___________________________________________________________________________

2018/SOM3/008
Agenda Item: 2

Update to the FTAAP Opportunity: A Report to

ABAC
Purpose: Information
Submitted by: ABAC

Third Senior Officials’ Meeting

Port Moresby, Papua New Guinea
19-20 August 2018
 1
Update to The FTAAP Opportunity: a Report to ABAC

Michael G. Plummer,
Johns Hopkins University, SAIS, and East-West Center
Christopher Findlay,
University of Adelaide
Peter A. Petri,
Brandeis University
Ganeshan Wignaraja,
Lakshman Kadirgamar Institute and Overseas Development Institute

Abstract

The regional economic integration and policy context in which the last ABAC Report on the scope and
pathway to an FTAAP was submitted to APEC leaders has changed significantly.

For the first time since the global financial crisis, there are favorable winds for regional economic integration
over the short-term but with risks. The Asia-Pacific is witnessing its strongest growth upturn since 2010 with
growth increasing to 4.0% in 2017, up from 3.4% in 2016. The IMF projects regional growth of 4.0% in both
2018 and 2019. The broad-based upturn covers both advanced and developing economies. It reflects a rising
global momentum, an expected increase in business investment, stronger external demand for Asia’s exports
and better consumer confidence.

Asia-Pacific trade and foreign direct investment (FDI) is generally supportive of the growth upturn. Trade
volumes increased by 4.6%, the fastest rate in four years. Of the 21 regional economies, 16 saw better trade
growth in 2017. A modest increase in FDI is also expected in 2017. Intra-regional trade is at historically high
levels, driven partly by sophisticated global value chains (GVCs). The digital economy has exploded in the
region bolstered by rising mobile phone penetration rates across the region, driving internet adoption and
changing consumer behavior; it is transforming the way business is being done across manufacturing and
services and will continue to do so.

But a fragile recovery the Asia-Pacific faces various risks – e.g., increased protectionism, a slowdown in
China, rising interest rates, geopolitical tensions and natural disasters, among others. The jury is still out as to
whether the current upturn represents the start of a cyclical recovery or a short-term blip on the road to a lower
growth trajectory.

Over the past two years, populism coupled with nationalism in OECD economies and elsewhere,
underpinned by anti-globalization sentiments, has dampened the enthusiasm for economic integration in
general and free-trade areas in particular. Some economies have suggested that the depth and quality of free-
trade agreements need to be improved and the benefits more fairly spread both within and across countries. In
Europe, for example, the new Italian government is comprised of euroskeptic parties, and the UK is currently
in the process of withdrawing from the EU in the wake of its “Brexit” referendum. Furthermore, the United
States signed but then withdrew from the Transpacific Partnership (TPP) agreement. Yet other economies
are pursuing development strategies aimed at

1 This report was prepared by an independent group of experts. The views expressed here are those
of the authors and do not necessarily reflect the views of ABAC.

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boosting domestic industrialization, e.g., the “Made in China 2025” program and the “Make in India”
initiative. Barriers to digital trade erected by some non-TPP signatories in the Asia-Pacific region have also
raised concerns about the ability to expand economic cooperation. The December 2017 WTO Ministerial
Meeting made limited progress with the launch of the e-commerce framework agreement among 70 countries
but failed to issue a ministerial declaration.

Yet, the economic arguments for closer economic integration in the APEC region outlined in the last report
continue to be at least as strongly compelling as they were in 2015, if not more so. Promoting economic
cooperation initiatives that build on ABAC’s “four pillars” of inclusivity, comprehensiveness, consultation,
and transparency, to energize the private sector at all levels and generate sustainable economic growth and
development still constitute a key aspiration for the region and would provide a bulwark against any further
rolling back of open markets for trade and investment.

Since deeper and wider economic integration has demonstrated its abilities to enhance growth, reduce poverty,
and improve socio-economic prospects, developing a comprehensive, modern, rules-based approach to
global economic governance is necessary to regional success in the 21st century. In addition, building
coalitions among smaller economies via liberalization “pathways”, such as the CPTPP, RCEP and the Pacific
Alliance, and in other fora to support concerted liberalization is essential to ensure that the Bogor Goals can
be fully realized.

Despite some setbacks, the region is still moving forward with its economic cooperation efforts: the TPP has
been reconstituted under the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) agreement
among its remaining eleven members; RCEP is moving forward with the goal of being completed at the end of
2018; and the Pacific Alliance continues to deepen internal and external cooperation, including entering into
free-trade area negotiations with potential “associate members” Australia, New Zealand, Singapore and
Canada in June 2017.

Nevertheless, the high expectations of deepening cooperation via pathways towards an FTAAP have been
tempered by new political realities. Structural adjustment is needed to ensure that opportunities to gain access
and enjoy a share in the economic benefits that derive from enhanced trade and investment flows, new
business models, the digital economy, new services made possible by the ICT revolution, and artificial
intelligence have entailed structural adjustment that can negatively affect individual workers and
communities. Moreover, there is the risk that some economies themselves may be left behind and a greater
“digital divide” may emerge between advanced and developing economies.

Hence, this ABAC report update includes not only a survey of new trends in economic integration and
critical policy developments over the past two years but also analysis of the new political- economy
challenges facing the APEC region as it considers practical approaches in deepening integration toward the
FTAAP. Given APEC’s long-held Bogor Goals citing an ambitious aspiration of 2020 for open trade and
investment among APEC economies, these new realities require a re- evaluation of some of the original
report’s predictions and a greater focus on inclusivity in the design of new trade policy initiatives.

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I. Introduction
Since our last report, much has changed in terms of the global policy context in which deeper and
wider Asia-Pacific economic cooperation is evolving. In particular, in the OECD and beyond, the rise
of populism on the political right has breathed new life into the anti-trade forces on the political left,
which has a long tradition of populism. While in the making for some time, this new reality made its
first major headlines with “Brexit,” i.e., the dramatic decision, via a referendum, of the United
Kingdom to exit from the European Union (EU). This was especially significant since the United
Kingdom was once the most pro-free trade country in the EU, e.g., it was instrumental in the
launching of the Single Market Program that transformed the region into a truly integrated market.
Populist, anti-trade parties have made considerable gains in other EU member-states as well, most
recently in March 2018 when populist parties on the left and the right were the main winners of the
Italian elections. This is also true for some APEC member-economies; elections in one member-
economy, for example, featured trade-skeptical candidates among all parties and most candidates
expressed an interest in withdrawing from the Transpacific Partnership (TPP).

This trend obviously poses significant challenges to the ABAC-supported APEC vision of global
trade free of policy obstacles. The prospect of realizing the Free-trade Area of the Asia-Pacific
(FTAAP), proposed by ABAC in 2004 and adopted by APEC itself, may be more distant at this
historical juncture than was the case when our earlier report was released. The potential gains—
economic and non-economic—of the FTAAP, therefore, continue to beckon for closer integration;
indeed, the current political winds underscore why the world requires Asia-Pacific leadership now
more than ever in forging a more prosperous, inclusive and fair world.

Three significant events since our report have had important bearings on the analysis of the previous
report. The first was the exit of the United States from the Transpacific Partnership (TPP) agreement,
based on a view that the agreement did not significantly advance its interests. Since then, it has
reopened NAFTA and KORUS2 negotiations to modernize both agreements to better reflect the
realities of trade. The United States has also said that it wishes to pursue bilateral FTAs, including
with Japan and Southeast Asian economies (with the Philippines ostensibly first on the list), but it is
unclear if this interest is mutual. Japan, for example, would prefer that the United States return to the
TPP. Besides, as underscored at length in our report, the very strength of mega-regional agreements
comes from their being large, multi-economy accords; bilateral FTAs tend to be less efficient.3

The second event was the signing in March 2018 of the successor to the TPP, the Comprehensive and
Progressive Agreement on Transpacific Partnership (CPTPP) among the remaining 11 TPP
economies. The CPTPP is remarkably similar to the TPP, with only changes in about two dozen
measures that were relegated to “suspension” status (these measures, more than half of which related
to intellectual property protection, were kept in the agreement in case the United States wishes to
return). While the CPTPP is much smaller in terms of economic size than the TPP12, the decision by
the region to continue to move forward without the twelfth member underscores the commitment of
member-economies to deepening Asia-Pacific economic integration and to pursuing deep integration
as a pathway to realizing the APEC Yokohama Vision of an FTAAP. It also demonstrates what can
be achieved in the area of ‘next generation’ trade and investment elements among a diverse group of
economies at different levels of economic development and regulatory sophistication.
2
On 23 March, 2018 an agreement on a slightly-revised KORUS was reached.
3
The APEC Strategic Blueprint for Promoting Global Value Chains Development and Cooperation also
emphasizing an APEC-wide approach, underscoring that, “Reducing trade and investment barriers will improve
economies’ access to global production networks and allow firms to source less expensive inputs globally, which in turn
would lower costs, increase efficiency and enhance competitiveness.” https://www.apec.org/Meeting-Papers/Leaders-
Declarations/2014/2014_aelm/2014_aelm_annexb.aspx
3
Another pathway to the FTAAP is the Regional Comprehensive Economic Partnership (RCEP),
which has been in negotiation since it was launched in November 2012. At the time of our previous
report, RCEP negotiations were still in their infancy. Since then, considerable progress has been made,
with a strong possibility of an agreement by the end of 2018. It is still unclear as to how
comprehensive the agreement will be in terms of scope and ambitions in terms of “depth”. As
anticipated in our earlier report, it would appear that the agreement will be “shallower” than the TPP
but still significant in terms of the signal it potentially sends about the importance of continuing
regional economic integration, although for credibility reasons this does require a certain level of
ambition. It continues to have great potential as a pathway to the FTAAP. The Pacific Alliance, which
has evolved as a looser arrangement that prioritizes open regionalism, continues to deepen internal
and external cooperation, including entering into free-trade area (FTA) negotiations with Australia,
New Zealand, Singapore and Canada in June 2017.

The third event is the adoption by some non-TPP signatories of new barriers to digital commerce and
the movement of data. Such barriers include requirements to locate data repositories in certain
jurisdictions, prohibitions on the movement of data cross borders, and limits on ownership of (and
investment in) certain types of technologies – such as cloud computing. Given the clear benefits of
digital trade to creating more inclusive growth, such barriers are a growing concern.

Our earlier report focused on the economics of the FTAAP, included business experiences with
economic integration to underscore its potential, and considered how it could be realized. It argued
that economic integration and next-generation agreements to facilitate it have not only delivered
remarkable results, but also address critical aspects of the emerging global and regional business
environment.

The main conclusions of the report, all of which echo the importance of the ABAC pillars of
inclusiveness, comprehensiveness, consultation and transparency, can be summarized as follows:

1. A high-quality, ambitious and comprehensive FTAAP would have the potential to reinforce the
sustainable growth of trade and lead to inclusive economic progress, bringing hitherto excluded
enterprises and workers into the mainstream of the global production system.

2. The future of the Asia-Pacific economy is bright, as long as it remains united; the private sector
can offer pragmatic advice on how to reduce barriers to economic integration and bridge cultural and
political differences.

3. The FTAAP would yield significant gains in terms of economic welfare, mainly by opening
markets and facilitating access to resources, including capital, workers, information and technology.
These are central to achieving high productivity, which in turn promotes a higher standard of living.
Business is increasingly organized around global value chains (GVCs) that require excellent
connectivity and especially low trade, investment and regulatory barriers. The FTAAP can deepen
technological links, support business innovation, and expedite adoption of technology by consumers.
It can chart new, inclusive paths of growth.

4. In terms of realizing the FTAAP, the “pathway approach” whereby the TPP, RCEP and Pacific
Alliance allow the region to test ideas and develop its thinking for FTAAP negotiations makes good
economic and political sense. They are already addressing business interests with rules hammered
out by key Asia-Pacific economies. Business needs a “living” FTAAP that accommodates change in

4
the business environment, encourages consultation, and admits new members. These features will
ensure that benefits from an FTAAP continue to grow as technology and the world economy evolve.

5. Business must help to build a persuasive case for the FTAAP. Economic integration, despite its
extraordinary record, faces resistance. Business has an incentive to make the case for continued
integration, based on its first-hand knowledge of impediments to regional trade and investment and
the benefits from resolving them.

While the political context is more challenging, the wisdom imparted by business experiences and
informed economic analysis regarding the potential benefits of deeper Asia-Pacific economic
integration continue to be valid. The case for the FTAAP is more compelling than ever, given the
current political headwinds, and the potential for the private sector to create jobs, enhance welfare,
and support sustainable growth over the long-run is bright. The main challenge is how to get there.

Hence, the goals articulated in our earlier report continue to be as relevant as ever. In fact, as will be
evident from the analysis below, the need to stress the importance of regional integration has even
become more pressing for at least two reasons. First, it is essential to keep the rules-based approach
to economic integration alive, as it is critical to the future competitiveness and prosperity of the region.
Second, in the new political context of strong nationalism and populism, building coalitions among
smaller economies in favor of reducing obstacles to welfare-enhancing economic interchange is
essential to ensure that the Bogor Goals moves forward.. If such a path doesn't take root, even without
a trade war economies may become more inward-looking simply to minimize risk, to the great
detriment of the region and the global economy more generally. The CPTPP and its possible
enlargement are significant in their own right, but the indirect benefits of being a beacon for outward-
oriented policy reform and deterrence against unilateralism are also vital to highlight.

In this update, we focus on what has changed since the first report was released at the end of 2015.
Section II considers trends in economic integration since the last report, including general growth
trends and short-term macroeconomic forecasts, developments related to trade and foreign direct
investment (FDI), global supply chains, and the digital economy, which featured prominently in our
earlier report. Section III focuses on the new policy context in which the FTAAP is being considered,
including changes in trade policy and new developments in regional cooperation. Finally, in Section
IV challenges to the FTAAP moving forward and emerging opportunities are addressed.

II. Trends in Economic Integration

A. Growth Trends: Favorable Winds over the Short-term but with Risks

The Asia-Pacific economy is experiencing its strongest growth upturn since 2010. Growth in the
region is expected to have increased by 4.0% in 2017, which is significantly higher than the 3.4% in
2016 (Figure 1). While the January 2018 IMF World Economic Outlook Update suggests that global
growth pessimism may have been misplaced, the jury is still out as to whether the current upturn
represents the start of a cyclical recovery in the region or a short-term blip on the road to a lower
growth trajectory.

The upside growth surprises in 2017 have been wide-ranging. Growth in the region’s developed
economies--led by a solid performance by both the United States and Japan--is projected to have
increased from 1.5% to 2.3% between 2016 and 2017, while that of developing economies is expected
to be even higher (4.8% to 5.2%). Much of the latter group’s revival derives from strong growth in
Asian developing economies (Table 1). While the expansion is projected to increase in Korea and in
major Southeast Asian economies, China’s growth is expected to moderate somewhat to around 6.6%
5
this year. Reflecting an improved performance from Mexico, the recovery in Latin American
developing economies is also expected to strengthen. Furthermore, in another encouraging
development, Russia is expected to move from negative to positive growth.

Upward revisions by the IMF to its short-term forecasts suggest that the Asia-Pacific economy will
continue to grow at a 4.0% clip in both 2018 and 2019 (Table 1). Developed economies are expected
to moderate slightly from 2.4% in 2018 to 2.2% in 2019. Meanwhile, developing economies are
expected to maintain growth of 5.2% in 2018 and 5.1% in 2019. The improved economic outlook in
the region is largely attributable to rising global momentum, the expected effect of a cut in the US
corporate profit tax on investment, and stronger external demand for Asia’s manufactured exports
(IMF, 2018). The expected fiscal impact of Japan’s 2018 supplementary budget and the favorable
effects of higher prices for commodity-exporting developing economies will also play a supporting
role.

The upturn in the Asia-Pacific economy in 2018-2019, however, could be undermined by several
lingering downside risks, which have fueled concerns about the fragility of the cyclical recovery.
According to the most recent annual PECC survey of 722 representatives of business, government
and non-governmental organizations, the top five risks to growth in the Asia-Pacific economy are:
(1) increased protectionism, (2) lack of political leadership, (3) a slowdown in China, (4) a possible
slowdown in world trade growth and (5) a failure of economies to implement structural reforms
(PECC, 2017). While the related risks of slowdowns in growth in world trade on the one hand and
China on the other have not been as serious as expected in early 2018, the risk of increasing
protectionism has become a particularly serious concern in the current trade-policy environment, with
a potential trade war is looming. Additional emerging risks include monetary tightening and rising
interest rates in developed economies, geopolitical tensions (e.g. over North Korea’s nuclear
ambitions), political uncertainty in some economies and a rising economic toll from natural disasters.

B. Trade and FDI

The Asia-Pacific economy’s trade and FDI flows are expected to be supportive of the upturn in growth.
The region’s estimated growth in trade volumes increased by 4.6% in 2017, the fastest in four years
(see Figure 2). This represents a significant improvement above the 1.0% growth in 2016. Improved
trade growth is due to a cyclical pick up in investment spending in developed economies, rising import
demand in the United States (US), increased intra-regional shipments across Asia, and somewhat
higher consumer confidence (WTO, 2017).

Over 2016 to 2017, the region’s developed economies are projected to have significantly increased
their trade volumes from 0.5% to 4.1% and developing economies from 2.4% to 4.8%. Of the 21
Asia-Pacific economies, 16 are likely to have experienced better trade volume growth in 2017 than
in 2016 (see Table 2). This includes most of the region’s largest traders such as China, the US, Japan,
Hong Kong, Singapore, Indonesia, Australia and Canada. However, Korean trade growth has
stagnated, and Brunei, Peru, the Philippines and Papua New Guinea may have experienced lower
trade growth.

As Table 3 indicates, in 2016 the Asia-Pacific economy exported goods and services valued at $9.5
trillion (45% of world exports) and imported goods and services worth $9.4 trillion (46% of world
imports). These figures are notably higher than those in 2010. During this period, China emerged as
a major global exporter on par with the US. Over 2010-2016, its share of world exports increased
from 8.5% to 10.6%, while that of the US rose from 9.8% to 10.6%. The next largest exporter, Japan,
saw its share fall from 4.5% to 3.8% over the same period. Meanwhile, the world export shares of

6
Korea (2.9%), Canada (2.3%), Hong Kong (2.9%) and Singapore (2.5%) were largely unchanged.
Russia’s world export share fell from 2.4% to 1.6%, and Mexico’s share rose from 1.7% to 1.9%.

Flows of FDI in the Asia-Pacific economy are expected to have experienced a modest increase in
2017, fueled by higher growth expectations, faster trade growth and a recovery in corporate profits
(UNCTAD, 2017). However, no projections on the value of FDI flows in 2017 are yet available for
individual APEC economies. As Table 4 shows, FDI inflows into the region amounted to $926 billion
(or 53% of world FDI inflows) in 2016, while FDI outflows from the region came to $876 billion
(60%). These figures are significantly higher than those in 2010. The US is by far the region’s largest
recipient of global inward FDI, with a 22% share, as well as its largest source of outward FDI flows
(21%). China and Hong Kong combined are the second largest recipients of world FDI inflows (14%)
and sources of FDI outflows (17%). Although Japan receives little inward FDI (under 1% of world
FDI inflows), it is a major outward investor (10% of global outflows). Conversely, Australia receives
notable inward FDI inflows (3% of global inflows) but constitutes a small share of global outward
FDI flows (less than 0.5%). The remaining Asia-Pacific economies account for relatively small shares
of FDI inflows and outflows.

C. Global Value Chains (GVC)

As noted in our earlier report, GVCs have been instrumental in reorganizing industrial production in
the 21st century, first in manufacturing but increasingly in services. Value chains make business more
productive, deliver lower-cost and higher-quality products to consumers, and enable low-income
economies to plug into world markets with far less capital, technology and skills than in the past.4
The Asia-Pacific region has been a pioneer in hosting these values chains. Empirically, this is
demonstrated by the fact that the Asia-Pacific economy is characterized by an unusually high degree
of intra-regional trade. Studies suggest that almost three-fourths of the region’s exports and imports
in 2016 were intra-regional (APEC, 2017). The major intra-regional exporters were found to be China,
Japan and the US, while the main intra-regional importers were China, Hong Kong and the US.

The high degree of intra-regional trade in the region reflects the geographical spread of sophisticated
GVCs with assembly operations occurring in low-wage economies and more developed economies
specializing in higher value-added intermediate and capital goods. China has become the central GVC
assembly hub in Asia and the US is the main market for final goods. This makes the prospects of a
potential trade war across Asia-Pacific economies particularly worrisome. Japan, Chinese Taipei,
Korea, Singapore and Thailand have become major suppliers of intermediate and capital goods. This
complex pattern of specialization and trade in intermediate goods in the Asia-Pacific economy has
been influenced by—and reflected in--rising FDI flows, falling barriers to trade and investment,
declines in trade logistics costs and rapid technological change.

A revival in intra-regional trade has accompanied the increase in trade volumes in the Asia-Pacific
since 2010. The Asia-Pacific economy’s share of intra-regional trade rose from 64% to 66% between
2010 and 2016 (see Table 5), higher than, for example, intra-EU trade flows. This is attributed in part
to a rise in the intra-regional trade share of the US from 62% to 65%, Japan from 67% to 69% and
Korea from 64% to 68.0%. Southeast Asian economies and Chinese Taipei also saw rising intra-
regional trade shares. Notable is the fall in China’s intra-regional trade share from 58% to 57%.
Slower growth and China’s structural transformation away from exports and investment have
translated into reduced demand for imports from the region including intermediate and capital goods.

4
Also, GVCs can enable micro, small and medium enterprises (MSMEs) to participate more in trade, by
creating opportunities at low-cost/low volumes that would not otherwise exist.
7
China’s transformation has had two important implications for GVCs in the region (Wignaraja et al.
2017). One is that some of China’s production stages--particularly labor-intensive ones--are
beginning to migrate from China to lower cost locations, as evidenced by a rise in China’s outward-
oriented FDI into manufacturing particularly in developing economies in Asia. This means that new
manufacturing opportunities will be available for lower cost economies in Asia as well as in Latin
America in a range of labor-intensive items, from clothing to electronics. There is also the
phenomenon of “onshoring” – technology enabling what were originally higher labor-cost economies
to regain manufacturing capability at lower cost.

Another is that China is following the model of higher domestic value added and building of
innovation capability first seen in Asia through Japan and later Korea. This entails the development
of more technologically sophisticated regional value chains and related services in East Asia, which
can power a new phase of regional and global trade growth in the future. The spread of robotics,
advances in miniaturization, developments in internet connectivity and research and development are
increasingly likely to feature in GVCs in this new phase of trade growth.

D. The Emerging Digital Economy

Digital technologies can be a powerful enabler of trade and growth in Asia and the Pacific. As noted
at length in our earlier report, the Asia-Pacific economy is leading the development of the global
digital economy and seems likely to continue to do so in the medium term. This is both as producers
and consumers of digital economy goods and services, including information and communications
technology (ICT) products, electronic commerce (e-commerce), digital banking, analysis of big data,
benefits of digital technologies for multinational corporations (MNCs) and many other digital
applications. Governments are increasingly investing in public infrastructure (like smart cities),
which help to overcome gaps in infrastructure development and provide e-government services which
improve the efficiency of public service delivery for business and consumers. Digitally-provided
services and other digital trade facilitation tools are increasingly reducing trade costs around the
region.

The region’s pivotal role in driving global digital economy development is indicated by the following:

• The development of sophisticated GVCs have positioned China as the global assembly hub
for ICT goods with parts and components being supplied by several regional economies
including the US, Japan, Korea, Chinese Taipei and Southeast Asia. A huge trade in final ICT
goods and parts and components exists with as much as 84% of world exports of ICT goods
in 2015 coming from the region’s economies (UNCTAD, 2017).

• The Asia-Pacific is home to many of the world’s leading MNCs in the digital economy
including Amazon, Apple, Alphabet and Alibaba. By market capitalization, about one-third
of the largest 135 MNCs in the digital economy are based in Asia alone.

• E-commerce has increased significantly with the US, Japan, China and Korea becoming the
world’s largest markets for business-to-consumer (B2C) e-commerce. Online payment
platforms such as Alipay, Apple Pay, PayPal and eBay developed by MNCs have significantly
reduced trade costs of cross-border trade.5 Online shopping is increasingly becoming a major
competitor to physical shopping. As noted by Ecommerce Europe: With a total B2C e-
commerce turnover of $567.3bn in 2013, Asia-Pacific was the strongest e-commerce region

5
There are, however, rising concerns that some economies may be taking steps to favor domestic companies in
managing payment platforms, which could significantly limit competition and consumer choice.
8
 in the world in 2013, as it surpassed Europe ($482.3bn) and North America ($452.4bn). In
comparison with 2012, the Asian-Pacific B2C e-commerce turnover grew by 44.6%, which
was the highest growth rate of all the regions.6

 Digital banking using smart phones and internet banking have increasingly benefitted
consumers and businesses across the region. More and more people appear willing to move
some of their holdings to banks that offer a compelling digital offer and good IT security.
Surveys suggest that digital banking penetration rates exceed 90% in Korea, Australia,
Singapore and Chinese Taipei; over 80% in Japan; and over 55% in China.7 Mobile banking
can also improve financial inclusion particularly in rural areas where there are few physical
bank branches. In Papua New Guinea, for instance, mobile network operators have been
exempt under the Banks and Financial Institutions Act 2000 to conduct mobile phone transfers.

 We predicted in our earlier report that digital technology will drive new strategies and designs
in new as well as conventional sectors, such as automobile manufacturing. For example,
technology companies such as Google and Apple are already devoted to building cars based
on self-driving technologies. Changes are on the way even in mundane services such as auto
repair, since consumers will know more about repair issues and options, supported by
manufacturers and perhaps a new industry of repair advisors.

• E-government services have progressed with some economies becoming world leaders in one-
stop platforms and on-line transactions. For instance, the 2016 UN e-Government Survey
ranked six Asia-Pacific economies—namely, Australia (2nd), Korea (3rd), Singapore (4th),
New Zealand (8th), Japan (11th) and the US (12th)--among the top dozen leaders on its global
e-Government Development Index.8
Reflecting these impressive changes, mobile phone penetration rates are increasing rapidly across the
region and driving internet adoption and changing consumer behavior. Mobile cellular subscriptions
per 100 people in Asia and the Pacific rose sharply from 107.5 to 128.6 between 2010 and 2016 (see
Table 6). Furthermore, the share of internet users in the region’s total population increased from 51%
to 67% over the same period. However, it seems that the digital economy is evolving at different
speeds in the region particularly for internet adoption. In 2016, the share of internet users in
developing economies (61%) was significantly lower than that in developed economies (87%). The
leaders in internet use are Korea (93%), Hong Kong (87%) and Singapore (81%). Meanwhile, Mexico
(60%), Peru (46%), Indonesia (25%) and Papua New Guinea (10%) are at the bottom.9 When GDP
per capita is taken into account, the relatively high cost of internet access and relatively low levels of
IT literacy remain obstacles to internet use in the region.

In lagging economies, digital technologies can help trade by supporting the efforts of small and
medium enterprises (SMEs) to access world markets. SMEs comprise the bulk of business in Asia
and the Pacific. They are likely to have a greater appetite for risk than larger firms and thus are better
placed to adopt new digital technologies. A study by Deloitte prepared for Google examined the

6
https://www.ecommerce-europe.eu/news-item/with-a-turnover-of-567-3-billion-asia-pacific-is-the-largest-e-
commerce-region-in-the-world/, accessed 23 March, 2018.
7
https://www2.deloitte.com/insights/us/en/economy/voice-of-asia/may-2017/digital-role-economic-
growth.html.
8
https://publicadministration.un.org/egovkb/en-us/reports/un-e-government-survey-2016.
9
It is noteworthy that these four economies have relatively low ranks on the UN e-Government Development
Index. Their ranks are: Mexico (59th), Peru (81st), Indonesia (116th), and Papua New Guinea (179th). Other low ranked
regional economies include: Brunei (83rd) and Vietnam (89th). 9 https://publicadministration.un.org/egovkb/en-
us/reports/un-e-government-survey-2016
9
potential gains from SMEs in Indonesia from adopting digital technologies.10 It reported that less than
one in ten SMEs considered themselves as having advanced online capabilities while 73% are offline
or had very basic capabilities. The study suggests that Indonesian SMEs could reap several gains
from embracing digital technologies including up to 80% higher revenues, 17 times the current
potential for innovation and greater international competitiveness. Somewhat ambitiously perhaps, it
concludes that improving SMEs’ digital engagement could increase Indonesia’s annual economic
growth by as much as 2% and enable it to make the jump to middle-income economy status by 2025.

Several risks face developing economies in the Asia-Pacific that under-invest in preparing for the
fast-moving digital economy. First, the gains from higher productivity arising from digitalization
typically go to a relatively small number of skilled workers, which may exacerbate income inequality.
Second, jobs in a wide spectrum of manufacturing (e.g. textiles and garments) as well as services (e.g.
retail trade and business process outsourcing) are likely to become obsolete with digitalization and
the associated automation technologies like robotics and artificial intelligence. This structural change
could lead to significant job losses.

Third, there are concerns about data privacy, security and cyber-crime with the increasing spread of
the internet and data flows. This worry is vividly illustrated by the on-going Facebook data privacy
scandal involving the misuse of personal data by Cambridge Analytica’s election ad targeting toolset.
Digital openness (including free cross-border flows of data and information) boosts productivity and
investment, helps to create jobs and expand economic growth – and can in fact enhance both
consumer protection and cybersecurity by enabling innovative approaches such as cloud-based
storage and encryption and collaborative approaches to cybersecurity threats. Restrictions on digital
trade undermine the capacity of economies (and MSMEs, as well as other businesses) to reap the
benefits of the digital transformation and risk creating a new “noodle bowl” of restrictions for
business.

Asia-Pacific economies are at the forefront of the world’s digital revolution and leading a wide range
of digital engagement across business, consumption and government sectors. While overall results
are impressive, different economies are evolving different speeds. Downside risks of marginalization
during the digital revolution are emerging and will necessitate approaches to ensure that emerging
economies have a ‘future-ready workforce’ with the necessary digital literacy and skills and adequate
infrastructure and regulatory settings to take full advantage of the opportunities that the digital
economy offers. There are opportunities for economies to increase their trade and growth by learning
from each other’s experiences.

III. New Policy Developments

A. Global and Regional Trends in Applied Policy Measures: Contained, but Clouds Ahead

Protectionism remains a salient threat to the world trading system. Although the rate of application
of new restrictive measures in world trade has slowed and the applications of trade-remedy measures
(like anti-dumping duties) have also not apparently risen, a large stock of trade-restrictive measures
has accumulated since the Global Financial Crisis. The WTO Trade Policy Review Body (TRBD)
found that, in the year to October 2017, 108 new trade-restrictive measures were put in place,
including new or increased tariffs, customs regulations, quantitative restrictions and local content
measures. This rate of application is 9 measures per month compared to 15 in the previous year. Over

10
https://www2.deloitte.com/id/en/pages/financial-advisory/articles/smes-powering-indonesia-success-
report.html
10
2012-2017, the number of new measures averaged 14 per month (although in some periods it was
over 20 per month).11

However, the bad news is that the absolute numbers are large, and the stock of measures has increased
significantly over time, even though the rates of increase have been relatively steady. The Australian
Productivity Commission reports that the stock of new measures quadrupled between 2010 and
2015.12 The WTO Director-General Roberto Azevêdo remained concerned about protectionism and
said that, while these 2017 numbers were welcome, substantial risks that threaten the world economy
remain in place and could easily undermine any trade recovery. He notes that much work needs to be
done to help facilitate trade, including avoiding measures which can hamper and restrict trade flows.

The Director General’s reference to trade facilitation is related to the implementation of the Trade
Facilitation Agreement (TFA) in February 2017. This was an important achievement by the WTO
and a major event since our last report. According to the WTO Secretariat, the full implementation
of the TFA will see an average decrease in transaction costs by around 14.3 percent (WTO, 2015).
This impact is significant, since it amounts to a real saving of resources; reducing a tariff of the same
order, for example, may have a similar effect on trade but would include a reduction in revenue
collection for the government. The TFA would have many advantages especially for small businesses
and their ability to participate in trade, a major priority of ABAC. There are also benefits from less
uncertainly in moving goods across borders.

Since our 2015 report, there has been an increase in the protectionist rhetoric and action in the Asia-
Pacific region. Unilateral actions to restrict trade flows create uncertainty for business and trading
partners, could undermine multilateral economic governance, and risk the stability and sustained
economic growth of the region.

In other WTO-related matters, the December 2017 Ministerial Meeting in Buenos Aires produced
disappointing outcomes, other than bolstering some work programs.13 No statement by Ministers was
forthcoming. There was no concrete progress in limiting even illegal fishing subsides, as some had
hoped, and no consensus was reached on future work on agriculture including trade-distorting
subsidies. There was some progress to continue to apply a moratorium on tariffs on electronic
transactions and a group of members agreed to undertake a project on trade-related aspects of
electronic commerce, including a number of APEC members. Other programs of work included
initiatives related to small and medium enterprises and to domestic regulation, as well as an informal
Declaration on gender and trade.

At the time of this writing, there are growing worries about rising protectionism that could lead to an
all-out trade war among major global economies. The decision to impose steel and aluminum tariffs
for national-security reasons on June 1 has lead to threats of retaliation with tit-for-tat measures from
major global economies. Other economies are seeking to take up these issues in the WTO context.

These developments create a dilemma for the WTO, particularly when they involve large and
influential member-economies. There may be a challenge in the WTO to their legitimacy (e.g., on the
basis that they abuse the intention of Article 21 of GATT regarding “essential security interests”), but
such a challenge poses a dilemma for the WTO: if accepted, it could lead to others emulating the
approach. If not, the central role of the WTO in global trade governance might be challenged.

11
https://www.wto.org/english/news_e/news17_e/trdev_04dec17_e.htm
12
https://www.pc.gov.au/research/completed/rising-protectionism
13
https://www.ictsd.org/bridges-news/bridges/news/wto-ministerial-in-landmark-move-country-coalitions-set-
plans-to-advance
11
B. Update on Regional Agreements

The interest in FTAs as a vehicle of liberalization continues to grow. Among its members, the Asian
Development Bank reports that since 2015, the number of FTAs signed and in effect has risen from
144 to 151, those signed but not yet in effect from 5 to 10, and those in negotiation from 68 to 78.
Even more significant is the rise in the number proposed FTAs from 67 to 91.14 Most of these
agreements in force (80%) are bilateral, but the share of multi-member agreements is rising,
comprising 44% of FTAs over the 2011-2015 period. Asian FTAs are also increasingly global, with
nearly two-thirds of FTAs launched over 2010-2015 being with non-Asian partners. Given the scale
of the potential benefits involved and the revealed interest in the movement in favor of FTAs across
the whole region, our focus in his section is on emerging major regional agreements.15 This trend
continues along the path described in our first report.

As noted above, the most significant recent event with respect to regional arrangements was the
signing in March 2018 of the CPTPP, which includes 11 economies (Australia, Brunei, Canada, Chile,
Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam). The CPTPP is substantially
smaller in terms of economic than the original TPP; the TPP members accounted for 37% of global
GDP and 26% per cent of global trade, while the current CPTPP accounts for 14% and 15%,
respectively.14 A number of the members already had agreements with each other but there are
additional impacts from deeper tariff cuts and new services trade liberalisation, new commitments in
non-traditional areas including non- tariff measures (NTMs) and regulatory coherence, and rules
governing a wide-variety of trade-related activities, from state-owned enterprises (SOEs) to the digital
economy, as well as coverage of relationships where previously no agreement existed. While smaller
than the TPP, therefore, its important contribution to regional regulatory- and norm-setting,
particularly in ‘new’ areas such as the digital economy and regulatory coherence, remains.

A number of provisions of the TPP have been suspended under the CPTPP16, including the coverage
of patents on some pharmaceutical products, policy changes affecting express delivery services and
procedures related to investor-state disputes. These remain in the agreement but are suspended from
implementation. Other changes relate to obligations to reform SOEs and labor commitments by
Malaysia and Vietnam, plus there is a side letter about Canadian continued protection of its cultural
industries.17 In our earlier report we identified a series of business trends, and areas we recommended
should receive attention in any further efforts towards integration. The TPP and now the CPTPP have
good coverage of these issues including e-commerce. Despite the suspensions, the CPTPP remains
remarkably similar to the original TPP and certainly is a milestone agreement for the Asia Pacific.

Economies not participating in the CPTPP will be negatively affected not only because of foregone
income and trade benefits but also the negative effects of trade diversion and preference erosion in
acceding economies (Petri and Plummer 2016). Could other economies possibly join the CPTPP?
The “suspended” measures, all of which are of particular interest to advanced economies, were
included as an incentive to return to the TPP12 and beyond. Indeed, new members may join (and
existing members have expressed a desire to see the agreement expanded to others prepared to make
14
https://aric.adb.org/database/fta
15
https://aric.adb.org/blog/the-resurgence-of-bilateralism-and-asias-evolving-fta-landscape
16
There are various summaries of these suspensions and their significance: see for example
https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-concluded-but-not-in-force/cptpp/tpp- and-
cptpp-the-differences-explained/; http://dfat.gov.au/trade/agreements/tpp/news/Documents/annex-2.pdf;
http://www.asiantradecentre.org/talkingtrade//tpp11-unpacking-the-suspended-provisions;
https://static1.squarespace.com/static/5393d501e4b0643446abd228/t/5aa0eb3c9140b75cb2070691/152049542
4652/Policy+Brief+17-11a+TPP11+Suspensions+%28with+amendments%29.pdf; https://www.ictsd.org/bridges-
news/bridges/news/tpp-11-trade-talks-approach-finish-line-under-a-new-name
17
https://piie.com/blogs/trade-investment-policy-watch/tpp-redux-why-united-states-biggest-loser
12
the same kind of ambitious commitments) but subject to the conditions negotiated and agreed with
existing members:

After the date of entry into force of this Agreement, any State or separate customs territory
may accede to this Agreement, subject to such terms and conditions as may be agreed
between the Parties and that State or separate customs territory.18

Economies expressing a possible interest in joining include Korea, Indonesia, the Philippines,
Chinese Taipei, and Thailand. The UK has also said it would like to consider entering into
negotiations after its Brexit transition period (most likely after 2020).

The other major project in the region is the negotiation of the Regional Comprehensive Economic
Partnership (RCEP). The most recent Ministerial statement19 said that the goal remains to come up
with a “good, commercially meaningful RCEP agreement that meets the commitment to achieve a
modern, comprehensive, high-quality and mutually beneficial economic partnership agreement”. The
Ministers have set a new goal to complete an agreement in 2018. The statement underscores that some
of the chapters have already been completed (Economic and Technical Cooperation and Small and
Medium-sized Enterprises) and others were nearly finished.

The Ministers also indicated a difference in opinions about the end point of the negotiations and
proposed to accommodate that by consideration of “landing zones”. They referred to both the role of
transition periods and the provision of capacity building. The Ministers also referred to work on
tariffs, services, investment and rules, in fact:
- “welcomed progress made in the discussions on the tariff modality and its parameters, and the
further intensification of the request and offer process.
- instructed negotiators (on services) to continue resolving outstanding issues and improving
offers across all modes of supply, while working together to address specific sensitivities faced by
(participating countries, or RPCs).
- expressed appreciation on the growing convergence among RPCs on the outstanding issues
on investment and instructed RPCs to consider to improve reservation lists.
- reiterated the commitment to expedite negotiations on rules, geared towards facilitating trade
and investment in support of the expansion and deepening of regional value chains.”

Clearly there is substantial work required to complete the RCEP agreement. It is important to have a
target date for completion so as to maintain the program of work and the negotiating process, but the
quality of the agreement is also critical for regional economic integration. There is likely to be a
trade-off between the two but better quality is worth waiting for, given the following three points of
significance about RCEP.

The first is that RCEP is centred on ASEAN and would thereby be expected to reflect its principles
of integration. As Menon (2018) says, “ASEAN’s success lies in its almost unique use of regionalism
as a means towards a greater end—maximising the welfare of its citizenry through the pursuit of
global integration” (p.7). The evident commitment to this principle is important in the current
environment, particularly given the new leadership void at the global level.

The second is that RCEP can be used to send an important signal. A commitment to economic
integration and to the principles of the world trading system is critical to structural change and thereby
growth in the region. A successful conclusion of RCEP can demonstrate the commitment of its

18
http://dfat.gov.au/trade/agreements/tpp/official-documents/Documents/tpp-11-treaty-text.pdf
19
http://asean.org/storage/2018/03/JMS-4th-RCEP-ISSL-MM-FINAL-0303181.pdf 3 March 2018
13
members to these goals. But RCEP has to be sufficiently credible to have this effect, and a test of
credibility would be, for example, that the opportunities it creates through the commitments of its
members in all areas attract the attention and mobilise the interests of businesses in OECD economies,
energizing the policy debate in these countries regarding the value of openness. The CPTPP will have
some effect in that respect, as indicated in the modelling results discussed below. RCEP can add to
that impact.

The third is the relationship of RCEP with the CPTPP. As noted above, a salient contribution of the
CPTPP is its treatment of key issues related to the evolution of international business, such as digital
transactions, e-commerce, the updating of rules, and other issues which we stressed in our earlier
report. Meeting the expectations of the agreement will be demanding for some economies. For
example, the levels of commitment on tariff reduction are higher in CPTPP than is immediately likely
in RCEP. CPTPP covers matters that will demand considerable institutional development in many
economies. These include matters related to state-owned enterprises, government procurement,
regulation and data flows. Some transition period may be required for all RCEP members to move
toward the CPTPP commitments. One way of managing that transition is via the processes of RCEP
itself, which includes an understanding of and provisions for capacity building. In other words, the
complementarity of the agreements is becoming clearer. With the CPTPP now signed, the next big
milestone for regional integration will be the RCEP agreement.

What forces might drive RCEP to make these contributions by reaching a credible conclusion within
a reasonable period of time? How can the RCEP process deliver a satisfactory result? Leadership
will be required, and more than one economy may be required to take that role. Size helps in this
situation, but the larger economies among the current membership face considerable domestic
challenges in making the commitments required for success. A team effort is more likely to be
effective: ASEAN, given its history, size, ambition and commitment to global integration is drawing
attention as the first place where that effort might be sought.20 The signs of this contribution are
positive; in the Joint Statement of the ASEAN-Australia Special Summit on 18 March 2018, the
Leaders said that they would “commit to intensify efforts in 2018 towards a swift conclusion of a
modern, comprehensive, high quality, and mutually beneficial Regional Comprehensive Economic
Partnership (RCEP).”21 After all, when it was launched in November 2012, RCEP negotiations were
slated to be led by “ASEAN Centrality”. APEC has an essential and complementary role as a forum
for dialogue on RCEP.

Another major initiative in the region is the Pacific Alliance, the most recent development of which
is its active engagement with Associate Members. The original members were Chile, Colombia,
Mexico and Peru (all except Colombia being CPTPP members). Other economies which have trade
agreements with at least half the members can apply for full membership, as have Costa Rica and
Panama. A new category of associate membership has also been created, and negotiations about its
conditions occurred in February 2018. Those currently in negotiating with the Pacific Alliance
include Canada, Australia, New Zealand and Singapore, also all CPTPP members. Clearly, the Pacific
Alliance has significant potential to deepen trans-Pacific links.

The original members of the Pacific Alliance, all with a Pacific orientation (in contrast to Mercusor
members), have been working on the traditional matters of an FTA--such as coverage of tariff
reductions, rules of origin and investment provisions--but have also done interesting work in
integrating financial markets (e.g., stock markets) and facilitating people movement (including
cooperation among policing and customs agencies on cross border illegal activities), as well work on

20
http://www.afr.com/opinion/columnists/asean-must-be-bulwark-of-free-trade-20180314-h0xg7r
21
https://aseanaustralia.pmc.gov.au/Declaration
14
e-commerce, air transport and infrastructure. The original members point to the value of the current
negotiations with the proposed associate members in terms of the coverage of the discussions in areas
not yet included in the intra-Pacific Alliance process, such as small and medium-sized enterprises,
labor and the environment.

C. Empirical Literature Related to Asia-Pacific Integration

The “size of the prize” from deeper economic integration remains significant according to the
empirical literature, although there are interesting differences in the magnitude of impacts from
various scenarios among economies. The original TPP might be a useful benchmark. Kawasaki
(2017) uses a standard Computable General Equilibrium (CGE) model and finds significant benefits,
especially from reductions in NTMs: the total increase in real GDP relative to the baseline for all
members would be 0.15% from tariffs reductions and 1.73% from reductions in NTMs. For the
CPTPP, he finds that these impacts fall to 0.05% and 1.09%, respectively. Excluded economies tend
to lose due to the CPTPP via trade diversion and preference erosion.

Kawasaki (2017) shows even larger gains from RCEP implementation, relative to baseline GDP of
participating economies, with benefits of tariff reductions of 1.89% and those from tariffs plus NTM
reductions, 4.19%. He points out the variation in these values across economies, ranging from small
in a large economy like China to very large in some ASEAN economies. The scale of these benefits
reinforces the earlier point about the value of ASEAN leadership. The negative effects on excluded
economies are mitigated via an increase in market access due to the non-discriminatory reductions in
NTMs (e.g., reductions in trade costs due to trade facilitation measures are reaped by all economies,
not just members).

Petri, et. al. (2017) also use a CGE model to examine the outcomes of CPTPP and RCEP, but with a
different scenario in terms of policy change compared to that assumed by Kawasaki. They find that
real income of member economies would be 1.0% higher in CPTPP and 0.4% higher in RCEP relative
to the 2030 baseline. These are significant impacts but the outcomes differ compared to Kawasaki
(2017) in relative terms due in part to underlying parametric assumptions; Petri, et. al. (2017) are
more pessimistic about the capacity of RCEP to deliver significant changes in openness and assume
smaller non-discriminatory spillover effects of NTMs in both agreements. In addition, they assume
that the CPTPP will entail a lesser degree of liberalization than under TPP (in which they estimate
that long-term increase in the real income of member-economies would be slightly higher, 1.1%, as
opposed to the 1.0% for members of the TPP12). Some CPTPP members benefit significantly less
than they do in TPP (for example, Japan, Malaysia and Vietnam). Moreover, Petri, et. al. (2017) point
out that, related to the question of accession, adding the five economies who have expressed interest
in joining the TPP/CPTPP (that is, Indonesia, the Philippines, Korea, Chinese Taipei and Thailand)
would more than double the benefits as a percentage of regional income. Also because of their
assumptions about the quality differences, the benefits of CPTPP with 16 members is close to double
that of RCEP. These results point to the benefits of quality (i.e., deeper coverage) and quantity (i.e.,
wider membership).

Ciuriak, et. al. (2017) present another set of estimates of these arrangements, with the same overall
direction of results but with smaller magnitudes. They find that TPP and CPTPP would increase over
the long-run members’ GDP by 0.098% and 0.075%, respectively. They, too, find that Malaysia,
Vietnam and Japan benefit much less from CPTPP than in the TPP.

In our earlier report, we included estimates of the economic effects of the FTAAP itself, defined as a
group that included all APEC member-economies, and this form of an FTAAP was then compared to
RCEP and TPP, based on Petri, Plummer and Zhai (2012). These numbers are summarized in Figure
15
3. Although both the RCEP and TPP pathways generate significant positive net benefits, the gains
from the FTAAP are much greater. Petri, Plummer and Zhai (2012) estimate that the aggregate
income benefits from the FTAAP could range from $1.3 to $2.4 trillion dollars per year by 2025, and
show the region’s trade (in a middle scenario) 26% higher than it would be otherwise. These gains
would be considerably larger than from completing any individual pathway. Because the region is
already well integrated, the vast majority of the gains would be due to trade creation rather than trade
diversion from excluded economies. Three-fourths of the gains would come from the liberalization
of regulatory barriers in manufacturing, services, and investment.

The large, positive results from an FTAAP are echoed in Shephard (2018), which uses a gravity model
approach to show that the gains from an FTAAP are much larger than the TPP and RCEP. The paper
emphasizes that these mega-regionals have great potential to deepen value chains in the region.

IV. Moving forward: Overcoming Challenges to Promoting the Pathways to an FTAAP

The FTAAP should do more than achieve liberalization in its narrow sense; it should be
comprehensive, high quality and incorporate and address ‘next generation’ trade and
investment issues.
APEC Secretariat 2015

APEC comprises 21 economies that account for about half of world GDP and trade. The region has
lifted hundreds of millions of people out of poverty, and has built a prosperous middle class, which
is likely to expand to more than two billion people by 2030. The region is growing faster than the rest
of the world and remains a key engine of global prosperity. Despite uncertainties over the short-term,
the 21st century is shaping up as the Asia-Pacific Century.

It is well documented that much of the Asia-Pacific success story is due to regional economic
integration and openness to trade and investment. As we noted in our earlier report, the private sector
ultimately drives growth, and this growth has been made possible via a global market, rather than just
national ones. But business requires strong institutions and predictable and open policies to enable it
to flourish. APEC has contributed to supporting predictable and open policies since its creation in
1989; ABAC has been a key source of ideas and vehicle for progress. The Bogor Goals envisioned
an Asia-Pacific market that would be characterized by “open trade and investment”. It established a
goal that was further articulated by the 2010 Yokohama Vision, which sought the creation of an
FTAAP, with a trans-Pacific pathway and an Asian pathway leading to it. The former has now been
manifested in CPTPP and the Pacific Alliance, and the later in RCEP. The Yokohama Vision
emphasizes the determination of APEC member-economies to “…further promote regional
economic integration, working toward the target year of 2020 envisaged by the Bogor Goals for all
APEC economies to achieve free and open trade and investment.”22

Our earlier report underscores the key role that ABAC plays in promoting integration across all its
membership via four pillars: inclusivity, ensuring benefits also for low-income economies and for
small- and medium-sized enterprises; comprehensiveness, covering all industries (including oft-
neglected areas such as services) and all types of business operations; consultation, seeking input
from many stakeholders, including business; and transparency, ensuring clear and predictable rules
and regulations.

22
Quote taken from the White House release, APEC Leaders Declaration: The Yokohama Vision – Bogor and
Beyond, available at: https://obamawhitehouse.archives.gov/the-press-office/2010/11/13/apec-leaders-declaration-
yokohama-vision-bogor-and-beyond
16
Since our last report, the regional economy has gained momentum. This is true for growth in GDP,
trade, and FDI. The digital economy continues to boom, and new transformative technologies—from
self-driving automobiles to artificial intelligence—continue to shape the future of the Asia-Pacific
economy. While growth in these areas has not been linear, their key importance was in evidence two
years ago and were treated at length in our report.

Hence, in this update we have discussed new risks that could have a negative bearing on the generally
optimistic growth forecasts, as well as to the future of Asia-Pacific economic cooperation. Certainly,
the most pressing challenge relates to the rise in nationalism, populism and anti-trade sentiments in
key economies. Critically, the looming trade war is a prominent concern for all economies in the
Asia-Pacific region.

But despite these emerging challenges, there continues to be a strong interest among regional
economies to pursue deeper economic integration. An important testimony to this is the decision to
move forward with the CPTPP after the TPP could not be realized. The strong interest in enlarging
the CPTPP is also encouraging and could yield great benefits.

The RCEP also continues to move forward and could reach an agreement by the end of the year, albeit
likely at a lower standard than CPTPP. Hence, the pathways moving toward an FTAAP are
progressing, with the Pacific Alliance serving as an additional platform for deepening intra-APEC
cooperation.

This update has underscored that deeper economic integration enhances growth prospects and that a
comprehensive, modern, rules-based approach to global economic governance is necessary to success
in the 21st century. Additionally, building coalitions among smaller economies via liberalization
“pathways” and in other fora to support concerted liberalization is essential to ensure that the Bogor
Vision moves forward and to preclude a retreat from regional and global markets.

Moreover, the above analysis stressed that there are significant costs to remaining outside of the
integration process in which virtually all APEC member-economies are now intricately bound. In
addition to the foregone benefits of integration, excluded countries suffer from trade and investment
diversion, as well as preference erosion in markets in which economies already have preferential
access. There also could be disruptions in the supply chains of MNCs, or at least businesses will
forego the tremendous economic potential that mega-regionalism holds for GVCs. Further, excluded
economies will be outside the 21st century rule-making process that was such an important advantage
of—and motivation for--the TPP. This cost is in evidence from the fact that essentially all “suspended”
provisions in the CPTPP are of interest to advanced economies.

In any event, the economic and political costs of staying out of the process of integration will be made
clear over time. Economic studies stress that the TPP is, in fact, a good agreement for all; perhaps
this will be more evident once countries outside of the CPTPP start to bear the costs of being isolated
from the process. Domestic politics in certain economies might also play a key role, with pro-trade
parties and interest groups making their cases. In addition, the private sector will continue to press its
case, particularly since firms in excluded economies could have to compete at a disadvantage.

Expansion of the CPTPP to include additional economies could yield large benefits. Petri, et. al.
(2017) show that a CPTPP that includes the five economies expressing an interest in joining would
generate gains on par with the original TPP—despite the fact that it would still be much smaller in
aggregate—and almost double RCEP benefits. It could be that an expansion of the CPTPP will take
place before FTAAP negotiations. Indeed, a CPTPP+RCEP configuration could yield global gains
that would be considerably more than the TPP itself, though less than an FTAAP.
17
In terms of sequencing, it is not clear when negotiations that would lead to an FTAAP would begin,
though given the Yokohama Vision of open trade and investment by 2020 one would expect it to be
not too far in the future. Still, since the CPTPP and RCEP will enter into effect in 2019 in the most
optimistic scenario, 2020 would be ambitious. And given the many uncertainties noted above, it
would be difficult to predict how these arrangements will play out.

In the meantime, much will need to be done in order to underscore the gains from trade in all
economies, while also addressing the key policy challenge of being inclusive. Populism essentially
argues that trade hurts an economy because of this effect. Indeed, increasing efficiency requires the
shifting of resources including labor, a process that is costly to those who are displaced. This is as
true for trade as it is for disruptive technological change or automation. Rather than block structural
change, public policy needs to support those who are negatively affected. Economic liberalization
needs to be accompanied by well-resourced and targeted active government policies that provide
training and compensation to displaced workers, and support the most vulnerable.

18
 References
APEC, 2017. APEC in Charts 2017, Singapore, APEC Policy Support Unit.

Ciuriak D, J Xiao and A Dadkhah, 2017. “Quantifying the Comprehensive and Progressive
Agreement for Trans-Pacific Partnership,” East Asian Economic Review, Vol 21, no. 4, December.

IMF, 2018. World Economic Outlook Update, 22 January, Washington DC: International Monetary
Fund.

Kawasaki K, 2017. “Emergent Uncertainty in Regional Integration: Economic impacts of alternative

RTA scenarios,” GRIPS discussion paper 16-28.

Menon, J, 2018. “Trade: regional means, global objectives,” East Asia Forum Quarterly, Vol 10, No.
1, pp 7-8.

PECC, 2017. State of the Region, 2017-2018, Singapore: PECC International Secretariat.

Petri P, M G Plummer, S Urata and Fan Zhai, 2017. “Going It Alone in the Asia-Pacific: Regional
Trade Agreements Without the United States,” PIIE Working Paper 17-10, October. Available at:
https://piie.com/publications/working-papers/going-it-alone-asia-pacific-regional-trade-agreements-
without-united

Shepard, Ben, 2018. “Mega-Regional Trade Agreements and Asia: An Application of Structural
Gravity to Goods, Services and Value Chains,” Working Paper DTC-2018-1, March 15. Available
at: https://developing-trade.com/wp-content/uploads/2018/03/Working-Paper-DTC-2018-1.pdf

Wignaraja, G, Mariasingham, M., Zhuang, J. and Duma-Cabauatan, M., 2017. “Changing Patterns of
Trade and Global Value Chains in Postcrisis Asia”, ADB Briefs No. 76, Manila: Asian Development
Bank.

UNCTAD, 2017. World Investment Report 2017: Investment and the Digital Economy, Geneva:
United Nations Conference on Trade and Development.

WTO, 2017. “WTO upgrades forecast for 2017 as trade rebounds strongly” WTO Press Release No.
800, Geneva: World Trade Organization.

WTO, 2015. World Trade Report 2015: Speeding up trade: benefits and challenges of implementing the
WTO Trade Facilitation Agreement, WTO Geneva.

19
Appendix

20
Table 1. Annual GDP Growth Rate
Percentage Change (%)
2017 2018 2019
2010 2011 2012 2013 2014 2015 2016 (b) (b) (b)
Economy
Australia 2.3 2.7 3.6 2.1 2.8 2.4 2.5 2.2 2.9 3.0
Brunei Darussalam 2.7 3.7 0.9 -2.1 -2.5 -0.4 -2.5 -1.3 0.6 8.7
(a)
Canada 3.1 3.1 1.7 2.5 2.6 0.9 1.5 3.0 2.3 2.0
Chile 5.8 6.1 5.3 4.0 1.9 2.3 1.6 1.4 2.5 2.7
(a)
China 10.6 9.5 7.9 7.8 7.3 6.9 6.7 6.8 6.6 6.4
Hong Kong SAR 6.8 4.8 1.7 3.1 2.8 2.4 2.0 3.5 2.7 2.9
Indonesia 6.4 6.2 6.0 5.6 5.0 4.9 5.0 5.2 5.3 5.5
(a)
Japan 4.2 -0.1 1.5 2.0 0.3 1.1 1.0 1.8 1.2 0.9
Korea 6.5 3.7 2.3 2.9 3.3 2.8 2.8 3.0 3.0 3.0
Malaysia 7.5 5.3 5.5 4.7 6.0 5.0 4.2 5.4 4.8 4.8
(a)
Mexico 5.1 4.0 4.0 1.4 2.3 2.7 2.3 2.0 2.3 3.0
New Zealand 2.0 1.9 2.5 2.1 2.8 3.2 3.6 3.5 3.0 2.5
Papua New Guinea 10.1 1.1 4.6 3.8 12.5 9.2 2.4 3.1 2.9 2.6
Peru 8.5 6.5 6.0 5.8 2.4 3.3 4.0 2.7 3.8 4.0
Philippines 7.6 3.7 6.7 7.1 6.1 6.1 6.9 6.6 6.7 6.8
(a)
Russia 4.5 5.1 3.7 1.8 0.7 -2.8 -0.2 1.8 1.7 1.5
Singapore 15.2 6.2 3.9 5.0 3.6 1.9 2.0 2.5 2.6 2.6
Chinese Taipei 10.6 3.8 2.1 2.2 4.0 0.7 1.5 2.0 1.9 2.0
Thailand 7.5 0.8 7.2 2.7 0.9 2.9 3.2 3.7 3.5 3.4
(a)
United States 2.5 1.6 2.2 1.7 2.6 2.9 1.5 2.3 2.7 2.5
Vietnam 6.4 6.2 5.2 5.4 6.0 6.7 6.2 6.3 6.3 6.2

Asia Pacific 5.8 4.4 4.3 3.9 3.9 3.6 3.4 4.0 4.0 4.0
Advanced 2.9 1.4 2.1 1.8 2.1 2.4 1.5 2.3 2.4 2.2
Developing 8.4 7.0 6.1 5.6 5.2 4.6 4.8 5.2 5.2 5.1
World 5.4 4.3 3.5 3.5 3.6 3.4 3.2 3.7 3.9 3.9
Source: IMF, World Economic Outlook and WEO Update 2018. Accessed January 2018
Notes: (a) Includes latest figures from the World Economic Outlook Database, January 2018 Update. (b)
Projections

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Table 2. Trade Volume Growth
Percentage Change (%)

2010 2011 2012 2013 2014 2015 2016 2017a

Economy
Australia 10.5 5.6 5.6 1.9 2.9 4.0 3.7 5.2
Brunei Darussalam 4.3 2.9 3.9 -6.7 -15.0 -11.3 -3.7 -6.1
Canada 10.2 5.2 3.1 2.2 4.0 1.9 0.1 3.5
Chile 14.0 10.3 2.7 2.7 -3.1 -2.3 -0.8 2.1
China 22.8 16.2 6.2 9.7 6.0 -1.3 3.0 5.0
Hong Kong SAR 18.0 5.2 3.7 8.1 1.0 -1.6 1.0 4.8
Indonesia 10.9 11.7 8.0 2.2 0.2 -3.1 1.2 4.2
Japan 18.0 2.8 2.7 2.0 8.8 1.9 -0.6 4.6
Korea 15.0 14.7 3.7 3.0 1.7 1.0 3.3 3.3
Malaysia 7.9 5.9 -3.5 1.0 5.2 2.9 2.5 5.7
Mexico 20.5 8.1 5.7 2.5 6.5 9.5 1.2 4.7
New Zealand 7.0 4.8 2.3 3.5 5.5 5.4 2.6 3.0
Papua New Guinea 21.5 7.0 9.5 -6.9 13.1 13.3 -3.0 -3.6
Peru 14.3 10.0 7.5 -0.2 -1.3 1.3 4.3 4.1
Philippines 18.1 -1.2 13.4 2.4 13.0 7.1 13.0 6.2
Russia 18.7 9.9 4.0 3.4 -4.8 -12.7 -2.1 4.6
Singapore 16.9 3.4 2.5 6.2 4.2 5.7 1.6 2.6
Chinese Taipei 26.7 2.0 1.0 4.1 5.3 0.8 2.2 2.4
Thailand 18.6 11.0 5.3 2.2 -2.6 1.3 -0.7 5.7
United States 12.3 6.2 2.8 2.3 4.4 2.7 0.5 3.9
Vietnam 5.5 -0.2 12.4 17.0 11.5 13.0 11.0 12.7
(b)
Asia Pacific 17.4 9.1 4.4 4.5 2.9 0.6 1.0 4.6
Advanced 13.1 5.1 3.0 2.2 5.1 2.6 0.5 4.1
Developing 4.0 10.8 4.8 6.2 3.3 0.1 2.4 4.8
World 12.5 7.1 2.7 3.6 3.8 2.8 2.5 4.7
Source: World Bank, World Development Indicators Database. Accessed January 2018
Notes: (a) 2017 figures are estimates. (b) Simple sum of the weighted average of export and
import volume growth rates (goods and services)

22
Table 3. Exports and Imports of Goods and Services
Exports
2010 2015 2016
Trade Value World Share Trade Value World Share Trade Value
Economy (US$ Millions) (%) (US$ Millions) (%) (US$ Millions) World Share (%)
Australia 222,103 1.17 264,829 1.24 227,285 1.09
Brunei Darussalam 9,240 0.05 6,751 0.03 5,652 0.03
Canada 469,066 2.48 490,372 2.30 474,344 2.28
Chile 82,487 0.44 71,975 0.34 70,314 0.34
Hong Kong SAR, China 469,445 2.48 606,075 2.85 601,311 2.89
China 1,602,475 8.47 2,431,264 11.42 2,199,968 10.57
Indonesia 183,481 0.97 182,167 0.86 177,884 0.85
Japan 857,110 4.53 772,994 3.63 797,490 3.83
Korea, Rep. 540,896 2.86 626,899 2.94 596,084 2.86
Malaysia 221,687 1.17 209,287 0.98 200,658 0.96
Mexico 313,989 1.66 404,706 1.90 399,504 1.92
New Zealand 44,356 0.23 48,916 0.23 48,811 0.23
Papua New Guinea
Peru 41,052 0.22 40,298 0.19 43,144 0.21
Philippines 69,464 0.37 83,135 0.39 85,267 0.41
Russian Federation 445,513 2.36 391,556 1.84 329,938 1.58
Singapore 472,246 2.50 528,176 2.48 511,239 2.46
Chinese Taipei
Thailand 226,788 1.20 275,818 1.30 280,450 1.35
United States 1,852,335 9.79 2,264,916 10.64 2,214,566 10.64
Vietnam 83,474 0.44 173,490 0.81 192,188 0.92
Asia Pacific 8,207,207 43.39 9,873,624 46.38 9,456,096 45.43
NON – Asia Pacific 10,707,798 57 11,416,049 54 11,360,216 55
World 18,915,005 100 21,289,673 100.00 20,816,311 100
Imports
2010 2015 2016
Trade Value World Share Trade Value World Share Trade Value World Share
Economy (US$ Millions) (%) (US$ Millions) (%) (US$ Millions) (%)
Australia 233,202 1.26 284,286 1.36 253,979 1.24
Brunei Darussalam 3,833 0.02 4,226 0.02 4,303 0.02
Canada 499,993 2.71 527,476 2.53 510,595 2.50
Chile 68,443 0.37 72,242 0.35 68,237 0.33
Hong Kong SAR, China 456,013 2.47 598,683 2.87 594,477 2.91
China 1,380,075 7.48 2,045,761 9.81 1,950,367 9.53
Indonesia 169,158 0.92 178,472 0.86 170,658 0.83
Japan 773,860 4.20 787,152 3.77 745,652 3.64
Korea, Rep. 506,037 2.74 530,642 2.54 500,172 2.44
Malaysia 181,099 0.98 186,603 0.89 180,820 0.88
Mexico 326,637 1.77 426,990 2.05 418,274 2.04
New Zealand 40,993 0.22 47,671 0.23 48,326 0.24
Papua New Guinea ..
Peru 35,181 0.19 44,863 0.22 42,974 0.21
Philippines 73,083 0.40 100,405 0.48 112,613 0.55
Russian Federation 322,367 1.75 281,420 1.35 263,747 1.29
Singapore 410,658 2.23 451,233 2.16 434,389 2.12
Chinese Taipei
Thailand 207,270 1.12 229,553 1.10 220,486 1.08
United States 2,364,992 12.83 2,788,958 13.37 2,735,805 13.37
Vietnam 92,995 0.50 171,962 0.82 186,929 0.91
Asia Pacific 8,145,887 44.18 9,758,599 46.80 9,442,805 46.15
NON – Asia Pacific 10,293,147 56 11,094,707 53 11,016,717 54
World 18,439,034 100 20,853,306 100 20,459,522 100
Source: World Development Indicators Database, World Bank. Accessed on January 2018

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Table 4. Foreign Direct Investment

Inward Foreign Direct Investment

2010 2015 2016
Value World Share Value World Share Value World Share
Economy (US$ Millions) (%) (US$ Millions) (%) (US$ Millions) (%)
Australia 36,443 2.63 19,477 1.10 48,190 2.76
Brunei Darussalam 481 0.03 173 0.01 -150 -0.01
Canada 28,400 2.05 41,512 2.34 33,721 1.93
Chile 17,227 1.24 15,866 0.89 11,266 0.65
China 114,734 8.29 135,610 7.64 133,700 7.66
China, Hong Kong SAR 70,541 5.10 174,353 9.83 108,126 6.19
Chinese Taipei 2,492 0.18 2,413 0.14 8,333 0.48
Indonesia 13,771 1.00 16,641 0.94 2,658 0.15
Japan -1,252 -0.09 -2,250 -0.13 11,388 0.65
Korea, Republic of 9,497 0.69 4,104 0.23 10,827 0.62
Malaysia 9,060 0.65 11,121 0.63 9,926 0.57
Mexico 27,263 1.97 33,181 1.87 26,739 1.53
New Zealand - 62 0.00 -337 -0.02 2,292 0.13
Papua New Guinea 29 0.00 28 0.00 -40 0.00
Peru 8,455 0.61 8,272 0.47 6,863 0.39
Philippines 1,298 0.09 4,937 0.28 7,912 0.45
Russian Federation 31,668 2.29 11,858 0.67 37,668 2.16
Singapore 55,076 3.98 70,579 3.98 61,597 3.53
Thailand 14,555 1.05 5,700 0.32 1,554 0.09
United States 198,049 14.31 348,402 19.64 391,104 22.39
Viet Nam 8,000 0.58 11,800 0.67 12,600 0.72

Asia Pacific 645,725 46.66 913,441 51.49 926,274 53.04

NON-Asia Pacific 738,054 53.34 860,560 48.51 820,150 46.96
World 1,383,779 100 1,774,001 100 1,746,423 100

Outward Foreign Direct Investment

2010 2015 2016
Value World Share Value World Share Value World Share
Economy (US$ Millions) (%) (US$ Millions) (%) (US$ Millions) (%)
Australia 19,804 1.43 -1,672 -0.10 6,012 0.41
Brunei Darussalam 1,179 0.09 58 0.00 -60 0.00
Canada 34,723 2.51 67,037 4.20 66,403 4.57
Chile 10,534 0.76 12,139 0.76 6,165 0.42
China 68,811 4.96 127,560 8.00 183,100 12.61
China, Hong Kong SAR 86,247 6.22 71,821 4.50 62,460 4.30
Chinese Taipei 11,574 0.84 14,709 0.92 17,843 1.23
Indonesia 2,664 0.19 5,937 0.37 -12,463 -0.86
Japan 56,263 4.06 128,654 8.07 145,242 10.00
Korea, Republic of 28,280 2.04 23,760 1.49 27,274 1.88
Malaysia 13,399 0.97 9,899 0.62 5,601 0.39
Mexico 15,145 1.09 10,733 0.67 -787 -0.05
New Zealand 716 0.05 90 0.01 -44 0.00
Papua New Guinea 0 0.00 174 0.01 0 0.00
Peru 266 0.02 127 0.01 303 0.02
Philippines 616 0.04 5,540 0.35 3,698 0.25
Russian Federation 41,116 2.97 27,090 1.70 27,272 1.88
Singapore 35,407 2.55 31,405 1.97 23,888 1.64
Thailand 7,940 0.57 1,687 0.11 13,229 0.91
United States 277,779 20.04 303,177 19.02 299,003 20.59
Viet Nam 900 0.06 1,100 0.07 1,388 0.10

Asia Pacific 713,364 51.47 841,027 52.75 875,529 60.28

NON-Asia Pacific 672,698 48.53 753,290 47.25 576,934 39.72
World 1,386,061 100 1,594,317 100 1,452,463 100
Source: UNCTAD, Foreign Direct Investment Database Accessed January 2018

24
Table 5. Intra-Regional Trade Share (%) (a)
Economy 2010 2015 2016
Australia 68.9 70.8 69.7
Brunei Darussalam 92.2 82.9 85.7
Canada 81.1 83.6 83.2
Chile 58.3 61.9 62.8
China 57.9 58.9 57.2
Hong Kong SAR 78.6 77.8 74.7
Indonesia 72.7 70.4 71.3
Japan 66.8 70.1 69.4
Korea 63.9 66.5 68.0
Malaysia 73.3 72.6 72.6
Mexico 84.7 85.4 85.7
New Zealand 71.4 71.4 71.5
Papua New Guinea 82.1
Peru 56.3 61.3 61.9
Philippines 74.7 76.1 78.8
Russia 23.9 27.4 31.3
Singapore 69.7 70.8 70.1
Chinese Taipei
Thailand 67.0 67.3 67.9
United States 61.6 64.5 64.9
Vietnam 70.5 70.9 72.0
Asia Pacific 64.2 66.0 66.0
Source: WITS. Accessed January 2018
Note: (a) Percentage of intra-regional trade to total trade of the region

Table 6. Digital Economy Indicators

Mobile cellular subscriptions (per 100 Individuals using the Internet (% of
people) population)
Economy 2010 2015 2016 2010 2015 2016
Australia 100.4 107.7 109.6 76.0 84.6 88.2
Canada 75.7 83.0 84.1 80.3 88.5 89.8
Japan 96.8 126.5 129.8 78.2 91.1 92.0
New Zealand 107.8 121.8 125.0 80.5 88.2 88.5
United States 91.3 117.6 127.2 71.7 74.6 76.2

Brunei Darussalam 108.6 108.1 120.7 53.0 71.2 75.0

Chile 115.8 129.5 127.1 45.0 64.3 66.0
Hong Kong SAR, China 195.7 228.7 234.0 72.0 84.9 87.3
Indonesia 87.8 132.6 149.1 10.9 22.0 25.4
Korea, Rep. 104.8 118.5 122.7 83.7 89.6 92.7
Malaysia 119.7 143.9 141.2 56.3 71.1 78.8
Mexico 77.5 86.0 88.2 31.1 57.4 59.5
Papua New Guinea 27.8 46.6 48.6 1.3 7.9 9.6
Peru 99.5 109.9 117.1 34.8 40.9 45.5
Philippines 89.0 115.8 109.2 25.0 53.7 55.5
Russian Federation 165.5 160.0 163.3 43.0 73.4 76.4

25
 Singapore 145.4 146.5 146.9 71.0 79.0 81.0
Thailand 108.0 152.7 172.6 22.4 39.3 47.5
Vietnam 125.3 128.8 128.0 30.7 43.5 46.5

Asia Pacific 107.5 124.4 128.6 50.9 64.5 67.4

Advanced 94.4 111.3 115.1 77.3 85.4 86.9
Developing 112.2 129.1 133.5 41.4 57.0 60.5
Source: World Bank, World Development Indicators Database. Accessed 2018

Figure 10. Effects of TPP, RCEP and the FTAAP on different groups (% of income)

Source: Authors, based on Petri, Plummer and Zhai (2012) and asisapacifictrade.org

26