APEC and Business - Facing New Realities

It is my pleasure to speak to you today about APEC 2007 which of course Australia is hosting. APEC first met in Canberra in 1989 - then there were only 12 members, now there are 21. Indeed, Australia was one of the key founding members of APEC and to this day remains one of its most active champions. However it was not until 1993 that APEC leaders began to meet, and so this year when APEC returns to its origins it will be the first time that Australia has hosted a gathering of so many of the world's top leaders. Some very big issues such as energy security and climate change and how to accelerate regional economic integration, will be discussed.

The APEC region itself has experienced tremendous gains since its formation. APEC members, with 41 per cent of world population, account for half of world trade and 57 per cent of world GDP. Per capita GDP has increased by 26 per cent compared with eight per cent for non-APEC economies. Tariffs in APEC economies have decreased from 17 per cent in 1988 to six per cent in 2004.

While the region's economic growth has of course been driven largely by market forces, APEC's contribution to it has often been under-publicised, under-estimated and under-appreciated. As the Australian Prime Minister noted in a speech recently, much of APEC's best work is done under the radar. Indeed, US Trade Representative Susan Schwab put it succinctly when she said at the APEC Trade Ministers' Meeting in Cairns earlier this month that "APEC doesn't make headlines, but it does make money for business". By this she meant that APEC has done much to improve the business environment in the APEC region. For example, people and capital are moving more freely around the region; the APEC Business Travel Card is facilitating airport procedures for APEC business people travelling in the region; there are more efficient customs procedures and progress towards paperless trading, mutual recognition of standards and other trade facilitation measures, all of which are saving businesses millions of dollars a year.

While APEC may not have met the expectations of some of its early proponents, and certainly has its shortcomings, it has brought a distinctive regional approach to promoting economic growth and has undoubtedly influenced the way regional governments shape their policies towards more open trade. It has added real value to the prosperity and well-being of people who live and work in the region. Moreover, the economies that comprise this unique grouping are, in their totality, absolutely vital to Australia's prosperity and security.

And yet, if you have been following the Australian media of late, especially in Sydney, you would think the only interest in APEC was traffic disruptions, heightened security precautions and what the Leaders will wear for the photo opportunity! All of these are very important issues no doubt but there is a lot more to APEC 2007 story than this. Since hosting APEC is a very large enterprise involving taxpayer's funds it is important that we tell this story so that Australians have a clearer idea of what they are getting for all this effort.

In telling the APEC story today I will cover four aspects: (i) how APEC actually works, its hardware, if you like; (ii) how APEC has had to adapt to a changing international environment; (iii) APEC's agenda and priorities this year; and (iv) a final assessment of APEC's performance as a regional organisation.

One of the main reasons that much of APEC's work occurs "under the radar" is because of the way it operates. It is important to understand that APEC is not a negotiating body like the WTO or the UN Security Council, with binding decisions. It works on the basis of voluntarism, consensus and concerted unilateralism. It provides a forum for sharing experiences and developing advice and guidelines on best practice for making economies operate more efficiently and effectively.

The Leaders' Meeting is the most visible event, and the highlight, of the APEC year. It is Leaders who set the priorities for APEC and make the key decisions. But it's not the only event. Each year there are six or seven sectoral ministerial-level meetings, often accompanied by business forums. This year, with Australia as host, we have had sectoral ministerial meetings on mining, small and medium sized enterprises, transportation, energy, health and trade, with finance ministers to meet shortly in Coolum.

In addition to these meetings there are about 30 technical working groups, task forces etc, covering a vast range of subjects - agriculture, energy, fisheries, e-commerce, transportation, intellectual property rights, customs procedures, standards and conformance and so on.

These groups do the hard slogging, but all-important, work of APEC. Those that are effective - and not all of them are - add real value to APEC's work. It is through these policy and technical working groups that APEC's capacity-building projects are developed. We currently have about 250 being implemented at a value of USD 18.5 million. Their aim is to assist APEC members, especially the developing economies, to compete effectively in a globalized world. Clearly all APEC economies - developed and developing - will benefit from new markets opening up with improved business environments and practices.

APEC has also introduced a unique arrangement with the business community through the APEC Business Advisory Council (ABAC) which provides a forum for APEC business leaders to discuss issues of concern to them and to report them directly to and discuss with Leaders.

One of APEC's key strengths which has enabled it to maintain its relevance over the years is the flexible way it has been able to adapt its priorities and agenda to the changing international environment.

In 1989 the environment was quite different from what we have now. APEC was at that time a response to a new set of economic and political circumstances in the region. Big geo-political shifts at the end of the Cold War were occurring. There was much speculation about competitive and exclusionary trade blocs emerging in Europe and North America, and about what was the best path for engaging the United States actively and positively in the trade and investment flows of the Asia Pacific. There was tension over trade policy between the US and Japan and concern about how to include Japan in a pattern of regional economic interdependence. China's economic reform process was only a decade old at that time, with some early gains registered, but the real boom was yet to come.

The questions that were being asked at that time were: could we manage these issues through some regional mechanism; and could we develop an institution that would both add value to multilateral trade negotiations and build on rapidly expanding regional economic growth?

There were then no lessons of history in the region on which the proponents of APEC could draw. Many people pointed to the huge economic, cultural and political diversity of the proposed group which many believed would make it all too hard to succeed. But what really sustained APEC from the time it began was a shared belief of member economies that outwardly-focused growth, sustained by trade and investment liberalisation and facilitation, together with technical cooperation for the less developed economies would be to the benefit of all of economies.

Things have of course moved on dramatically since 1989. Developments which - seen from the perspective of today - were in their infancy in 1989, now drive much of APEC's current agenda. One of these of course is the smooth integration of China's growth into regional economic patterns. Another is the emergence on a heightened scale of trans-national threats such as terrorism and pandemic disease. We are also seeing major shifts in demographics including the emergence of a global middle class, with important implications for consumer behaviour and the way societies and political systems function.

But perhaps the most important change of all has been the emergence of truly global markets that are effectively turning the world into one large factory, and, tied to this, the growth of services-based economies. Regional and global commerce is no longer as dominated by deliveries of commodities or finished manufactured products from one country to another.

A fascinating illustration of this in the APEC context, which was cited at the APEC Policy Dialogue in Adelaide earlier this year, is the simple "Barbie Doll", which it turns out is not so simple: the doll is designed in California; the oil that is used to make the plastic pellets to produce the doll's body is refined into ethylene in Chinese Taipei; its nylon hair is made in Japan; its wardrobe cloth in China; its moulds in California; it is assembled in Indonesia and Malaysia; and its quality testing and marketing takes place in California. This trend is having a significant impact on APEC businesses and on APEC's work.

Let me now turn to APEC's agenda, in particular its priorities in Australia's host year in 2007.

When APEC was created in 1989 its aims were founded on three "pillars": trade and investment liberalization (especially support for the WTO); trade facilitation; and economic and technical cooperation, also referred to as capacity-building. These remain APEC's core priorities in 2007 although how we go about pursuing them, and the focus we give them, have changed a lot as the international environment has changed.

This year, Australia, as host, is keen not to reinvent the APEC wheel and has taken the priorities that were agreed at last year's Leaders' meeting in Hanoi, and is building on them as the priorities for this year. Australia will not be promoting a new set of Australia-centric priorities for APEC in 2007.

That said, Australia as host this year is keen to do what it can to refocus and reinvigorate the organisation. APEC is the pre-eminent organisation promoting economic growth in the Asia Pacific region and we want to make sure it stays that way. The only way this can be done is by adapting to change and new challenges.

So, this year's priorities, while still underpinned by APEC's original "three pillars" reflect very much issues of current concern. What are they?

(i) Support for the WTO Doha Round

As you know, the current Doha round of WTO negotiations is now at a critical juncture and a successful outcome cannot be assured. For APEC economies, which account for more than half of world trade, the WTO remains the primary mechanism by which we aim to achieve free and open trade, and all of us have a very real interest in its success.

In the last round of WTO negotiations in 1994 (the Uruguay Round) APEC's approach worked to good effect by building a consensus among its members which undoubtedly helped deliver a successful outcome after seven and a half years of negotiations.

Whether APEC can play a similar role this time around remains to be seen. All of the different negotiating positions on farm subsidies, industrial tariffs, services, etc, that exist in the wider WTO membership exist of course among APEC members, and are not easy to bridge. But one thing we can say about APEC economies is that they have a strong sense of pragmatism and generally take a practical approach to solving issues. In the right circumstances, this could prove useful to concluding the Doha round. Certainly APEC will do all it can in coming weeks to bring the Doha negotiations to a successful conclusion.

(ii) New Ways to Promote Regional Economic Integration

This year APEC is also having a fresh look at ways of promoting regional economic integration. Last November APEC Leaders asked officials to prepare a study on ways to promote regional economic integration, including a Free Trade Area in the Asia Pacific as a long-term prospect. Economic integration has, of course, always been a key objective of APEC but this is the first time this issue has been on the formal Leaders agenda. Work on the report is well advanced and will be presented to Leaders when they meet in Sydney in September.

(iii) Structural Reform - Behind the Borders

It has become clear that in intensifying regional economic integration there are many things that can be done - an FTAAP is just one idea and it is very much a long-term prospect. In the meantime there are many practical and valuable measures that can be taken. This leads to a third priority this year - structural reform in domestic economies, which we also refer to as behind-the-border issues.

Business people are telling us that while reducing tariffs and other border barriers remain very important to them this is not enough to secure the fuller regional economic integration and improved business environment that they are seeking. What they are looking for is deeper structural reform within domestic APEC economies to make them more transparent and efficient, and less bureaucratic, costly and burdensome for business.

There is solid evidence to justify the attention that business is giving to this issue: theoretical research by the Crawford School of Economics and Government at the ANU's College of Asia & the Pacific (Philippa Dee) indicates that comprehensive structural reform in East Asian economies (which for the purposes of this analysis includes 9 of the 21 APEC member economies, namely Indonesia, Malaysia, Philippines, Singapore, Thailand, China, Japan, Korea and Australia), would be worth USD 107 billion per annum in additional income to these economies. A full Doha Round outcome would be worth around USD 33 billion per annum of additional income.

Consequently, a high priority for APEC this year is to address these behind-the-border barriers to trade and investment. In particular, APEC has an ambitious policy agenda looking at regulatory reform, standards and conformance, competition policy, public sector and corporate governance and strengthening economic legal infrastructure.

(iv) Human Security

Since 9/11 and the SARS and avian influenza outbreaks, human security issues have assumed high prominence on the APEC agenda. We all recognize that, apart from the devastating human consequences of serious and destabilizing incidents affecting human security, there would be serious economic losses, as confidence and efforts to achieve more open trade and investment were undermined. The activities of terrorists, natural disasters and outbreaks of disease all pose a threat to regional economic growth and stability.

As we saw in 2003 with the SARS epidemic, the cross-border outbreak of a serious infectious disease can cause widespread damage to people and businesses in disparate locations around the globe.

Businesses in the APEC region are extremely concerned to ensure preparedness against human security incidents, whether they involve terrorists, natural disasters or outbreaks of disease, and many of them are working closely with APEC member economies to develop joint strategies and best practices to ensure safety and security, business continuity and economic viability.

(v) Energy Security and Climate Change

A major issue that has rapidly emerged at the top of APEC Leaders' priorities this year is to develop a coherent regional policy response to one of the big challenges now facing APEC member economies: energy security and climate change. APEC economies account for 60 per cent of global energy demand and include the world's four largest energy consumers, as well as some major energy producers. Across the group demand is expected to double by 2030. APEC includes the world's two largest greenhouse gas emitters - the United States and China (which together will soon generate half of global emissions) - as well as Indonesia (which according to some estimates is the third largest global emitter).

The Australian Prime Minister, as chair of the Leaders' Meeting, has written to his APEC counterparts indicating that he would like APEC Leaders to consider ways in which APEC can support an emerging, practical consensus on a global framework for tackling climate change.

How well-placed is APEC to tackle these big issues? The answer to this depends in part on one's expectations of APEC and some of APEC's critics have quite unrealistic expectations. So let me answer this question by addressing the more frequent criticisms and in so doing perhaps show that some of the perceived weaknesses can in fact be strengths.

Most often heard is the criticism that APEC's approach of decision-making by consensus and voluntarism rather than entering into binding agreements makes APEC no more than a talkfest.

There is indeed plenty of talk in APEC meetings, but as the Uruguay round of trade negotiations demonstrated in 1994, APEC's consensus-based approach can deliver successful outcomes. The voice of APEC's 21 members carries great international weight.

Moreover, APEC's consensus-building approach is particularly well-suited to addressing many complex contemporary issues, and notably two of APEC's priority issues to which I have just referred - climate change and structural reform.

Both these touch on areas of acute domestic political sensitivity in APEC economies. To tackle them in an adversarial, negotiating forum is not likely to succeed. On climate change, it is most unlikely that there will be a silver-bullet, one-size-fits-all solution. Individual countries will want to devise their own approaches in accordance with their particular circumstances, albeit as part of some larger global framework. Because of the way it works, APEC is well-positioned to build and support a consensus among its members on multi-faceted solutions that individual members can then take up.

Similarly, on domestic structural reform, local vested interests frequently impede progress. By drawing on the real-world experience and know-how of those economies that have been implementing domestic structural reform over many years, such as Australia, NZ, Singapore and Canada, other member economies that are at an earlier stage of the process can strengthen their case for reform in their domestic political debate. Both Vietnam and China used the lessons they learned in APEC to good effect in overcoming domestic barriers to change during their successful WTO negotiations. While APEC's best-practice guidelines might not be binding on member economies, they will be aware that if they don't reform their domestic policies, chances are they will fall behind and be less competitive than others which do, and the well-being of their people will suffer.

Another criticism is that APEC's membership is too diverse and covers to wide a geographic spread. East Asian interests have, however, always been global in nature and East Asian economies therefore have an interest in APEC encompassing a broader economic agenda across the Pacific with North America and with those economies in Latin America that have an open and outward-looking economic and trade agenda. We should never lose sight of the fact that one of APEC's most significant achievements, and one of its greatest strengths, is that it helps keep the United States engaged in East Asia.

Some express disappointment that APEC has not been able to take on a greater role in addressing big regional security issues. Clearly, the fact that APEC's membership includes some economies that are not regarded by the others as sovereign political entities limits its ability to deal with sensitive political security issues. For this reason APEC's sole aim when it was created was to promote economic growth.

It is however worth noting that APEC has indirectly made an important contribution to regional security by ameliorating the transition from the old tensions following the end of the cold war.

Moreover, unique among Asian regional organisations, APEC includes Hong Kong and Chinese Taipei, two highly important regional economies, among its members. APEC has also taken a strong stand against terrorism and has done constructive work on lessening the trade and economic impact of potential terrorist incidents.

But APEC is, and will remain, an organisation whose fundamental aim is to promote economic growth through open trade and investment. That is where its strength lies and we should not be concerned about trying to make APEC into something that it cannot be.

If you take a realistic view of APEC past record and its current focus, it has been successful. It's not without shortcomings and we need to ensure that APEC itself is able more effectively to respond to new challenges affecting the region. In order to reinvigorate APEC's structures and improve its responsiveness, APEC Leaders have highlighted APEC reform as a key priority and indeed, under Australia's chairmanship this year, APEC reform has been robustly pursued. We need to rationalise the number of working groups and meetings, and make them work more effectively. The APEC Secretariat which I currently head needs to be structured so it is better equipped to service the needs of members. Proposals include establishing a policy research and analysis unit and to appoint a fixed-term Executive Director. We have also brought the business community, through ABAC, into the mainstream of APEC activities - ABAC now attends APEC meetings with full rights of participation. Other proposals are on the table: APEC reform is very much a work in progress. Not all members want to proceed at the same pace, and progress can be slow. But it is work that has to be done.

Let me conclude by noting that, starting in less than eighteen months from now, Singapore will take over as APEC host in 2009. As with other host economies, this will be a very big event for Singapore. Given the small size of Singapore's territory and the inevitable geographic concentration of APEC events during the year that this will entail, APEC will have a bigger than usual impact here. I hope therefore that my presentation today has given you a clearer idea of what APEC is all about, what it has done, what it seeks to do in the future, and what to expect in 2009.