Free Trade Showdown

Small armies of Asian officials, often helped by researchers from Japan's enormous bureaucracy, have been shuttling about the region lately to talk about trade problems ranging from wildly different customs rules to incompatible telephone networks. The reason for the scurrying is the Nov. 19 summit in Osaka, where 16 Pacific Rim heads of state will discuss plans for achieving free trade in the world's most dynamic region by 2020. This ambitious goal was adopted by the Asia-Pacific Economic Cooperation (APEC) forum last year in Bogor, Indonesia. Now it's time to take the first steps to make it happen.

That's what makes it a defining moment for APEC and one that will affect Asia's economic vitality. The central question in Osaka will be whether to take the plunge with a deal to dismantle all Asian trade barriers across every industry by 2020. Or should Japan and other countries be allowed to exempt "sensitive sectors," such as agriculture?

American officials have prepared a tough line for President Clinton as he gears up for his Osaka trip. If Japan can exempt agriculture, argue U.S. free-traders, the bold blueprint from Bogor won't mean much. Instead, progress could bog down as special interests in each country pressure leaders to get their own industries exempted. "Australia will pull motor vehicles off the table, and we'll pull textiles," warns a senior Clinton Administration official. "The only thing left to talk about will be widgets." Australia, Indonesia, Singapore, and Thailand support the no-exemptions stand.

If Washington rejects compromise, however, the risk is that the Osaka meeting will be portrayed as a failure. That could be short-sighted because it would overshadow some very real progress that is occurring (table). A breakdown blamed even in part on Washington's heavy-handedness also could hurt the U.S. both diplomatically and economically.

Washington needs to understand, some Asians argue, that the real force behind trade liberalization is self-interest. Most Asian nations realize that to keep growth rolling they need to make progress opening markets in their regions. Governments also recognize that long-coddled local industries must soon be able to meet the international competition. So leaders from Indonesia, Thailand, and even the Philippines have all jumped on the free-trade bandwagon.

SWIFT PROGRESS. Even without formal APEC agreements, Asian countries are slashing tariffs, deregulating their financial sectors, and opening telecom and power monopolies to local and foreign investors. Progress has been swiftest among the seven-country Association of South East Asian Nations (ASEAN), which includes Indonesia, Singapore, Thailand, the Philippines, Malaysia, Vietnam, and Brunei. In its bid to form a common market of 420 million, ASEAN last year agreed to push up its deadline by five years, to 2003, for slashing most tariffs on manufactured goods to no higher than 5%.

Acting individually, Indonesia in May announced a plan to slash tariffs on 6,000 items, by as much as 35%. It also sharply reduced import barriers in strategic sectors such as petrochemicals, wood products, and cars. Thailand has announced a five-year plan for sweeping financial deregulation. Even countries with economies as primitive as Vietnam's are starting to make moves to open up to foreign financial institutions.

The reforms are paying off. Trade within Southeast Asia surged 41% last year, to $118 billion. And when ASEAN heads of state meet again in Bangkok on Dec. 14, they will consider a proposal to push the deadline up again to 2000.

For its part, APEC is starting to show progress in a number of unsung but important fronts. For example, 10 working groups are preparing action plans to harmonize areas such as customs, product quality and safety standards, telecommunications systems, and investment rules, which vary widely across Asia and North America. Simply collecting data, let alone suggesting policies, has been a formidable task. Tokyo has offered a grant of nearly $100 million to dramatically boost the budget of APEC's Singapore-based secretariat office, which now has just $2 million and 32 full-time staff.

NOT SEXY. This work will benefit companies in the region. One initiative: to get APEC to agree on health, safety, and quality standards that make exporting across the Pacific Rim less costly and time-consuming. APEC hopes to achieve common standards within three years for electrical appliances, plastic toys, and labeling on packaged foods. "These areas aren't sexy or grand," says David Parsons, Singapore-based director-general of the Pacific Economic Cooperation Council, which represents private-sector, government, and academic groups. "But this is where APEC can really smooth the path for the average company and cut the cost of doing business."

To bolster the trade reformers, the challenge at Osaka will be to create an artful compromise. For now, Japan is showing little sign of budging on agriculture. With his ruling coalition on the brink of collapse, Prime Minister Tomiichi Murayama is too weak to give much ground on the emotional issue of rice imports. "We think that in the process of liberalization, we have to be practical," says Katsuhisa Uchida, a key Foreign Affairs Ministry official. "We simply can't make a commitment" on cutting rice tariffs. South Korea and China also say they won't budge on agriculture.

The goal will be to finesse the wording of the Osaka declaration so that Asian politicians have the flexibility to wait until the timing is right to open sensitive sectors--without letting them off the hook entirely. "Everyone recognizes that all of us have different problems at different times in different sectors for different reasons," says Tony Miller, Hong Kong's chief trade negotiator. "But that doesn't mean excluding an industry forever and ever."

Therein lies some room for maneuver. For Japan, which now regards Asia as its main engine of growth, being blamed for a disappointing summit could deal a serious blow. Even Beijing, the least enthusiastic backer of APEC's free-trade goals, has come to realize it must be involved if it wants to be perceived as a responsible superpower.

Any compromise that emerges, however, is likely to fall short of the ambitious pace and concrete guarantees Washington has been insisting on. That shouldn't be considered a disaster, and U.S. negotiators are quietly beginning to signal they understand that. In Asia, where personal trust is key, it will be difficult for leaders to go back on the promises they made last year in Bogor. "In Asia," says APEC Executive Director Shojiro Imanishi, "shame is more effective than legal processes." That's why it's time for the Americans to play the game by Asian rules.


Even if Asian leaders don't agree on completely open markets at their Nov. 19 summit meeting in Osaka, the region is already showing signs of progress:

-- Many countries are liberalizing their financial sectors and opening telecommunications and power monopolies to local and foreign investors

-- Particularly within Southeast Asia, countries are lowering their tariff barriers to both manufactured and agricultural goods

-- The Asians are making strides in standardizing customs regulations as well as quality and safety product codes

-- Foreign investment rules are becoming clearer


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