The Overall Role of APEC
Earlier this morning, I was on Bloomberg’s First Up TV program, and our conversation turned to the economic integration of the region. I briefed on the latest economic trends in the region and discussed the progress APEC member economies have made toward strengthening trade, investment and supply chains to promote global recovery.
Generally this has been a story of resilient growth in a very fragile world still reeling from the Global Financial Crisis.
APEC is an economic forum of 21-economies that straddles the Pacific Ocean. Its primary goal is to support sustainable economic growth and prosperity in the region. APEC does this by championing free and open trade and investment, promoting and accelerating regional economic integration, encouraging economic and technical cooperation, and facilitating a favourable and sustainable business environment.
From its early years APEC focused on traditional trade and investment liberalisation as articulated through the Bogor Goals in 1994. Since the founding of APEC, MFN tariffs in the region have been reduced an average of 65%. Concurrently, member economies have seen their trade volumes increase more than 6 fold and their GDP expand over half a percentage point faster each year than the global average. It seems clear that freer access to global markets and investment have helped APEC members grow. And over the last year, many economies are using their emerging prosperity to help grow domestic demand, a rebalancing that economists have been looking to for sometime.
On a per capita basis, APEC’s real GDP (PPP) nearly doubled from about $8,000 in 1989 to nearly $14,000 in 2011 at a 2.5% compound annual growth rate. In the same period, per capita GDP in the rest of the world increased much more slowly from over $5,800 to about $7,700 (annual rate of growth of only 1.3%).
The weighted average of the growth in total employment in economies across the APEC region was about 11% between 2000 and 2010 (the most recent data available). These numbers tell a positive story.
However this rapid growth and changing market dynamics have exposed new issues such as behind-the-border trade restrictions. This is a topic that has received more attention from policy makers as they focus on the second generation issues of trade facilitation, including agreeing common standards on many aspects of trade, customs and e-commerce, and promoting business mobility. APEC likes to monitor progress, quantifying where possible, and these second generation issues have been monitored through the trade facilitation action plans. They record a reduction in measured trade transaction costs by around 35% by 2015.
In addition, there is a broader business facilitation agenda. To help monitor progress, APEC has established an ‘Ease of Doing Business’ Index measuring how easy it is to start a business, obtain credit, contract and other aspects of trading. There is a measured objective of 25% improvement by 2015.
A study by the Conference of Asia Pacific Express Carriers (CAPEC) in collaboration with APEC, noted that setting a de minimis exception threshold in the APEC region for customs procedures of US$100 could bring savings of nearly US$20 billion per year and also cut delivery time by 10%, potentially expanding exports by more than 4%. These are very big potential gains.
General Drivers of Connectivity
The last few years have seen more focus on another aspect of regional economic integration: connectivity – a significant priority for APEC 2013. This has been the result of a number of emerging new trends. Very fast regional growth means demand has outstripped existing economic infrastructures and begun to act as a brake on economic growth prospects. There has been growing regional integration in product and input markets including for capital and skilled labour. This is part of a broader pattern of more integrated production, and the phenomenon of supply chain management. This does not just involve large multi-national businesses; it has also got implications for establishing, financing and operating SMEs.
At the same time as production processes are changing, we are seeing the growth of middle classes and urbanization accompanied by demographic tightening. These trends are putting new demands on social infrastructure. The new focus of some big traditional exporters on building domestic demand adds to this.
Overall, there is a deepening realization that a globalised world requires connectivity. APEC work had started with a focus on reducing traditional and non-tariff barriers to trade and reducing behind-border barriers. While continuing these efforts, APEC has now also focused on promoting connectivity, a very positive approach to connecting economies in non-traditional ways.
Work started under the APEC Finance Ministers at their 2009 meeting in Singapore, where an Infrastructure Pathfinder Initiative was launched to develop a harmonized roadmap for private sector infrastructure provision. This reported in 2010, cautioning that the development of a public-private partnership infrastructure market was an evolutionary process with a complex series of stages to follow.
APEC sought wider business input in developing its Supply Chain Connectivity Framework Action Plan, holding a number of symposiums involving logistics and transportation companies. In particular ABAC spearheaded a survey that asked such companies to rank their various operational chokepoints according to what affected their businesses the most. The Action Plan identified eight critical supply chain chokepoints and these have been selected for special attention by APEC. These include regulatory impediments, customs ineffectiveness, and inadequate transportation networks. Addressing these issues will make a difference for the companies that ship products and for the consumers who will find more competitive prices and better varieties in their stores.
Recent research quoted in the APEC PSU Interim Assessment shows that logistics performance matters more for trade in parts and components, i.e. the type of goods that circulate within supply chains, than for trade on final goods.
Regional manufacturing can be very diverse. The Policy Support Unit identifies five broad groups of manufacturing, and they have very different characteristics and requirements. Four of these sectors (global innovation for local markets, regional processing, global technologies, and labour-intensive tradables) according to McKinsey account for more than three quarters of global manufactured value added. In all these sectors, transportation and logistics functions are considered highly important.
Currently the APEC’s Policy Support Unit is carrying out its 2013 Interim Assessment to check progress on the Supply Chain Connectivity Framework Action Plan. This has yet to be formally reported to APEC, but it is continuing to show progress in reducing bottlenecks.
In addition there are many practical examples of connectivity underway led by the vibrant network of APEC working groups. These include self-certification of rules of origin, goods tracking by intermodal global navigation satellite systems, improving cross border transport services using the Star database, using electronic procedures to integrate certificate of origin, e-invoices, e-documentation and e-financing across borders, using the single window system for lodging customs procedures, using the APEC business travel card to speed up travel mobility, using the Authorized Economic Operator program for customs procedures, and certifying product quality using agreed standards and conformance procedures. These initiatives have all involved a strong public/private sector approach.
This year’s host economy, Indonesia, has picked up this concept and is pushing the connectivity theme strongly. Adopting the ASEAN framework, connectivity is viewed in three dimensions: physical infrastructure, connections among institutional and people-to-people connections. There is a significant APEC work program on this now underway. Dr Arto Suryodipuro will elaborate this following my talk.
What can we learn from the ASEAN approach?
ASEAN has focused on connectivity for some years as a central pillar of their work on integration and community-building. In particular, the objective of building an ASEAN economic community by 2015 calls for an economically well-connected region. To promote this, ASEAN has established a Connectivity Master Plan outlining challenges to improve regional and national physical, institutional, and people-to-people linkages. The Master Plan is both a strategic document and an operational plan of action for the period 2011-2015, aiming to connect up ASEAN through physical infrastructure development, effective institutions and empowering people, with a focus on financial resources and decision making requirements.
In APEC we have been reviewing this Master Plan in order to take lessons from it. Work over the last two years involving a mapping exercise to identify APEC and ASEAN initiatives and highlighting areas for possible collaboration has taken place. As part of this exercise we have identified seven broad areas of possible collaboration, based on the potential overlap of work and the importance of these priority areas to both institutions’ agendas. These areas included Supply Chain Connectivity as well as Trade Facilitation, Investment Facilitation, Disaster Preparedness, Structural and Regulatory Reform, Food Security, and Small and Medium Enterprises (SMEs). To be more specific on the connectivity goal, at APEC we are interested in the possibility of working together with ASEAN, on ongoing work on customs procedures, risk management methodologies, advance rulings. and single window procedures, the authorized economic operator approach, aviation and multimodal transport, mutual recognition agreements and harmonization of approaches.
I met with Secretary General Le Luong Minh in Jakarta earlier this year in the margins of the first APEC Senior Officials’ Meeting to discuss how APEC and ASEAN could explore these mutual areas of interest.
However APEC should not simply be seen as a way to extend the ASEAN model Pacific-Wide because there are important differences in the two organisations. The objectives of ASEAN go beyond economic integration into security, political, cultural and social issues. APEC, with its 21 economies, covers a much wider geographical region, different stages of developments, and it involves economies that are quite different from one another. Therefore any focus on APEC connectivity needs to be carried out at a level that is broad enough to engage all members. There are different connectivity issues at the APEC level, and it is harder to develop joint infrastructure projects.
The ASEAN Connectivity Master Plan is designed to support the ASEAN Economic Community 2015 goals. It focusses on a future where ASEAN production will be very integrated. It is primarily a top-down approach driven by member states, with legally binding regional commitments, if necessary, to change domestic legislation to support this. The ASEAN Master Plan involves completing roads and networks, filling in railway links and linking up power systems within the region. There are some key regional projects underway such as the Singapore-Kunming Rail Link, the ASEAN Power Grid, and the ASEAN Highway Network. All are aimed at integrating the economies and attracting multi-nationals to set up production networks.
APEC works differently. Priorities are set from top- with directions from Economic Leaders. These are coupled with bottom-up ideas and initiatives that stem from its wide networks, with direct inputs from the business community, working groups and lessons from capacity building projects. (That said, many capacity-building needs are very similar between the two organizations.
Specific investment projects are less likely in the APEC environment, spread as it is, over much wider area. APEC’s primary focus is on trade and investment liberalisation and business facilitation, so connectivity projects are likely to line up with these goals. APEC’s style has always been voluntary and non-binding. Individual actions can be pursued as pathfinder projects where some member economies move forward and others are free to join later. Wider initiatives take time. Following this approach, APEC has been particularly successful as an incubator of ideas, a place to test the acceptability of approaches and a driver of high level economic integration.
Within APEC people-to-people connectivity occurs in most of the hundred or so projects organized each year by the working groups. These could involve custom officers, quarantine officers, trade policy experts, transport regulators and data settlement standards agencies coming together to find ways to reduce chokepoints.
Institutional connectivity provides different challenges. With its noodle-bowl of around 100 trade agreements and many more in the pipeline, APEC faces the challenge of helping incubate, standardize and integrate these, to free up connections in the region. The more they are standardized, the less work to be done by WTO.
In the area of energy, for example, APEC’s Energy Working Group is supported by its own public-private sector dialogue mechanism–the Energy Working Group Business Network. This body advises on energy issues from an industry perspective and facilitates regular exchanges between energy policymakers and business representatives. The arrangement is helping to boost energy sector investment in the region in sustainable ways and move towards APEC goals such as 45% reduction in members’ aggregate energy intensity by 2035.
As we progress into the Indonesia year, APEC Senior Officials will be looking more closely at the topic of connectivity and deciding how it best fits in with APEC values through activities such as the Dialogue on Infrastructure Development and Investment and the APEC Symposium on Connectivity in the Asia-Pacific Region. From these meetings and other dialogues such as today’s ISEAS symposium, we hope to cement a more solid view of what we mean by regional connectivity and how APEC can play a part.
I congratulate the Institute of Southeast Asian Studies and the Singapore APEC Study Centers for their decision to hold this Symposium. It is very well-timed, and I look forward to learning from the insights it can offer, and also how the results may be shared with the APEC and ASEAN so that we can continue to explore how best to collaborate given the importance that members of both fora attach to these issues.