8:47 AM Mar 4, 1996


Kuala Lumpur 4 March (by Martin Khor) -- The proponents of "free trade" and "investment liberalisation" often imply that everyone gains and no one loses from the process.

However, a recent study shows that if APEC countries were to liberalise according to a certain set schedule, a few countries would greatly benefit, but other countries (including those in Asean) would suffer a negative trade effect.

"Free Trade" is being promoted so vociferously by some influential quarters (mainly in industrial countries) and through the international media, that many people almost automatically think that it is a good thing for all nations practising it.

But the opening up of borders, so that imports can come in easily, can create problems for a country, unless it can also raise its exports to other countries at the same rate or faster.

Strong countries, with big companies, usually take advantage of trade liberalisation whilst weaker countries could well end up losing. It is not true that "everyone gains from free trade."

This point has important policy implications, including for policy makers of countries that are asked to liberalise their economies in line with multilateral organisations such as the WTO or with regional groupings such as APEC (the Asia Pacific Economic Cooperation Forum).

Some Asian developing countries in APEC have resisted the strong moves by the United States and Australia to convert the organisation into a formal and legally binding free trade agreement.

At the Osaka Summit meeting of APEC last November, several of these countries insisted that economic liberalisation by APEC countries should be on a voluntary basis, and not be compulsorily dictated by fixed uniform schedules and a binding time-table.

There is merit in the reluctance to agree at this stage to a formal trade agreement. APEC has big, medium and small countries. Some are already economically advanced (US, Australia, Japan); others are almost just as developed (Korea, Taiwan, Singapore); some are middle-income and fast growing (Malaysia, Indonesia, Thailand, China); others still are grappling with the more basic issues of getting growth going.

It is by no means clear that all parties would gain or gain equitably from liberalisation. It is also not clear in what way different countries would be affected by liberalisation in terms of growth, employment or trade performance.

A recent study conducted by Dr Yoshisha Inada of Konan University in Japan has given some interesting estimates on what would happen should APEC countries follow an agreed regime of trade and investment liberalisation.

A paper by Dr Inada, "The economic impact of regional integration with special reference to APEC", was distributed at a Conference on East Asian Development organised by UNCTAD and held in Kuala Lumpur on 29 Feb to 1 March.

Unfortunately Dr Inada was not present, but his paper served as a background note for participants. At an earlier informal UNCTAD workshop last October, Dr Inada presented the results of his study.

Dr Inada's paper compares growth rates and trade performance of different groups of countries under three different scenarios:

* Scenario 1 projects future growth and trade movements based on current trends, without an APEC agreement. This is the "baseline" position.

* Scenario 2 assumes that APEC countries have agreed on tariff reductions between 1995 to 2003 at the following rates: US and Japan by 4 percent; Korea and Taiwan by 4 to 8 percent; the five Asean countries by 4 to 12 percent; and China also by 4 to 12 per cent.

* Scenario 3 assumes the above tariff reductions plus an agreed deregulation of foreign investment, resulting in increased investment inflow to China and the Asean 5.

The paper shows that there are different effects of liberalisation on the economic growth rates (measured by the Gross Domestic Product) of different groups of APEC countries.

APEC countries as a whole would gain as their overall average growth in the 1995-2003 period would rise from 2.7 percent in Scenario 1 to 2.9 percent in Scenario 2 and 3 percent in Scenario 3.

But the benefits and costs are unevenly shared.

Among the losers are the Asean countries. Scenario 1 has their average growth at 7.6 percent, whereas the rate drops to 7.4 percent under Scenario 2 and 7.5 percent in Scenario 3.

The gainers are Japan (growth rate up from the baseline 2.8 percent to 3.2 per cent in Scenarios 2 and 3) and Korea (up from 6.3 percent to 6.7 in Scenario 2 and 7.3 percent in Scenario 3). The effect on the US is neutral, its growth remaining at 2.3 percent in all situations.

As Dr Inada's paper put it, the "merits of integration are not equal in the member countries." The tariff rate reductions "encourage APEC member countries' intra-trade flow and APEC as a whole gets merits from it. But member countries and regions do not always get merits equally."

Even more interesting in Dr Inada's paper are the estimates for what would happen to the trade balance.

Under Scenario 1, the Asean 5 would have had a trade surplus of US $48 billion in the year 2003. But under Scenario 2 this surplus would be reduced by $21 billion (to $27 billion). And in Scenario 3 the surplus would be lowered by $39 billion (to only $9 billion).

In other words, trade and investment liberalisation under APEC auspices would have a $39 billion negative effect on the trade balance of Asean in the year 2003, compared to the balance if there were no trade and investment liberalisation.

China would be even worse off. In Scenario 1, China would already have a $25 billion trade deficit in year 2003. The deficit would grow to $46 billion and to $109 billion in Scenarios 2 and 3. There would thus be a negative trade effect of $21 billion and $84 billion respectively, which are very significant.

The biggest gainer would be Japan. In year 2003, its trade surplus would be $179 billion in Scenario 1, rising to $249 billion in Scenario 2 (a hefty gain of $70 billion) and to $251 billion under Scenario 3 (a gain of $72 billion).

Another beneficiary would be Korea, which in year 2003 would enjoy a positive trade effect of $4 billion and $12 billion under Scenarios 2 and 3. For Taiwan, there would be a negative trade effect of $772 million under Scenario 2 but a hefty trade balance gain of $17 billion in Scenario 3.

Surprisingly, the US would be among the losers: its trade balance would be $9 billion less under Scenario 2 (compared to the baseline) and $6 billion less in Scenario 3.

These, of course, are only projections and cannot be taken as firm data. In any projection, on can get varying results under different assumptions.

The exercise carried out by Dr Inada is, however, most valuable as it shows the real possibility that different countries can gain and others can lose under conditions of trade and investment liberalisation.

No doubt there may be disagreements over the accuracy of the assumptions and the predictions of conditions and thus of the estimates. This is normal in the art of economic forecasting.

However, the study does demonstrate that there should not be a presumption that liberalisation is automatically good for all parties, nor that a free trade agreement (with fixed rates of tariff reductions and with rules on investment liberalisation) is necessarily and equitably beneficial to all countries.