loan is unlikely to be attached political conditions due to China - its main contributor - having a non-interference policy on other countries’ internal affairs.

Read more on doing business in APAC.

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Paolo  Tavolato
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