Implementing Free Trade and Investment in the Pacific Region
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The past few decades have seen astounding economic growth in the Pacific region, especially among the region's developing economies. As the region has grown, it has also become more interdependent. This trend, and the accompanying increase in regional cooperation, has in turn helped maintain and increase economic activity.
Pacific economies have recognized that, to maintain growth, promote development, and continue to increase living standards in the region, they should pursue rapid and effective trade and investment liberalization. Liberalization increases economic activity; boosts the efficiency and competitiveness of the region's businesses; lowers costs while increasing quality and selection for consumers; and helps develop the region's physical, social, and human infrastructures.
Achieving regional trade and investment liberalization will require a set of mutually complementary initiatives. Multilaterally, the Uruguay Round requires a broad range of liberalization from all WTO members. Regional efforts can supplement and go beyond these multilateral requirements. The most significant such effort in the Pacific region is that led by the Asia-Pacific Economic Cooperation (APEC) forum, which has the aim of achieving "free and open trade and investment" in the region, with developed economies to reach this goal by 2010 and developing economies by 2020. Sub-regional and bilateral agreements have also been used to speed liberalization for smaller groups of economies. In addition, many Pacific economies, recognizing their own self-interest, have unilaterally liberalized elements of their trade and investment regimes in advance of any multilateral, regional, sub-regional, or bilateral requirements.
The Pacific Basin Economic Council (PBEC), believes that all these types of initiatives are necessary for achieving the final goal of full trade and investment liberalization in the region. This paper examines the major issue areas involved in liberalization, describes the benefits of liberalization for the region's individual and collective economies, and sets forth PBEC's recommendations on appropriate initiatives. These recommendations are based on both what is needed and what is feasible. Where appropriate, they are based on work already underway.
Some initial general observations are in order:
The Pacific economies currently have a unique opportunity to maintain the region's economic growth and improve its citizens' standards of living. We believe that implementing the recommendations in this paper would be a major step in the right direction. The region's public and private sectors should not only pursue these initiatives, but also continue their record of mutually beneficial and open dialogue.
Summary
A key ingredient in most Pacific economies' impressive growth has been the inflow of foreign investment. For Pacific economies to continue growing and developing, and for all economies in the region and their citizens to mutually benefit from growth and trade, direct investment rules must be liberalized throughout the region. However, some Pacific economies maintain policies and laws that discourage or disadvantage foreign investors.
The Pacific Basin Economic Council (PBEC), recommends the following initiatives to
liberalize investment:
A key ingredient in most Pacific economies' impressive growth has been the inflow of foreign investment. Foreign investment, in both its direct and portfolio forms, brings needed capital for development and economic expansion. Foreign investment benefits host economies by speeding sound economic and social progress, strengthening business enterprises, increasing employment, boosting productivity, and enhancing healthy competition. It also helps the host economy's development and export performance by transferring technology, labor, and management skills; spurring improvements in transportation, communications, and other basic services; spreading information; and increasing access to international markets. International investment in the Pacific region will also boost trade flows as interlocking transnational relationships develop and mature.
Pacific economies have already demonstrated their attractiveness to investors. In fact, while the global recession of the early 1990s led to an overall decrease in foreign direct investment worldwide, foreign direct investment flows to Pacific economies increased at an average rate of almost 50 percent annually. Foreign investors continue to invest heavily in Pacific economies, to the benefit of both investors and host economies.
For Pacific economies to continue growing and developing, and for all economies in the region and their citizens to mutually benefit from growth and trade, direct investment rules must be liberalized throughout the region. Liberalized investment will encourage and increase capital flows, helping to ensure that Pacific economies can continue their development. Liberalized investment will reduce distortions in capital flows, enhancing economic efficiency in the region. Increased investment flows will also strengthen regional trade. In addition, stocks of global capital are limited, and trends may indicate increasing skepticism by investors regarding developing economies. In such an environment, liberalized investment regimes, when appropriate, are needed to help attract foreign capital.
PBEC believes that, in order for businesses to generate foreign investment flows that are beneficial to both sides of investment transactions, investment liberalization should be accelerated and made enforceable through the laws of each Pacific economy. In particular, investment laws and regulations should be fair and predictable and foreign investors should be subject to no lesser treatment than domestic investors.
Some progress has been made to date toward these goals. However, some Pacific economies maintain policies and laws that discourage or disadvantage foreign investors. The most obvious are direct restrictions on foreign investment, which limit or even forbid foreign equity or majority ownership. Less blatant, but more prevalent, are performance requirements imposed on foreign investors and other types of restrictions.
In addition, some Pacific economies suffer from a lack of transparency in their laws and regulations on foreign investment. One widespread problem is a lack of coordination among government agencies responsible for investment approvals and licenses. Lack of coordination and transparency increases costs for potential investors, decreases economic efficiency, and discourages investors.
Existing Multilateral Efforts:
The Uruguay Round Agreement on Trade Related Investment Measures (TRIMs) forbids WTO members from maintaining some of the more problematic performance requirements, including local content requirements and preferences, import-export balancing requirements, foreign exchange balancing requirements, and export requirements.
However, the TRIMs Agreement does not address some other significant performance requirements, including remittance restrictions, technology transfer requirements, requirements that an investor produce a particular product in the economy, and domestic sales requirements, including government mandated offset programs. In addition, the TRIMs Agreement does not address equity or majority ownership limitations and it allows long transition periods for developing and least-developed economies.
PBEC has long placed a strong emphasis on investment issues. Most significantly, we adopted a Pacific Basin Charter on International Investments in 1972, and revised it in 1978 and more recently in 1995. The charter sets forth important basic principles for both governments and investors which, if fully implemented, would make significant progress toward the goal of investment liberalization. However, its provisions have not been fully implemented by all economies in the region.
In another regional development, APEC members, in their first attempt to address investment issues, adopted a set of non-binding investment principles in 1994. Examining and implementing these principles is serving as a good educational process for Pacific economies. Unfortunately, these principles fall short of adequate liberalization and protection, and investors are not likely to see much immediate benefit from them. PBEC hopes that these principles will lead to further dialogue and improved liberalization in the near future.
Recommendations:
The PBEC Charter expresses the needs of regional businesses and governments with respect to cross-border investment. Full adoption would be a major step toward improving the investment climate in the region.
The TRIMs Agreement is currently the only binding multilateral investment agreement. It should be looked upon as a limited, but very important, step on the road to the long-term goal of comprehensive investment liberalization in both the Pacific region and in the broader multilateral trading system. Eliminating at least some performance requirements throughout the region would significantly improve investment opportunities for businesses in all Pacific economies. It would also establish a framework and hopefully begin a process for further regional liberalization. To expedite these benefits, developing Pacific economies should not fully exploit the Agreement's transition periods but rather accelerate implementation of their obligations under the Agreement.
Moreover, economies should draft and enact the laws and regulations needed for implementation as soon as possible. These laws and regulations would then become effective on the economy's date of implementation. Investment liberalization can involve complicated technical and political issues. By constructing the needed legal regimes now, developing economies will help ensure that they can overcome any difficulties in time to meet their implementation deadlines, and reduce the risk of non-compliance. They would also facilitate technical assistance from other economies, both within and outside the Pacific region.
While Pacific economies should stress comprehensive regional investment liberalization, a web of bilateral investment treaties could provide the critical mass for achieving this goal. IPAs, if strong, will provide stepping stones to full regional investment liberalization. To be useful tools for reaching that goal, and to make the largest positive impact on the region's business and economies, IPAs should require at a minimum:
Pacific economies should not only pursue the actions described above, but also keep firmly fixed on the long-term goal of comprehensive investment liberalization in the region. If APEC proves up to the task, it may serve as a good forum for comprehensive liberalization. However, any APEC-led effort in this area would have to go well beyond the current set of non-binding APEC investment principles, which, while representing a good educational effort, fall short of sufficient investment liberalization and protection. APEC members should begin the process of reaching a regional agreement by strengthening the APEC principles. However, all regional efforts should end with a binding agreement that accomplishes three things:
(1) Improve market access. Some of the necessary elements in this area are:
(2) Protect foreign investment. Some of the necessary elements in this area are:
(3) Provide for effective investor-to-state and state-to-state dispute settlement. Some of the necessary elements in this area are:
Some Pacific economies have already taken this step, which encourages foreign investment. As economies around the world compete for limited capital, instituting "one-stop shopping" can provide an important competitive advantage.
CHAPTER 2 -- INTELLECTUAL PROPERTY
Summary
Intellectual property rights provide powerful incentives for creativity and innovation, encouraging people and companies to research and develop new production and product technologies, market new products, and create artistic works. However, intellectual property protection and enforcement in the Pacific region is not yet strong enough, and infringement of intellectual rights still exists in the Pacific region.
The Pacific Basin Economic Council (PBEC) recommends the following initiatives to improve intellectual property protection:
The Pacific economies' future will depend heavily on having a strong, vibrant, and creative technological and industrial base. A key prerequisite to developing and maintaining this critical underpinning of growth is strong protection of intellectual property rights.
Intellectual property rights provide powerful incentives for creativity and innovation, encouraging people and companies to research and develop new production and product technologies, market new products, and create artistic works. Protection of these rights is no less important to economic and cultural development than protecting property rights in tangible property, such as land and personal possessions.
Strong intellectual property protection has numerous positive effects on an economy. For example:
Besides promoting the development of domestic industries, effective protection and enforcement of intellectual property rights encourage foreign investment and technology transfer, especially by high technology industries. The converse is also true -- weak protection or enforcement discourages foreign investment and technology transfer. Weak protection is also likely to skew foreign investment away from research and development and sophisticated production facilities, and toward distribution and sales operations. Where protection is weak, foreign companies are more likely to transfer technology that is older and less valuable technology rather than state of the art. Weak protection also impedes the on-the-job training that results in a higher quality and more technically prepared labor force.
Inadequate protection or ineffective enforcement of intellectual property not only puts an economy at a competitive disadvantage with respect to investment, technology transfer, and development of domestic industries. Widespread infringement of intellectual property, as an underground activity, reduces tax income to the government. It can also cast a patina of illegitimacy on an economy's legitimate exports.
Some of the problems in intellectual property rights protection stem from inadequacies in laws and regulations. In other instances, the legal regime is sufficient, but enforcement is lacking. Both elements -- good laws and strong enforcement -- must operate hand-in-hand.
Existing Multilateral Efforts:
The Uruguay Round Trade Related Intellectual Property (TRIPs) Agreement is the first multilaterally-established baseline for intellectual property protection and enforcement. The agreement serves as a good floor for progress towards fully adequate and effective protection of intellectual property. However, some Pacific economies will be able to use the TRIPs Agreement's transition periods to delay implementation. These delays, if used to their full extent, would postpone the benefits of the Agreement to all economies in the region.
Recommendations:
As part of this effort, Pacific economies should facilitate technical assistance and sharing of information on the technical and legal infrastructures needed for strong protection and enforcement of intellectual property. Regional seminars and workshops bringing together technical and legal experts would be one useful tool. Programs to educate and train customs and other personnel on TRIPs obligations and enforcement are another. APEC has pursued both types of programs; Pacific economies should fully participate in, and expand on, these initiatives. Pacific economies should also consider compiling and adopting "best practices" of national administrative and enforcement bodies.
In addition, Pacific economies, recognizing the advantages of strong intellectual property protection, should not take advantage of the full implementation periods. Delaying implementation will only delay the benefits of improved intellectual property protection. Moreover, economies should draft and enact the laws and regulations needed for implementation as soon as possible. These laws and regulations would then become effective on the economy's date of implementation. Intellectual property protection involves complicated technical and political issues.
The TRIPs Agreement is only a step toward the goal of fully adequate and effective intellectual property protection. Moreover, technology is constantly evolving, and the TRIPs Agreement will not adequately cover many new forms of intellectual property. For example, the developing Global Information Infrastructure will likely involve forms of intellectual property that are not covered by the TRIPs Agreement. The Pacific economies should begin working together to consider how to move beyond the TRIPs Agreement, considering both multilateral and regional possibilities.
Even the best laws and enforcement cannot totally eliminate the problem of intellectual property infringement. Pacific economies, as well as the private sector, should implement programs to engender appreciation of, and respect for, intellectual property.
CHAPTER 3 -- GOVERNMENT PROCUREMENT
Summary
The benefits of fair and open government procurement practices are straightforward. They enable governments, with limited public resources, to purchase the best quality goods and services from the most competitive and efficient suppliers for the least amount of money. Unfortunately, the current procurement policies and practices of some Pacific economies severely distort the allocation of government contracts.
The Pacific Basin Economic Council (PBEC) recommends the following initiatives to improve government procurement practices:
In many Pacific economies, the public sector represents a substantial segment of the overall market for goods and services. Governments are spending huge amounts of money to improve the economy, modernize infrastructures, and raise standards of living. Because of this significant public sector participation in the economy, government procurement presents important opportunities for Pacific Basin businesses, especially in infrastructure sectors such as energy, power generation, construction, transportation, and telecommunications.
The benefits of fair and open government procurement practices are straightforward. They enable governments, with limited public resources, to purchase the best quality goods and services from the most competitive and efficient suppliers for the least amount of money. Under fair and open procurement procedures, Pacific Basin businesses are able to compete on a level playing field, with contracts awarded to the companies with the best prices and quality.
Unfortunately, the current procurement policies and practices of some Pacific economies severely distort the allocation of government contracts. The lack of equal, competitive opportunities for foreign goods and service providers in government purchasing is the primary problem. Some economies award public contracts on a discriminatory basis, both explicitly and implicitly favoring domestic companies over foreign bidders. In some cases, certain contracts are entirely closed to foreign bidders. Bidding and award procedures often suffer from lack of transparency, and some economies do not provide adequate opportunities to challenge awards. Some economies do not even have clearly defined procurement procedures. In addition, corruption sometimes taints the entire procurement process.
Existing Multilateral Efforts:
The WTO Agreement on Government Procurement will make significant progress toward more fair and open government procurement. The Agreement, which covers both goods and services, addresses many of the concerns discussed above and significantly improves both domestic and foreign companies' ability to compete fairly for public contracts.
Unfortunately, in contrast to most WTO Agreements, WTO members are not required to adhere to the Procurement Agreement. Moreover, the Agreement's substantive rules apply only to those government entities specifically scheduled by signatories, and only for contracts above an explicit monetary threshold.
Recommendations:
The Procurement Agreement's substantive rights significantly improve businesses' ability to compete fairly and openly for public contracts. Few developing economies in the region, however, are members of the Agreement. Pacific economies should seek to expand coverage of the Procurement Agreement throughout the region in order to place all the region's businesses, both domestic and foreign, on an equal footing. Membership by all Pacific economies in the Procurement Agreement will significantly improve prospects for development throughout the region by enabling governments to purchase higher quality, lower priced goods and services.
As Pacific economies join the Procurement Agreement, they should schedule significant commitments. However, if some economies determine they are not able to schedule meaningful commitments at this stage, they should at least agree to the framework provisions of the Agreement, making whatever commitments they can and paving the way for future commitments when more favorable economic and political conditions permit.
As fair and open government procurement is a key element of trade liberalization, joining the Procurement Agreement should be encouraged as a part of WTO accession. Declaring adherence to the Agreement before accession to the WTO would be beneficial for the applicant's economy and would demonstrate a commitment to WTO principles.
Because the Procurement Agreement applies only to those sectors specifically committed to by signatories, the scope of coverage of the Agreement, even in those economies that are signatories, is incomplete.
Because of its limitations, the Procurement Agreement alone does not hold all the answers to liberalization in this area. Pacific economies should vigorously pursue speedy liberalization of government procurement on a unilateral basis. In addition, in those areas not addressed by the Agreement, and for those economies that have yet to adopt its commitments, Pacific economies should aggressively pursue regional and sub-regional procurement agreements to supplement the Agreement.
Many Pacific economies lack significant experience regarding modern, open government procurement procedures. Those economies with more advanced government procurement experience should share this knowledge with other economies in the region through technical assistance programs. Pacific economies should consider adopting a "best practices" program for procurement.
CHAPTER 4 -- MARKET ACCESS FOR GOODS AND SERVICES
Summary
Many Pacific economies have made commendable progress recently in reducing some barriers to trade through multilateral trade negotiations, regional and bilateral efforts, and unilateral measures. In order to maintain the region's impressive economic growth and to improve living standards, Pacific economies must continue to make substantial headway in removing barriers facing the region's businesses.
The Pacific Basin Economic Council (PBEC) recommends the following initiatives to liberalize market access:
Free and open markets offer great benefits both for individual economies and for the Pacific region as a whole. Many Pacific economies have made commendable progress recently in reducing barriers to trade through multilateral trade negotiations, regional and bilateral efforts, and unilateral measures.
In order to maintain the region's impressive economic growth and to improve living standards, Pacific economies must continue to make substantial headway in removing barriers facing the region's businesses. Improved market access, achieved by reducing tariff and non-tariff barriers on imports, is an engine for economic growth, employment, and increased standards of living for the region's citizens. For example:
Liberalization of trade in services as well as goods is necessary. The quality and efficient supply of such services as transportation, communications, financial services, construction, and distribution affect the pace and cost of development, as well as the efficiency of both goods- and services-related industries. Access to technology-based services, such as in the fields of health, education, and training, improves social welfare and development. To reap these benefits, the economies of the Pacific Basin must continue to make strides in opening their services to international trade.
Despite the benefits of liberalized trade, high tariffs and non-tariff barriers (NTBs) still exist in the region that significantly impede the free exchange of goods and services in the region. In fact, as the region's economies have gradually reduced tariffs, NTBs have become increasingly prevalent, including such barriers as quotas, import licensing, discriminatory customs procedures, and burdensome and discriminatory testing and certification requirements. (Some of these NTBs -- customs problems, burdensome and discriminatory standards, and related requirements -- are discussed separately in more detail in Chapter 7 of this paper.)
Significant barriers to foreign service providers, including lack of national treatment and restrictions on cross-border sales, contractual arrangements, and establishment still exist in the region. Some services, such as telecommunications and energy production/distribution, remain in the hands of government monopolies. Other service sectors, such as wholesale and retail operations, financial services, distribution, franchising, advertising, and product servicing, are heavily restricted or completely closed off to foreign providers in some economies.
Barriers to trade penalize consumers substantially, adding tens of billions of US dollars to the costs of consumer goods. The economic costs of barriers to trade in services are also high. The World Bank estimates that services now account for close to one-fourth of world trade and three-fifths of FDI flows. Barriers to services trade therefore hamper a major segment of economic activity. Liberalization of trade in services, which has lagged behind the opening of markets and trade in goods is vital to the future efficiency and competitiveness of Pacific economies.
Existing Multilateral Efforts:
The Uruguay Round included many significant accomplishments with regard to market access for goods and services. The agreed tariff reductions will ease trade in goods for Pacific Basin businesses, and reduced tariff bindings will increase the security of market access. Disciplines on many NTBs, including import licensing requirements, pre-shipment inspection procedures, technical standards, sanitary and phytosanitary standards, rules of origin, and customs procedures, will also be helpful. The Round also improved market access for agricultural goods, textiles, and apparel. However, even after full implementation of these market access commitments, some Pacific economies still maintain considerably high tariffs in some sectors such as autos, while in others, such as civil aircraft, the possibility exists that tariffs could be raised subsequently as those economies develop indigenous capabilities. Moreover, if history is any guide, NTBs will continue to be a concern in the region.
The Uruguay Round also expanded international trade rules to services through the General Agreement on Trade in Services (GATS). The GATS sets out a framework of strong rules for treatment of foreign service providers. However, the majority of these rules, including most notably those relating to market access and national treatment, apply only to those sectors included in each member's scheduled commitments. Thus, despite the substantial progress made in the Uruguay Round, significant and widespread obstacles to market access in trade in services remain, especially with respect to basic telecommunications, financial services, and audiovisual services.
In addition to multilateral progress made through the WTO, the Pacific economies have pursued regional and sub-regional liberalization efforts. The Association of Southeast Asian Nations (ASEAN) plans to establish a free trade area among its members by the year 2003. In a broader regional initiative, the members of APEC have established the goal of "free and open trade and investment" within APEC by 2010 for developed economies and by 2020 for developing economies.
APEC's efforts establish laudable long-term goals and commitments, but businesses need to see results more quickly. PBEC members believe that the region's interests are best served by continuous and meaningful liberalization. Therefore, while the APEC "free and open" trade target dates are significant achievements, these goals should not delay liberalization measures that can begin now. Delays to liberalization will result in continued trade distortion, to the detriment of the region's private sector and citizens.
Recommendations:
Pacific economies should at least agree to a standstill, with all economies pledging not to impose any new measures that hinder trade among the region's economies.
The time-frame for Uruguay Round implementation should be shortened, especially with respect to tariff reductions, implementation of WTO rules/disciplines, and services commitments. To achieve this end, the Pacific economies should accelerate their Uruguay Round tariff cuts and reduce other transition periods where feasible.
The Pacific economies should deepen their WTO commitments. Tariff reductions beyond those made in the Uruguay Round are necessary for continued growth of regional trade and development. Pacific economies should also eliminate gaps between bound and applied tariff rates -- many economies bound tariffs at levels higher than effective tariff rates, thereby allowing them to increase tariffs in the future without violating their Uruguay Round commitments. Economies should also bind all their remaining unbound tariffs in key sectors. Additional services liberalization is also necessary.
The Pacific economies should broaden WTO commitments as well. New sectors need to be covered, and exceptions should be reduced. Pacific economies need to complete ongoing WTO services negotiations, including those on telecommunications, transportation, maritime, and financial services.
Pacific economies may want to focus initially on reducing and eliminating barriers in easier areas, i.e., pluck the "low-hanging fruit," in order to build momentum to address more politically sensitive areas in the future. However, all areas must eventually be on the table for full liberalization, including agriculture and automotive products.
At the same time as WTO obligations are being met and expanded, Pacific economies should pursue complementary market access initiatives within APEC and other regional bodies to address NTBs and seek further tariff reductions on an accelerated basis. In particular, Pacific economies should negotiate further zero-for-zero tariff reductions, continuing the efforts begun in the Uruguay Round and accelerating the existing phase-in periods. Pacific economies should also work to reduce tariff disparities among the region's economies, in order to lessen damaging trade distortions. All such liberalization efforts must be in compliance with the WTO, supplementing and spurring ongoing WTO liberalization efforts.
Several Pacific economies impose higher tariffs on value-added products while allowing imports of raw materials or unfinished products with low or zero tariffs. This practice, known as tariff escalation, protects domestic markets, creating inefficiency and severely distorting the free flow of goods. Eliminating tariff escalation will bring competitiveness to currently protected domestic industries, further the regional liberalization effort, and contribute to continued economic growth and development.
CHAPTER 5 -- DOMESTIC REGULATION AND TAXATION
Summary
Pacific economies' domestic regulations and policies, including those related to taxes, have a significant impact on regional trade, investment, and development. Deregulation has become a growing phenomenon in Pacific economies, developed and developing alike. However, most Pacific economies still have far to go in their deregulatory efforts. In addition, companies also sometimes experience problems with double taxation and discriminatory aspects of tax systems.
The Pacific Basin Economic Council (PBEC) recommends the following initiatives to improve the regulatory and tax climate in the region:
Pacific economies' domestic regulations and policies, including those related to taxes, have a significant impact on regional trade, investment, and development. Rational policies and regulations that take the needs of domestic and cross-border business operations into account will facilitate and speed national and regional economic development. Conversely, policies that hamper domestic and foreign business operations, or that have an unfair impact on international businesses, will adversely affect economic growth.
Deregulation has become a growing phenomenon in Pacific economies, developed and developing alike. Economies are recognizing that less regulation boosts economies and helps companies expand, operate more efficiently and effectively, increase their exports, and more quickly commercialize new technologies and products.
However, most Pacific economies still have far to go in their deregulatory efforts. Moreover, some Pacific economies maintain regulatory provisions that discriminate, either through intent or by effect, against foreign products, services, and investment. Such regulatory problems impede national and regional economic activity and growth and distort regional trade and investment flows.
On the tax front, double taxation is a major problem for business operations. Bilateral tax treaties are the generally accepted solution to this problem. While some tax treaties do exist between Pacific economies, they are relatively few and far between.
Foreign companies also sometimes experience problems with discriminatory aspects of domestic tax systems. Some Pacific economies impose taxes that discriminate or have a discriminatory effect against imported products, foreign companies, or domestic companies with foreign operations. For various reasons, in some economies, taxes are inconsistently applied in different regions. Moreover, some economies' tax assessment methods go against international norms, presenting problems for both domestic and foreign companies.
Recommendations:
This is an effort that should, in general, be taken unilaterally. Pacific economies that have successfully undertaken deregulatory programs, as well as those economies that have always maintained a rational and lean regulatory system, could provide technical assistance and advice as requested by their regional neighbors.
Economies with extensive experience in this area should provide technical assistance upon request.
Summary
Lack of transparency is a significant barrier to trade and investment and economic growth in general. Transparency of the legal regime is a necessary element for a well-functioning economy and an open and predictable trade and investment climate.
The Pacific Basin Economic Council (PBEC) recommends the following initiatives to improve transparency and reduce questionable business practices:
Lack of transparency is a significant barrier to trade and investment and economic growth in general. The problem derives from the lack of a "level playing field" for business. It drains an economy of valuable resources and contributes to an unfavorable business climate, preventing the economy from reaching its full potential and ultimately denying the region's citizens the full benefits of liberalized trade and investment.
Transparency
Transparency of the legal regime is a necessary element for a well-functioning economy and an open and predictable trade and investment climate. Lack of transparency harms both foreign and domestic businesses by increasing uncertainty and complicating business planning. Lack of transparency reduces international business confidence in the integrity of an economy's legal regime, its commitment to liberalization, and its ability to fully implement trade and investment agreements. Lack of transparency also weakens investor confidence and ultimately results in less investment capital and slower economic growth.
All businesses, domestic and foreign, have a need, for purposes of long-term business planning, and a right, for the sake of fair play, to published, readily available, and comprehensible rules of the game. Overly complex or layered legal requirements, as well as discretionary rules, discourage trade and investment. Greater transparency allows businesses to compete on the basis of economic merits such as price and quality, rather than on the discriminatory basis of whim. A fair and non-discriminatory basis for business is crucial to investor confidence and lowers the cost of doing business, laying the groundwork for more rapid development and higher standards of living.
Existing Multilateral Efforts:
Most of the WTO agreements concluded in the Uruguay Round contain provisions relating to transparency. These provisions provide a good baseline for improving transparency with respect to the fields covered by the agreements, but by themselves only begin to address the much broader problem of lack of transparency.
Recommendations:
Because some economies have no clearly defined procurement procedures, adoption of the WTO Procurement Agreement by all Pacific economies is an important step toward improved transparency. The Agreement imposes significant disciplines on procurement procedures, reducing the element of discretion. Adoption of the Procurement Agreement by all Pacific economies will impose important disciplines on procurement procedures including bidding and challenges to awards, thereby reducing opportunities for questionable practices. Adoption of the Agreement would also level the playing field by making the rules of the game in government procurement public throughout the region.
Full implementation of WTO transparency requirements will contribute significantly toward reducing the impediments to trade and investment that lack of transparency creates. The region's economies should rapidly implement these obligations in order to prove their commitment to fair and open rules and to boost economic development throughout the region.
All Pacific economies should make efforts to simplify and publicize their regulatory regimes, especially where they impact trade and investment. To this end, Pacific economies should undertake studies of their regulatory regimes with an eye toward simplification; clarification; publication of all laws, regulations, and procedures; and elimination of duplicative layers of bureaucracy and multiple approval procedures. The region's economies should also pursue initiatives to reduce the use of "administrative guidance" and "administrative approvals," and, where they are used, ensure transparency and fairness. Pacific economies should also follow the trend of the "one-stop shop," centralizing where feasible all regulations and permits within one agency. Pacific economies should strive as well to provide up-to-date and accurate information centers for foreign businesses considering trade or investment opportunities in the region.
On a regional level, Pacific economies should pursue initiatives, perhaps through the auspices of APEC if effective, such as the exchange of information, technical assistance, and regional and sub-regional agreements to improve transparency. Pacific economies should explore the possibility of creating a region-wide information center -- accessible through the Internet -- to provide access to all relevant trade and investment laws of the constituent economies. Centralized access to the laws and regulations of all the economies would provide Pacific Basin companies with a more educated knowledge of the business opportunities that each economy presents and allow comparison of the regulatory regimes in each.
To that end, PBEC should study and develop an updated set of regional guidelines for business
practices.
CHAPTER 7 -- BUSINESS FACILITATION
Summary
Regional efforts to improve the Pacific business climate, including those under APEC, have usually included a range of initiatives gathered under the broad heading of "business facilitation." This category encompasses a spectrum of activities and subject areas that are complementary to the traditional policy issues involved in trade and investment liberalization. Business facilitation measures can make a big difference in day-to-day business operations.
The Pacific Basin Economic Council (PBEC) recommends the following business facilitation initiatives in the areas of customs rules and procedures, technical standards and related testing and certification, and movement of business personnel:
Regional efforts to improve the Pacific business climate, including those under APEC, have usually included a range of initiatives gathered under the broad heading of "business facilitation." This category encompasses a spectrum of activities and subject areas that are complementary to the traditional policy issues involved in trade and investment liberalization. PBEC members regard business facilitation measures as "down to earth" efforts that, while not being squarely within the traditional areas of trade policy, can make a big difference in day-to-day business operations.
Regional business facilitation efforts should focus at a minimum on the following areas: customs rules and procedures; technical standards and related testing and certification; and movement of business personnel.
Customs
Problems involving customs rules and procedures can be one of the most immediate impediments to day-to-day international business operations. Businesses face numerous difficulties in this area, including non-transparent and inefficient customs infrastructures; differing customs and tariff systems; and improper application of rules of origin, customs valuation, pre-shipment inspection, and import licensing. Customs problems can impact especially heavily on small- and medium-sized businesses, which have less experience and fewer resources to deal with these problems.
Customs difficulties complicate and hinder the free flow of trade in the region, harming companies and national economies. They also can discourage foreign investment, as investors frequently must rely on some imported products. Fair, simplified, and harmonized customs procedures would greatly benefit businesses and boost economic activity in the region.
Existing Multilateral Efforts:
WTO members are all parties to four agreements covering customs issues -- the Agreements on Rules of Origin, Customs Valuation, Preshipment Inspection, and Import Licensing Procedures. These agreements, when fully implemented, will help alleviate some of the customs-related problems faced by businesses in the Pacific region.
Recommendations:
While the WTO customs-related agreements will not solve all customs-related difficulties faced by businesses, these agreements will significantly facilitate import and export activities in the region.
Pacific economies should focus on the following areas in their efforts:
Standards, Testing, and Certification
Standards and related testing, certification, and accreditation requirements all can serve important purposes in enhancing economic efficiency and the quality of goods and services. However, they can also be impediments to trade, or even serve as substantial and costly trade barriers.
Standards differ considerably among Pacific economies, imposing additional costs on businesses, creating business uncertainty, and impeding economic cooperation. Even where standards are similar, products often need to be tested and certified separately in each market, which also adds significant and unnecessary costs. In addition, some Pacific economies have used standards and related requirements as disguised protectionist devices. This increases costs to consumers and greatly impedes market access.
Existing Multilateral Efforts:
WTO members are parties to two agreements covering standards-related issues: the Agreement on Technical Barriers to Trade and the Agreement on Sanitary and Phytosanitary Measures. Both agreements make needed progress, but are only steps to eliminating standards-related trade distortion and protectionism.
Recommendations:
These agreements will help move the region to a more rational, and less trade-distortive, standards regime. It will also set the stage for further progress in resolving standards-related problems.
Under an MRA, an economy recognizes testing and certification related to its standards that are performed in another economy. By eliminating duplicative testing, MRAs are a useful tool for reducing the sometimes significant costs related to standards, testing, and certification. Pacific economies should actively pursue such agreements in priority product areas. APEC members should continue to pursue their current goal of reaching MRAs in selected product areas, but rapidly move beyond the currently limited product scope of the MRAs currently under APEC consideration. The overall goal should be to implement the principle of "tested once, accepted everywhere" in the region.
Harmonized standards would substantially reduce compliance costs for businesses. While harmonization will be difficult or even impossible in many areas, Pacific economies should identify areas in which it is feasible and actively pursue harmonization in those areas. Where international standards exist, harmonization should be accomplished by Pacific economies conforming to those standards. Adaptation of the metric system is one of the possible areas to be considered by all the economies in the region.
Standards, testing, certification, and accreditation are all highly technical and complicated issues. Some economies in the region have valuable experience and knowledge in these areas that should be shared with their neighbors. Such assistance would greatly speed the process of reducing the trade distortive effects of standards and related requirements. Technical assistance activities are already underway in the region, including through APEC; Pacific economies should continue and expand these efforts.
Movement of Business Personnel
Movement of personnel is necessary for efficient business operations. Because some jobs associated with modern services and manufacturing require a high degree of skill and specialization, locating employees for each and every area of specialization in each and every economy is not possible. As companies adjust their businesses to more proficiently address the global marketplace, and as intra-regional business relationships develop and mature, the ability to move skilled professional and technical persons easily and quickly between economies for short periods of time to perform specific and defined tasks becomes critical.
Restrictive public policies, laws, and regulations in many Pacific economies impede companies' ability to use personnel as needed. The present maze of restrictive and complicated laws on immigration and personal income tax translates into burdensome, time-consuming, and expensive procedures for granting temporary entry to business visitors into many Pacific economies. This hinders economic activity and discourages foreign investment.
Recommendations:
At the very least, Pacific economies should take the following actions:
Ideally, these actions should be taken unilaterally. However, if it would speed the process, Pacific economies should undertake regional discussions on these issues. In particular, APEC's 1995 Osaka Action Agenda includes some collective actions on mobility of business people. Pacific economies should play a full part in these APEC activities.
While each Pacific economy has the right to establish its own laws and regulations on these issues,
harmonization is a viable solution to the current problems faced by businesses. Pacific economies
should pursue regional negotiations, perhaps under the auspices of APEC, to find a harmonized
approach that balances the legitimate control needs of local immigration authorities with the
legitimate flexibility requirements of businesses. At the very least, Pacific economies should agree to
establish a regional business visa, which could be issued by any Pacific economy and would allow
multiple entry to all Pacific economies for short business visits.
Summary
Technology has been one of the major roots of economic growth in the Pacific region. It is therefore critical that businesses are encouraged to implement and spread new technologies, including by investing and competing in developing markets. National governments should do their part by implementing policies that are consistent with increased technology transfer. In particular, strong intellectual property protection is needed to encourage companies in developed economies to transfer ideas and technology to developing ones.
The Pacific Basin Economic Council (PBEC) recommends the following initiatives to improve technology development and transfer:
Technology has been one of the major roots of economic growth in the Pacific region. New technologies facilitate the flow of capital, enhance the positive effects of trade and investment, and contribute to the overall economic well-being of citizens in the region. Continued regional growth will be heavily dependent on efforts to stimulate the development of new technologies and to accelerate their implementation.
Technology affects nearly all areas of commerce and life in the Pacific region. Technology development and transfer is particularly important in the areas of environmental protection, energy conservation, and production and quality control. Moreover, advances in information technology have increased trade in information-based services (e.g., research and development, computing, inventory management, quality control, accounting, personnel administration, and advertising). Efficient provision and trade of these services greatly benefits the region's businesses and citizens. The development and use of the Global Information Infrastructure (GII) will heavily depend on emerging and cutting edge technologies.
Thus, it is critical that businesses are encouraged to implement and spread new technologies, including by investing and competing in developing markets. National governments should do their part by implementing policies that are consistent with increased technology transfer. In particular, strong intellectual property protection is needed to encourage companies in developed economies to transfer ideas and technology to developing ones.
However, adequate and effective intellectual property protection is not provided uniformly through the region. In addition, some Pacific economies impose technology transfer requirements on foreign companies, especially those engaging in direct investment. These requirements are counterproductive -- they inhibit business relationships and make it less likely that companies will want to invest in, or trade with, the economy in question. Market forces, not government mandates, should determine technology transfer.
Recommendations:
Strong intellectual property protection and enforcement is a prerequisite for efficient and rapid flow of technology in the region. To ensure this flow, Pacific economies should implement the PBEC recommendations regarding intellectual property given in Chapter 2 of this paper.
It is in each Pacific economy's best interests to unilaterally eliminate all government mandates, thereby encouraging market-driven investment and technology transfer. However, to the extent that concerted action is more feasible, Pacific economies should examine the possibility of a regional accord to eliminate these mandates.
Governments and businesses should explore such efforts together, recognizing the great benefits of technological development and implementation for all in the region. Businesses should be encouraged not only to develop and quickly implement new technologies, but also to invest and compete in developing markets. Heavier involvement in developing markets will inevitably lead, through market forces, to the spread of technology.
Summary
As Pacific economies continue to grow and make economic progress, they should also work to maintain a healthy and sound natural environment and pursue sustainable development. Pacific economies should pursue economic development, higher standards of living, and environmental protection as mutually supportive goals.
The Pacific Basin Economic Council (PBEC) recommends the following initiatives for pursuing environmental protection in conjunction with economic liberalization and development:
As Pacific economies continue to grow and make economic progress, they should also work to maintain a healthy and sound natural environment and pursue sustainable development. Pacific economies should pursue economic development, higher standards of living, and environmental protection as mutually supportive goals.
High standards of living depend both on economic progress and on a healthy environment. Economic development, and the international trade and investment that promote development, can be fully consistent with environmental protection and sustainable development. In fact, economic development help creates the resources and popular support for improving environmental protection. Environmental issues should not be used as a tool to slow development, trade, and investment; rather, the Pacific economies should adopt economic and environmental policies that can operate together to improve standards of living for all in the region.
Business can also make a major contribution by means of technology cooperation and partnerships with developing economies -- partnerships that bring environmental benefits. With a well thought out program of cooperation and planning regarding environmental protection, Pacific economies can foster a climate that encourages foreign investment, innovative partnerships, and the diffusion of sound technology. Mandatory investment or technology transfers should not, however, be a condition of doing business in a particular economy.
Developed economies in the region should recognize the importance of developing sound environmental infrastructures and assisting developing economies by sharing their experiences and identifying environmental policies that have worked, thereby avoiding costly regulatory excesses and mistakes.
In order to ensure the strong support of the business and investment community in economic development and environmental protection, economies must have transparent, consistently administered environmental standards and regulations, effective consultation processes, and clear criteria for decision-making. This all helps ensure timely decisions, uniform treatment, and use of the most efficient technologies and equipment, and provide the basis for sound economic planning.
Trade and environmental policies can and should be mutually supportive. Sustainable development in Pacific Basin economies can only be achieved by fostering economic growth while, at the same time, protecting public health, welfare, and the environment. This will require free and fair trade and investment flows guided by clear laws and well-enforced policies. The use of trade sanctions to enforce environmental laws or policy is inappropriate and should be discouraged as damaging to all economies. Pacific economies' goal should be to ensure environmental protection while avoiding environmental protectionism.
In general, multilateral agreements are the most appropriate means to resolve transboundary or global environmental problems. Such agreements should be based on sound scientific evidence and evaluation of the problem(s). Agreements should also respect the rights of economies, while avoiding the creation of a patchwork of incongruous environmental standards and policies, and minimizing the risk of trade and investment disruptions.
Existing Multilateral Efforts:
The WTO contains a Committee on Trade and the Environment, which is examining issues at the nexus between trade and the environment.
The OECD has also been examining environment and trade issues. Its areas of study currently include the transportation industry, eco-labeling and life-cycle analysis, and trade in wastes.
Recommendations:
Each Pacific economy has a duty to its citizens, based on existing economic and physical conditions, resources available, and pressing health and social needs, to determine its appropriate environmental objectives and policies. Environmental policies and standards should be transparent and based on performance and outcomes, rather than prescriptive in nature, enabling companies to achieve compliance through the use of the most efficient and effective technologies. In general, environmental policies should be developed taking into consideration risk, costs, recognized scientific standards, and community values and expectations.
Opportunities for regional standards may exist where common environmental problems are faced by a number of economies in close geographical proximity. In such instances, regional standards can achieve a significant environmental benefit at lower cost. However, uniform Pacific environmental standards may not be practical, economical, or politically viable for many economies. Agenda 21, which was adopted by the United Nations Conference on Environment and Development in 1992, recognized that "environmental standards valid for developed countries may be unwarranted social and economic costs in developing countries." It should be recognized that economic and social priorities in developing economies are different from those in developed economies. This principle does not suggest that environmental issues should be ignored in developing economies. Rather it calls for the recognition of environmental programs as one component of an overall plan for economic development.
Trade and environmental objectives should be developed to stand independently, but on a complementary, consistent, strong, and enforceable basis. The WTO is the international body best suited to prevent the misuse of environmental policies for protectionist purposes.
The principal objectives of multilateral economic agreements, such as the GATT and NAFTA,
have been and should remain the liberalization of trade and investment and the promotion of
economic growth. The successful conclusion of a trade pact should not be compromised or
delayed by efforts to solve specific environmental problems. Conversely, the conclusion of an
environmental agreement should not be held hostage to the successful resolution of trade and
investment disputes.
Summary
The Pacific economies, by promoting economic growth through increased trade and investment, will improve working conditions throughout the region. These two goals must be pursued hand-in-hand; attempts to improve labor conditions should not be used as an excuse to slow the pace of trade and investment liberalization and economic growth. As the Pacific economies pursue trade and investment liberalization, they should also pursue cooperative initiatives related to labor conditions. However, confrontational approaches, which would promote neither improved working conditions nor economic growth should be avoided.
The Pacific Basin Economic Council (PBEC) recommends the following initiatives for promoting better labor conditions in conjunction with economic liberalization and development:
The Pacific economies, by promoting economic growth through increased trade and investment, will improve working conditions throughout the region. These two goals must be pursued hand-in-hand; attempts to improve labor conditions should not be used as an excuse to slow the pace of trade and investment liberalization and economic growth.
There is growing evidence that increasing trade and investment, and the economic growth they foster, have a positive impact on working conditions in developing economies. This happens naturally, without the threat of trade sanctions or the compulsion of international labor standards. In the 1980s, when newly industrialized economies became significant economic forces in world markets, real earnings for workers in those economies either kept pace with or exceeded growth in GDP/GNP.
Available evidence also calls into question the charge that global trade and investment liberalization is adversely affecting wages and labor standards in industrialized economies. On the contrary, developing economy markets continue to be a valuable source of high-wage employment in industrialized economies. To the extent there are pressures on employment conditions in industrialized economies, they appear to result mainly from domestic economic policies and increasingly competitive trade among industrialized economies.
As the Pacific economies pursue trade and investment liberalization, they should also pursue cooperative initiatives related to labor conditions. However, they should avoid any confrontational approaches, which would promote neither improved working conditions nor economic growth.
Recommendations:
There is currently no international consensus on labor rights. To the extent possible, Pacific economies should work within existing organizations to develop and enforce internationally recognized worker rights and labor standards. Such standards would provide a fair and equitable foundation for economic and social development.
Pacific economies should pursue economic and labor objectives on independent tracks, recognizing that the two are complementary. In particular, trade sanctions should not be used in attempts to improve labor conditions. Any such confrontational approach will almost certainly be counterproductive, failing to achieve labor goals while damaging economic and political relations.
In addition, economic and labor agreements should not be linked. The principal objectives of economic agreements have been and should remain the liberalization of trade and investment and the promotion of economic growth. The successful conclusion of an economic pact should not be compromised or delayed by efforts to solve specific labor problems. Conversely, the conclusion of an agreement on labor conditions should not be held hostage to the successful resolution of trade and investment disputes.
