Peter Gallagher

Ear­lier this week, I spoke at the APEC Senior Offi­cials Meet­ing Trade Pol­icy dia­log in Da Nang on the sub­ject of ‘inte­grat­ing’ exist­ing regional trade agree­ments in the APEC region. It’s a project that is fraught with dif­fi­culty due to the incon­sis­tent rules of ori­gin, and dif­fer­ent pref­er­ences in the exist­ing agree­ments. There is, how­ever, one exam­ple of a regional agree­ment that is being cre­ated by the ‘dock­ing’ of pref­er­ences among exist­ing ‘free trade agree­ments’. It’s a pro­ject­be­ing spon­sored by the Euro­pean Union.
I pre­pared a pre­sen­ta­tion for the Senior Offi­cials and some notes.  The con­tent of the notes is below. The pre­sen­ta­tion is avail­able here

Why are we try­ing to do this?

Inte­grat­ing (‘har­mo­niz­ing’, ‘docking’)FTAs is even more com­plex than nego­ti­at­ing FTAs. So we’d bet­ter be clear why we want to do it before we start. As it turns out, there is a dif­fer­ent path towards the Bogor goals that is much less tech­ni­cally demand­ing and would take much less time than the inte­gra­tion of FTAs. We’ll come to that at the end of the talk.

What sort of inte­gra­tion are we talk­ing about?

By ‘inte­gra­tion’ of FTAs I mean a pro­gram that aims at the uni­ver­sal ‘dock­ing’ of the 40 exist­ing (70+ poten­tial) FTAs in the APEC region. That is, extend­ing the same mar­ket access pref­er­ences among mem­bers of dif­fer­ent FTAs through­out the period of FTA imple­men­ta­tion and at the end of the imple­men­ta­tion period. This amounts to the revi­sion of restric­tive ROOs to allow ‘cumu­la­tion’ of pro­duc­to­rig­i­nat­ing in any of the part­ners to the ‘docked’ FTAs for the pur­pose of con­fer­ring regional ori­gin. Once their prod­uct is counted as ‘orig­i­nat­ing’ through­out the docked FTA then every mem­ber will have access to the pref­er­ences offered within the FTA.

Even if there were no other aspects to FTAs than the mar­ket access pref­er­ences, this ‘dock­ing’ would be dif­fi­cult to nego­ti­ate. There is at least one excel­lent exam­ple of such a process under-way else­where in the world, but it may be an excep­tion that ‘proves’ the dif­fi­culty of this project for APEC.

Mod­ern, com­pre­hen­sive FTAs have many pro­vi­sions other than the goods access sched­ules affected by ROOS. Is it pos­si­ble to sep­a­rate the ‘dock­ing’ of the access sched­ules and the inte­gra­tion or har­mo­niza­tion of the other pro­vi­sions of the FTAs? I’m going to leave that ques­tion for later dis­cus­sion.

Does every­one have the same goal?

We can imag­ine that there is only one rea­son for attempt­ing to inte­grate FTAs that now exist in the APEC region: because inte­gra­tion seems like a step towards the Bogor goals (and more stand-alone FTAs are a step away). The prob­lem is that the enthu­si­asm of APEC mem­ber economies to take on the com­plex, time-consuming task of FTA–inte­gra­tion is prob­a­bly qual­i­fied by the moti­va­tions for the FTAs them­selves.

Let’s look for a moment at what those var­i­ous motives are.

Eco­nomic integration?

Ana­lysts agree that the best ratio­nale for an FTA/RTA is to bet­ter inte­grate the econ­omy with those of its trad­ing partner(s). Eco­nomic inte­gra­tion has the same ben­e­fits as overnight eco­nomic growth (size of the mar­ket) and a quick boost to the effi­ciency of pro­duc­tion (more spe­cial­ized pro­duc­tion in a greater range of activ­i­ties). But it brings with it the full pain of adjust­ment … Even stretched out over time, few gov­ern­ments feel the need to take on dif­fi­cult adjust­ment, except in times of ‘cri­sis’. So high qual­ity FTAs that are com­pre­hen­sive and com­pleted in a short time-frame (10 years) are a small minor­ity and all link economies that were already trad­ing inten­sively before the FTA was nego­ti­ated (Europe, NAFTA, ANZ, Chile–USA). The eco­nomic inte­gra­tion objec­tive is, how­ever, con­sis­tent with the logic for full and uni­ver­sal ‘dock­ing’ of regional FTAs.

Deeper but narrower?

The most com­monly stated rea­son for an FTA or RTA: bring­ing economies closer together in the least painful fash­ion by going fur­ther than on an MFN basis (‘deeper’), but in ‘non-sensitive’ sec­tors. The ‘deeper but nar­rower’ moti­va­tion leads to agree­ments that are almost impos­si­ble to inte­grate because they are uniquely nar­row and var­i­ously deep. It may extend to some selec­tive ‘dock­ing’ of addi­tional RTAs/FTAs, but is incom­pat­i­ble with uni­ver­sal dock­ing even within the APEC region, espe­cially with those FTAs that are (more) com­pre­hen­sive.

For­eign pol­icy objectives?

What­ever they say, gov­ern­ments pur­sue FTAs/RTAs more for for­eign pol­icy rea­sons than for any other: to give more sub­stance to an impor­tant rela­tion­ship, to express a geo-strategic role (a ‘hub’)or to cre­ate an out­let for expan­sive regional ambi­tions. Many FTAs suc­ceed in these terms what­ever the ratio of black-to-red ink on the trade ledger. Some ‘dock­ing’ might fit with these motives. But it’s dif­fi­cult to imag­ine uni­ver­sal dock­ing being on the agenda of any but a dom­i­nant regional power (e.g. the EU in the con­text of the Euro-Mediterranean FTA).

The oppor­tu­nity

Why pur­sue the inte­gra­tion of regional FTAs now? We can imag­ine some good rea­sons. For exam­ple, the IMF warned ear­lier this month that the global econ­omy is much closer to a sub­stan­tial ‘cor­rec­tion’ in exter­nal bal­ances than it was the last time the IMF said this (last year). If you think that, like the boy who cried ‘wolf’, they will even­tu­ally be right about a sub­stan­tial cor­rec­tion bring­ing exchange rate realign­ment in the wake of a cri­sis in global demand, then a project to bet­ter inte­grate the economies of the APEC region would make sense. It could be one way to start deal­ing with the cause of the imbal­ances and to make the most of the oppor­tu­ni­ties that will arise after the ‘cor­rec­tion’ (which could be smoother and smaller). Because inte­gra­tion is an inher­ently com­plex under­tak­ing requir­ing many dif­fer­ent nego­ti­a­tions that could take years, the sooner a start is made the bet­ter.

Offi­cials tend to think about resource oppor­tu­ni­ties, tech­ni­cal challenges

Although pre­cau­tion is often a great moti­va­tor, it’s unlikely that this argu­ment will move inte­gra­tion up the polit­i­cal agenda. More likely the agenda will be deter­mined by oppor­tu­nity. r />

‘Sus­pen­sion’

So far, the inac­tion in the Doha nego­ti­a­tions is noth­ing excep­tional. There’s never much action in August and, what­ever ‘sus­pen­sion’ means, we know that Mr Lamy has no pow­ers to impose it. The nego­ti­a­tions will start again (pos­si­bly have started again). But it will be clear by about Decem­ber whether they have any rea­son­able prospect of deliv­er­ing ver­i­fied sched­ules of com­mit­ments by the date in May when the cur­rent TPA dead­line becomes final. After Decem­ber we could be look­ing at a real ‘sus­pen­sion’ for sev­eral years, assum­ing there is no TPA exten­sion. This period will be marked by dis­ap­point­ment and res­o­lu­tion to take alter­na­tive routes toward one or other of the dif­fer­ent goals we’ve just con­sid­ered. An ‘inte­gra­tion’ pro­gram would cer­tainly be an attrac­tive oppor­tu­nity (more attrac­tive than an expan­sion in the num­ber of RTAs?).

The polit­i­cal oppor­tu­ni­ties mat­ter more

I’m will­ing to pre­dict that the polit­i­cal reac­tion to a longer hia­tus in the WTO nego­ti­a­tions will be ‘bal­anced’. My obser­va­tion is that busi­ness lob­bies and insti­tu­tional lead­ers have made much stronger calls for progress in the nego­ti­a­tions than have gov­ern­ments. In any case, gov­ern­ments aren’t going to give them­selves much grief over things that, indi­vid­u­ally, they can’t fix. The APEC oppor­tu­nity will appeal strongly to mem­ber gov­ern­ments as an alter­na­tive oppor­tu­nity to reas­sure busi­ness that they are still pur­su­ing glob­al­iza­tions rewards

The exhaus­tion of ‘TPA’

But if a Doha hia­tus is due to the exhaus­tion of the US President’s “Trade Pro­mo­tion Author­ity” prac­ti­cal steps towards inte­grat­ing regional FTAs will prob­a­bly be con­fined to the West­ern half of the APEC region for at least a cou­ple of years (and may be over­taken by a revived Doha nego­ti­a­tion after, say, 2010).

Best prac­tices

I can assume that every­one here is famil­iar with the “Best Prac­tices” prin­ci­ples so I won’t recap them. I will, how­ever, say that they form at best a pro­logue to any prac­ti­cal pro­gram of inte­gra­tion. Their attrac­tion is that they com­prise clear, intu­itively attrac­tive pol­icy rec­om­men­da­tions that have won uni­ver­sal endorse­ment. The rec­om­men­da­tions look for­ward, apply­ing to the nego­ti­a­tion of future FTAs or the com­ple­tion of exist­ing nego­ti­a­tions. But an assault on the prob­lems of inte­grat­ing exist­ing FTAs needs some heav­ier artillery, able to deal with the messy, com­plex, deeply-entrenched defences of most exist­ing FTAs.

ROOs under­ly­ing model

Why the ‘mil­i­tary’ metaphor? Because FTAs are not like a series of self-contained towns that we want to join with roads to make com­merce eas­ier; they are more like a series of fortresses designed to defend pref­er­en­tial access and pre­vent the loss of mar­ket rents. Every inte­gra­tion strat­egy but one—that I’ll describe a lit­tle later—means breach­ing the defen­sive walls by deter­mined and (polit­i­cally) coura­geous attack on pref­er­en­tial mar­gins and the busi­nesses that ben­e­fit from them. The walls of these fortresses are built from Rules of Ori­gin.

A busi­ness model, not a trade model

The under­ly­ing model for a rule of ori­gin is a busi­ness model. It’s not about trade or for­eign pol­icy, its about com­mer­cial advan­tage in a com­pet­i­tive busi­ness envi­ron­ment. The ROOs prob­lem is an expres­sion of the arche­typal mar­ket fail­ure prob­lem: the incen­tives oper­at­ing on the pri­vate actors whose energy and polit­i­cal influ­ence helped cre­ate the con­di­tions for the FTA in the first place are such that they are likely to max­i­mize pri­vate gain from the Agree­ment at the cost of—or, at best while under-investing in—the social gain.

Busi­ness: exclu­sive access = profit margin

Export­ing busi­nesses, with the excep­tion of com­mod­ity traders, don’t spend much time wor­ry­ing about tar­iffs. Sur­veys (World Bank among oth­ers) show this over and over. Con­sumers pay tar­iffs. As long as third coun­try com­peti­tors are pay­ing the same duties, tar­iffs are an annoy­ing fixed cost (which is why they mat­ter more to com­mod­ity traders whose mar­gins are small rel­a­tive to the fixed cost) but have no com­pet­i­tive impact. What busi­nesses want is an exclu­sive mar­gin that is not avail­able to com­peti­tors; a com­pet­i­tive advan­tage. Restric­tive ROOs are the price of achiev­ing this advan­tage as well as its guar­an­tee. Con­cep­tu­ally, it’s a sim­ple sum: “Present value of the expected mar­gins minus lob­by­ing costs minus the PV of expected ROO admin­is­tra­tive costs”. On the import­ing side of the equa­tion the moti­va­tion is dif­fer­ent but the logic is the same: the ROO is still seen as a defense against com­pe­ti­tion, lim­it­ing the breadth of the pref­er­ence.

Trade: open entry/exit = greater range of sub­sti­tu­tion = max­i­mize wel­fare at higher levels

The ben­e­fits of trade to the economies of RTA part­ners have, of course, a com­pletely dif­fer­ent logic. The logic of trade con­sid­ers com­pe­ti­tion a good thing. But that’s not the logic of FTA/RTAs. Does the busi­ness sec­tor impose ROOs on gov­ern­ments or the other way around? Nei­ther, I sus­pect; between gov­ern­ments and the pri­vate sec­tor lob­bies that are much more promi­nent in FTA nego­ti­a­tions than in any mul­ti­lat­eral nego­ti­a­tion there is a mutual—but dif­fer­ently founded—interest in ‘exclu­siv­ity’.

Busi­ness interest

The busi­ness logic of ROOs is the biggest sin­gle hurdle—although far from the only hur­dle, in prac­tice— to an FTA inte­gra­tion strat­egy. A head-on assault—for exam­ple, decid­ing to ignore busi­ness inter­est in favor of the social inter­est in more open, com­pet­i­tive markets—is the sort of thing that most Finance Min­istries and aca­d­e­mic ana­lysts will rec­om­mend. This is a fine idea but it has a sorry his­tory. A more likely way to suc­ceed with an inte­gra­tion strat­egy the cre­ation of some other incen­tive that replaces the busi­ness logic of ROOs (com­pet­i­tive advan­tage). I know of one case in which this approach seems to work but the chal­lenge is to find a way to apply it in the APEC region. Obser­va­tion of how firms man­age incon­sis­tent ROOs, how­ever, sug­gests to me that for indi­vid­ual firms the value of the com­pet­i­tive advan­tage con­ferred by FTAs with restric­tive ROOS approx­i­mates to the value of the mar­gins in only one or per­haps two mar­kets.

Busi­nesses opti­mize choice among ROOs

It’s impor­tant to under­stand bet­ter how busi­nesses deal with the prob­lem of over­lap­ping ROOs to deter­mine how they would react to the sim­pli­fi­ca­tion that inte­gra­tion implies. My obser­va­tion from talk­ing to man­agers in the APEC region (Aus­tralia, Sri Lanka, Bangladesh, Malaysia, Thai­land) East­ern Europe (Hun­gary, Bul­garia, Croa­tia) and Africa (Kenya, Uganda, Zim­babwe, South Afri
ca) is that busi­nesses are likely to ‘opti­mize’ where ROOS force them to make a choice between access­ing dif­fer­ent pref­er­ences. Man­agers con­sider the rel­a­tive value of com­pli­ance and MFN trade. In some cases, the mar­gin of pref­er­ence, the com­pet­i­tive advan­tage and expected vol­ume of trade is may be too small to jus­tify the com­pli­ance cost. In this case, sup­ply under MFN con­di­tions removes ROO considerations.

Where pref­er­ence mar­gins are poten­tially valu­able, busi­nesses develop prod­uct and man­u­fac­tur­ing strate­gies that take account of the cus­tomer and reg­u­la­tory require­ments includ­ing ROO in their most impor­tant mar­ket first and then try to jug­gle com­po­nent vari­a­tions and com­pli­ance costs in less impor­tant mar­kets to take advan­tage of pref­er­ences where fea­si­ble and prof­itable. In other words, they treat the choice as an opti­miza­tion prob­lem. Fre­quently the prob­lem is triv­ial because exist­ing con­trac­tual arrange­ments make the choice of mar­kets (and ROO com­pli­ance) obvi­ous.

Man­agers eval­u­ate mar­gins after book-keeping, re-tooling, inven­tory costs

Where busi­ness is able to make a choice among FTAs or between pref­er­en­tial and MFN access to a mar­ket, the opti­miza­tion prob­lem requires them to con­sider much more than reg­u­la­tory com­pli­ance costs. Fre­quently, in sophis­ti­cated RTA admin­is­tra­tions, the reg­u­la­tory costs are being con­tained by tech­niques such self-assessment of pref­er­ence eli­gi­bil­ity with ran­dom ver­i­fi­ca­tion and account­ing sep­a­ra­tion rather than phys­i­cal sep­a­ra­tion of non-originating com­po­nents in inventory.

The more dif­fi­cult choices for man­agers con­cern the costs of prod­uct devel­op­ment to meet restric­tive ori­gin require­ments; meet­ing cus­tomer spec­i­fi­ca­tions in sea­sonal or vari­able sup­ply indus­tries with­out access to non-originating sup­ply; re-tooling for batch pro­duc­tion of orig­i­nat­ing goods for dif­fer­ent mar­kets etc. Most busi­nesses are eas­ily per­suaded that CTC is a sim­pler sys­tem to man­age with­out loos­ing the exclu­siv­ity of a ROO. CTC has the advan­tage that ori­gin is con­ferred by the degree of trans­for­ma­tion as seen through the prism of the HS rather than by more com­plex value-adding cal­cu­la­tions eg. ex-factory cost pro­por­tions as the cri­te­rion for ‘sub­stan­tial trans­for­ma­tion’ where ROO com­pli­ance is affected by the vari­able costs of inputs (a big fac­tor in the food indus­try).

Firms take account of few ROOs

My hypoth­e­sis is that only a small number—perhaps one or two—FTAs actu­ally impact on the export mar­ket­ing activ­i­ties or pro­duc­tion deci­sions of most firms even in economies where there are mul­ti­ple FTAs to choose from. ROO–restricted pref­er­ences in sec­ondary mar­kets must either align with the pri­mary ROOs or the pref­er­ence is passed up.

Pro­duc­tion net­works may favor some ‘docking’

The (prob­a­bly) lim­ited num­ber of ROOS that actu­ally impact on pro­duc­tion or mar­ket­ing deci­sions lim­its the resis­tance of export­ing busi­nesses to inte­gra­tion. There are also some busi­nesses that will actively seek more inte­gra­tion or ‘dock­ing’ of RTAs; espe­cially those that par­tic­i­pate in a pro­duc­tion net­work whose cus­tomers are located in one or more of the RTA part­ners. Within a pro­duc­tion net­work, at least as far as the inputs and out­puts of the net­work are con­cerned, the busi­ness logic of the ROO does not hold. Of course, these busi­ness may have other pro­duc­tion and trade inter­ests that are not part of the pro­duc­tion net­work where the logic of the ROO reasserts itself.

ISI an exam­ple of MNC pro­duc­tion net­work influence

Described by US offi­cials as one of the most sig­nif­i­cant aspects of the Singapore-US FTA, the Inte­grated Sourc­ing Ini­tia­tive effec­tively removes the Agreement’s ROO tests for a lim­ited num­ber of prod­ucts shipped between Sin­ga­pore and the USA that were already duty-free under the WTO Infor­ma­tion Tech­nol­ogy Agree­ment (and for cer­tain med­ical prod­ucts also duty-free before the SUSFTA). The impact of the ISI is to allow MNCs from the US and Sin­ga­pore to locate ‘net­work’ pro­duc­tion facil­i­ties else­where in the region, or the world for that mat­ter, for pro­cess­ing or even trans­ship­ment through one econ­omy or the other.

Dif­fi­cult to say how impor­tant pro­duc­tion net­works are

They appear to be wide­spread, elab­o­rately orga­nized and increas­ingly char­ac­ter­is­tic of highly com­pet­i­tive, low-margin indus­tries such as tex­tiles, pc’s and con­sumer elec­tron­ics as well as some indus­tries char­ac­ter­ized by net­work scale where there is small num­ber of global pro­duc­ers (auto­mo­biles, air­craft). But the high degree of intra-industry trade char­ac­ter­is­tic of other man­u­fac­tur­ing sec­tors does not nec­es­sar­ily indi­cate a ‘pro­duc­tion net­work’. Nor do net­works imply an inter­est in FTAs’; net­works oper­ate suc­cess­fully on the basis of ‘inward’ and ‘out­ward’ pro­cess­ing and duty-drawback arrange­ments or export pro­cess­ing zones.

An exam­ple of ROO ‘docking’

There is some encour­age­ment for a poten­tial APEC pro­gram of FTA ‘dock­ing’ in the EuroMed RTA now being cre­ated by the EC and its part­ners in bilat­eral Mediter­ranean Asso­ci­a­tion Agree­ments. The EuroMed pro­gram is apply­ing the pan-European model of cumu­la­tion of ori­gin to the wider Mediter­ranean region (41 economies), elim­i­nat­ing ROO restric­tions. But this model seems to work by replac­ing the busi­ness logic of ROOs with some­thing of greater value. I sus­pect that it works only in a ‘hub and spokes’-configured RTA.

PanEURO-Mediterranean model

Begin­ing in 2003, the EC is facil­i­tat­ing a series of ‘dock­ing’ agree­ments among Mediter­ranean economies that already have an ‘Asso­ci­a­tion’ agree­ment with the Com­mu­nity. This is a sig­nif­i­cant ini­tia­tive that, once com­plete, will effec­tively extend the pan-European origin-model that oper­ates inside the EC itself to all of the mem­bers of the ‘Euro-Med’ region.

Terms of docking

In brief, any Asso­ci­a­tion coun­try already has access to the EC mar­ket on pref­er­en­tial duty-free terms (sub­ject to cer­tain con­di­tions includ­ing the ‘no-drawback’ rule on non-originating com­po­nents incor­po­rated in exports to the EC). The preference-receiving imports are con­sid­ered ‘EC ori­gin’ mate­ri­als for the pur­poses of trade among mem­bers of the EC; that is they may be ‘cumu­lated’ with e.g. French ori­gin goods for the pur­pose of ‘sin­gle mar­ket’ sales any­where in the Com­mu­nity. Under the terms of the Euro-Med agree­ment, the Asso­ci­a­tion coun­tries are encour­aged to nego­ti­ate a series of bilat­eral free-trade pro­to­cols among them­selves extend­ing the iden­ti­cal
‘cumu­la­tion’ rules to each other cov­er­ing all bilat­eral trade The incen­tive to do so is that the EC will con­sider any goods incor­po­rat­ing mate­ri­als orig­i­nat­ing in coun­tries that have such pro­to­cols as orig­i­nat­ing goods.

In other words, the pan-Euro cumu­la­tion rules will apply through­out the Euro-Med region. The EC has added fur­ther incen­tives in the form of sim­pli­fi­ca­tion of treat­ment of non-originating goods from out­side the region (sub­ject to the ‘no-drawback’ rule) includ­ing the use of only two duties (5% and 10%) on non-originating com­po­nents on import into the EC.

Poten­tial mem­bers of the RTA

Alge­ria, Bul­garia, Egypt, Faroe Islands, Ice­land, Israel, Jor­dan, Lebanon, Morocco, Norway,Romania,Switzerland(includingLiechtenstein), Syria, Tunisia, Turkey and West Bank and Gaza Strip and the EC (25)

‘Geom­e­try’

The EC describes the arrange­ment as ‘diag­o­nal geom­e­try’ of cumu­la­tion. Another way of describ­ing the model is a ‘hub-and-spoke’ arrange­ment in which the Euro-Med pro­to­cols for cumu­la­tion of ori­gin are the com­ple­tion of the ‘rim’ among the spokes.

Use of ‘busi­ness logic’

The logic of an exclu­sive com­pet­i­tive advan­tage that nor­mally under­lies a ROO is over­whelmed by the advan­tages of improved terms of access (sim­pli­fied, lib­er­al­ized treat­ment of non-originating com­po­nents) to the largest, wealth­i­est mar­ket in the region

Would the EuroMed model work in APEC?

We can test the hypoth­e­sis by con­sid­er­ing its appli­ca­tion to some exist­ing and pro­posed FTAs. The fol­low­ing exam­ple places China at the ‘hub’ of a net­work of FTAs with ASEAN (as a group), Aus­tralia and New Zealand.

The same pref­er­ences among ‘spokes’ as with the ‘hub’

Pref­er­ences between ‘hub’ and ‘spokes’ in the cur­rent China–ASEAN, China-Australia and China-NZ nego­ti­a­tions are—as far as I know—undecided they are prob­a­bly not com­pre­hen­sive free trade. China has made it clear that it is reluc­tant to extend duty-free access on agri­cul­tural prod­ucts, for exam­ple. It seems likely that Aus­tralia will seek to main­tain pro­tec­tion for its gar­ment indus­try until at least the end of the cur­rent indus­try plan in 2015.

For Aus­tralia and New Zealand, the com­pre­hen­sive free-trade terms of CER would become tan­ta­mount to MFN terms of access if they extend the pref­er­ences in that agree­ment to China or to ASEAN. This would be a major step for each econ­omy but per­haps not impos­si­ble to imag­ine if the corol­lary were the same preference—that is, duty-free access—to ASEAN and China For ASEAN, free trade in mer­chan­dise is not yet com­plete within the region and there seems to be no plans for com­pre­hen­sive free trade with China or with ANZ

The same ROO among ‘spokes’ as with the ‘hub’

If the mar­gin of pref­er­ence extended to China and to the other ‘spokes’ is com­pre­hen­sive free trade in goods and ser­vices then there seems to be no rea­son not to have the same ROO among the spokes and between the spokes and hub

The incen­tive

In the case of EuroMed the incen­tive for the same terms of access among the spokes as with the hub is that the hub is such a dom­i­nant trad­ing part­ner across all goods trades that extend­ing the same pref­er­ences to the other spokes seems a rel­a­tively small step and the incen­tive of still bet­ter terms of access to the hub is poten­tially effec­tive (the ‘spoke-to-spoke’ pro­to­cols are not, how­ever, all in place yet).

Ques­tions

(1)

If China were to offer ASEAN, Aus­tralia and New Zealand the same mar­ket access deal on goods that the EC offers the Mediter­ranean Asso­ci­a­tion coun­tries on con­di­tion that they extended the same terms ‘spoke-to-spoke’, would this remove oppo­si­tion to com­pre­hen­sive free trade among Aus­tralia, NZ and ASEAN? Would the offer be ‘picked-up’ by the spokes?

(2)

Would there be any ben­e­fit for China in offer­ing com­pre­hen­sive free trade to the ‘spokes’? Or do the per­ceived threats to e.g. agri­cul­tural employ­ment in China still pre­dom­i­nate?

An opti­mistic view

The exam­ples sug­gest that the hypo­thet­i­cal ‘dock­ing’ using the EuroMed approach is not out of the ques­tion, but it’s far from con­firmed. If, how­ever, the ‘EuroMed’ propo­si­tion fails in this case, what hope is there for the broader—and even more radical—Bogor goals that extend, for exam­ple, to ser­vices trade? In order not to fin­ish this talk on such a pes­simistic note, I’d like to offer some obser­va­tions that sug­gest some­thing like the EuroMed project may be pos­si­ble in the APEC region in the future.

We tend to focus on the hard cases in ROO

When we think about the dif­fi­culty of ‘dock­ing’ FTAs and the rigidi­ties and restric­tive­ness of ROO, we tend nat­u­rally to think of the hard cases such as the NAFTA pro­vi­sions on tex­tiles. Most ROO based on CTC oper­ate much more sim­ply and trans­par­ently. The busi­ness logic remains, even with this sim­pler means of decid­ing ori­gin—ROO are still intended for pur­poses basi­cally inim­i­cal to the logic of trade—but sim­ple ROO do make the nego­ti­a­tion of dock­ing less dif­fi­cult should there be a suf­fi­cient incen­tive found.

Anes­thetiz­ing the MFN decision

As in the EuroMed case, an offer from a dom­i­nant part­ner to the ‘spokes’ can have the effect of ‘anes­thetiz­ing’ trade-exposed sec­tors in the spokes to the MFN–like exten­sion of pref­er­ences among them­selves. This was, after all, the logic of MFN itself: once you have nego­ti­ated terms with your most impor­tant trad­ing part­ner for a par­tic­u­lar trade (the ‘ini­tial nego­tia­tor’), the exchange of those same terms with less sig­nif­i­cant sup­pli­ers or mar­kets is not a major step. It’s the size of the pref­er­ence (‘free trade’)that is dif­fi­cult, not the breadth of its sub­se­quent appli­ca­tion. Of course, it remains an open ques­tion whether the ‘hub’ busi­ness groups would find the pain of free-trade access by the spokes quite so ano­dyne. In the APEC region we already have the world’s first and third biggest traders (USA and China) and soon it will be the first and sec­ond. Plus, of course, Japan. An offer from those giant economies to all other APEC mem­bers might be suf­fi­cient to ini­ti­ate a ‘EuroMed’ result. But if such an offer were on the cards then the orig­i­nal Bogor goals would be much closer than any­one imag­ines.

The big­ger the goal the less com­plex the agreement

RTAs emerge, as we have observed, from a polit­i­cal con­text. An approach to ‘docking&rsq
uo; exist­ing and future RTAs along the lines of the EuroMed model would need deter­mined polit­i­cal sup­port, in China, and the USA, espe­cially. The nego­ti­a­tions would, even so, be long and extremely com­plex (I am ignor­ing, too, the inte­gra­tion of other aspects of the exist­ing agree­ments). In my view, how­ever, the EuroMed Agree­ments offer the only exam­ple of a com­pa­ra­ble ‘dock­ing’ effort and deserve our closer study and, pos­si­bly, emu­la­tion if RTA inte­gra­tion is the direc­tion in which APEC heads. But even as we con­tem­plate the dif­fi­culty of cre­at­ing the polit­i­cal envi­ron­ment (if it can be cre­ated) and under­tak­ing the tech­ni­cal work for an RTA ‘dock­ing’ project, we should reflect that is/was a global agree­ment on offer that chal­lenged APEC economies even less on the polit­i­cal level and much less on the tech­ni­cal level that we have so far been unable or unwill­ing to com­plete. Finally, the Bogor Goals con­tem­plate a deci­sion that would cut through most, if not all, of the com­plex­ity of ‘dock­ing’ and even the com­plex­i­ties of the Doha Round by mak­ing bilat­eral FTAs, sub– regional RTAs and all the machin­ery of the ‘modal­i­ties’ irrelevant.