APEC and the WTO: Which Way Forward for Trade Liberalization?

Article excerpt

APEC's decision at its Kuala Lumpur leaders' meeting in November 1998 to refer its programme of "Early Voluntary Sectoral Liberalization" (EVSL) to the World Trade Organization (WTO) confirmed what skeptics had long asserted: APEC is not an effective forum for inter-state negotiation of contentious trade issues.(1) Why might the WTO succeed where APEC has failed? And what roles remain for APEC in its pursuit of trade liberalization and facilitation in the Asia-Pacific region? These are the principal questions this article seeks to address.

The Political Economy of Trade Liberalization

For students of trade policy, the lack of congruence between the prescriptions of economic theory and the behaviour of governments poses an immediate puzzle. If free trade is as beneficial as economic theory suggests, why have governments practised it so rarely? Does the option of free trade not provide a rare instance of harmony - a situation in which self-interested governments will pursue policies that maximize not only their individual welfare but also the common good? Most economies have so small a share of global trade or of total trade in a particular product that on their own they are not able to improve their terms of trade. Unilateral liberalization is the preferred policy prescription of economic theory. It is one, none the less, that governments, historically, have rarely embraced.

Several factors might explain governments' failure to practise free trade. One is that governments are simply lacking in knowledge, unaware of the purported benefits of trade liberalization. Such an explanation is scarcely credible in an era of easy global communication, at a time of almost universal participation by states in the World Bank and the International Monetary Fund, and when the international financial community is keen to "sell" the message of liberalization to recipients of capital.

A second set of explanations revolves around a failure by governments to accept the logic of the neoclassical case for free trade, and thus their conscious rejection of the accompanying policy prescriptions. These objections may be based either on economic theory or on governments' giving higher priority to non-economic objectives than to the purported gains to be made from trade liberalization.

A starting point here are the exceptions to the case for free trade that neoclassical theorists accept.(2) Leaving aside for the moment the case for optimal tariffs (that would enable governments to capitalize on their monopoly, or monopsony positions) because this argument applies only to large players in the world economy, neoclassical theory allows several other exceptions to the case for free trade. Perhaps the best known of these is the argument for infant industry protection. Often associated with the mercantilist ideas of Alexander Hamilton and Friedrich List, the argument none the less received the endorsement of one of the most enthusiastic of the nineteenth century proponents of free trade, John Stuart Mill. In the post-war years, the case for infant industry protection became one of the cornerstones of development economics.

The costly failures of import substituting industrialization in many less developed economies, especially in Africa, South America and South Asia, have done much to discredit the case for infant industry protection - albeit often as much for reasons of political economy as for those derived from economic theory itself. In an era of global (or regional) production networks, however, when production is frequently for the world rather than the domestic market, the economic case for infant industry protection is also less compelling. The advent of post-Fordist production techniques, often based on the application of numerically-controlled machine tools, renders the economies of scale that infant industry protection is often designed to achieve less important in some sectors of the manufacturing industry today than it was in the first three post-war decades. …