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Asia-Pacific leaders promise to liberalize regional trade at APEC gathering

VLADIVOSTOK, RUSSIA — They gathered, they spoke, they made their positions known, one by one.  Leaders representing 21 economies from the Asia-Pacific region vowing, once more, to ease the barriers that can often make trade more difficult and more expensive.  

They came, they saw, they conquered

The event was rather diplomatic: lots of handshakes, formalities, photo-ops and smiles. But some, including the U.S. Secretary of State Hillary Clinton – representing the American delegation – came out swinging:

[P]rotectionist policies might provide short-term benefits to domestic terms, but they disrupt supply chains, they scare investors, and ultimately, they set back economies and weaken the rules of the road that are designed to benefit everyone.

Indeed, “protectionism” was a dirty word, while “free trade” was the battle-cry. Though Clinton mentioned no country by name in her attack – she’s more diplomatic than that – it was assumed by most that she was referring to China, whose leaders she just visited in Beijing, and whose president spoke just hours earlier.

APEC Russia 2012 logo on canopy, Vladivostok, September 2012 (photo: Roee Ruttenberg)

APEC Russia 2012 logo on canopy, Vladivostok, September 2012 (photo: Roee Ruttenberg)

For his part, the Chinese President Hu Jintao announced his intentions to rebalance his country’s economy, and promised a transition of power in China – due in the coming months – won’t change that commitment.  Hu urged the some five-hundred CEOs from the region also attending APEC, who represent the private sector, to help with China’s reform:

China welcomes the Asia Pacific business community getting involved in China’s reform, and opening up, the modernization and sharing the benefits and opportunities of China’s development. China will work  with all of you to sustain economic growth and improve the lives of the Asia Pacific people.

There were some notable successes. Among them, a renewed commitment to more eco-friendly trade that saw a list of “green goods” expanded to include fifty-four groups. Goods included in those groups will see their tariffs cut to 5% by the year 2015.  There was also lots of talk of finding new ways to get food in and out  of countries, by means that are quicker, easier, and cheaper.  This fell under the mantra of food security, a particularly sensitive issue in a year when drought has affected three significant exporting countries: the U.S., Australia, and the host country Russia.  More than 80% of U.S. arable land was affected by this year’s water shortage, with production of corn dropping to levels not seen since 1995 and the price of the staple good rising (in some cases) by 25%. It is estimated that Americans spend only ten percent of this post-tax income on consumable goods (i.e. food), and though they likely noticed a change in the price of corn, it won’t “make or break” them.

However, in some of the other members’ economies – namely, developing countries in Asia which rely on importing U.S. crops – a change in the American price meant more people on this side of the Pacific going hungry. So, as Russia’s President Vladimir Putin noted, it is not just about producing the grains – it is also about getting them to those who need them in a cost-efficient way. Speaking on Sunday at the closing press conference of the event, Putin noted that the Soviet Union lacked much of the necessary infrastructure to export grains. Now, according to Putin, Russia is the second or third largest grain exporter in the world. But, he added, the infrastructure is still not as good as it should be.

Zolotoy Rog Bay Bridge soars as a reminder of Russian investment in Vladivostok ahead of APEC 2012 (photo: daniilr)

Zolotoy Rog Bay Bridge soars as a reminder of Russian investment in Vladivostok ahead of APEC 2012 (photo: daniilr)

As was consistent with the theme during the week, Russia called on regional members to invest more in developing Russia’s Far East, specifically expanding the infrastructure in its largest city, Vladivostok, which hosted the gathering. Indeed, based on this last week, it seems Russia has the most to gain. Putin oversaw the investment of $20 billion in the city to get it ready for APEC 2012. That include a new airport terminal, additional roads, the modernization of rails and shipping terminals, and the construction of three new bridges linking various parts of the city (and the once secretive Russkiy Island, where Putin’s folks built a new university campus to house the event, the media, the leaders and their delegates).

Putin is a happy man today

Putin, who appeared pleased with the results, vowed to invest more:

We will be making full use of the active involvement and initiative of the people of our country, and we will try to fully tap new prospects of integration and partnership with our Asia-Pacific neighbors that will now open up.

And it’s paying off. At the APEC Leaders Week, Russian and Chinese leaders agreed to expand trade between the two bordering nations to $100 billion by 2015, and $200 billion by 2020 – three times the current amount. But the investment in the region and the new bilateral deals represents something much larger: a shift in focus in Moscow from the West to the East. Collectively, Europe is Russia’s largest trading partner, meaning that the EuroZone crisis deeply affected Russia. Leaders in the Kremlin, more than 6,000 kilometers away, usually rejected this region. So the cost of living remained high, and young people are leaving at an unsustainable rate. Putin, it appears, has decide that it is better to bet on the Asia-Pacific region, which represents some 40% of the world’s population, and more than 55% of its output production (GDP). Essentially, Moscow wanted in on the action, and even presented the reinforcement of the Trans-Siberian Railway – with its final stop in Vladivostok – as an alternative transport route to the Suez Canal.

Overlooking the problem

But will the investment pay off?  Not until the bigger issues are addressed, says Alexey Chomutov. The Vladivostok businessman owns a local shipping company.  His boats, now in Japan, brought some of the building material for APEC:

It’s a good investment for Vladivostok, and its makes the people happy.  But there are a lot of problems — problems that affect business — and they still need to be fixed.

What he’s alluding to is the unfavorable business culture in Russia. Ironically, some of that was obvious in the way the event and the construction of the facilities themselves were handling, according to “video monstr,” an anonymous vimeo user which spammed journalists on the first day with a video making all sorts of accusations about the campus. Aside from warning visitors about the immediate and long-term health risks posed by what it claims is poorly-planned construction, video monstr also accused the Russian government – which even Putin himself admitted heavily overspent on its budget to host APEC – of awarding the construction contract without a competitive tender. Effectively meaning that a friend of a friend of a friend of a friend – who is likely close to someone important – got a multi-billion dollar contract.

Watch the video for yourself by clicking here. (Note: I cannot verify the claims)

Other media have made similar accusations. If true, this stands in sharp contradiction to the principles promoted by the APEC leaders, and even more ironically, by Putin himself: namely, a free market economy. How can that be promoted if private companies – nevermind foreign ones – are not allowed to compete for government tenders? And how can you guarantee the people, whose tax money is being used, that the best product was provided at the best price?

Russian efficiency: the elevator buttons inside the APEC press center, Vladivostok, September 2012 (photo: Roee Ruttenberg)

Russian efficiency: the elevator buttons inside the APEC press center, Vladivostok, September 2012 (photo: Roee Ruttenberg)

And then there is efficiency. I would like to share an anecdote. The brand-new “international media center” is eleven stories tall. Nevermind that the “official entrance” was through the back on the 5th floor. It reminded me of American shopping centers, in which the escalators require you to cut across the enter building on ever floor so that you forcibly pass by all of the shops. This was exactly the same: getting up and down involved a series of multiple elevators, escalators and even stairs, all in different locations. And getting out required sophisticated navigation skills (making this further ironic: the Russian hosts gave the media a “goody-bag” that include a GPS tablet). The point is: can Russia promote efficiency on a regional level when it can’t seem to first get it right on a local level? This is essentially the criticism Chumotov makes: fix the small before you tackle the big. Putin response is: the investment was all worth it, and when you bring in more and more business, the “small” will fix itself.

Speaking with the Delegates

I had the good fortune of interviewing a handful of delegates, both from the private and government sector (Note: the views presented here are my own and do not reflect the network for which I conducted the interviews).

With the Australian Trade Minister, Craig Emerson, I discussed the issue of food security and the government sector’s role in addressing the issue. I had a similar conversation – but about the private sector – with Sam Allen, CEO of John Deere & Company.

I also discussed the effects the EuroZone crisis has had on the Asia-Pacific region with David Gray of PwC Russia, and the growth opportunities to be found in Pat Dawson, CEO of Dow Chemical Asia. Meanwhile, Jing Ulrich, the Managing Director for Global Markets (China) at JP Morgan Chase, shared her views on where the Chinese economy is heading. And John Faraci, CEO of International Paper, told me what steps can be taken moving forward from APEC.

The U.S. Under Secretary of State Robert Hormats, who was the highest-ranking American delegate until his boss Hillary Clinton showed up, said he is optimistic about America’s role in the region.

What’s Missing?

Critics say, for all the rhetoric, what has been achieved – while significant – is overshadowed by what hasn’t been achieved.  And much of that is thanks to politics. Hu Jintao did not meet with his South Korean and/or Japanese counterpart. The three largest Asian economies are engaged in an ongoing political spat involving disputed islands. Hu also failed to met with the leader from the Philippines, a country engaged in a simliar dispute.

Meanwhile, U.S. President Barack Obama who is focusing on his re-election campaign, skipped the event altogether (as mentioned earlier, the American delegation was represented instead by Secretary of State Hillary Clinton). It is the first time an American president has missed an APEC gathering in more than fifteen years, arguably discouraging for those hoping to remedy trade disputes between Moscow and Washington. It should be noted that Clinton vowed to push for the repeal of Congressional laws will put restrictions on Russian trade, laws that date back thirty years to when Soviet authorities refused to let Jews leave the Soviet Union. Still, this has been a source of frustration between the two, particularly now that Russia is the newest member of the World Trade Organization, officially joining in August after 18 years of negotiations. Clinton applauded Russia’s membership.

And an least one regional leader was noticeably missing. Pyongyang is not a member of APEC, even though it sits in A-Asia and touches P-the Pacific. Its young presidential-hier, Kim Jung-Un, was not invited, though North Korean officials reportedly asked to attend as “observers,” a request that appears to have been rejected. But since politics and economics are so intertwined, might it not have made sense to have him there? …particularly since five of the “Six Party Talks” delegations were in attendance?

Meanwhile, on the issue of the environment, the members did not really tackle the larger regional issue: clean energy. Getting rid for-good of dirty energy might help not only avoid environmental disasters – pollution in East Asia’s capitals, and floods in South Asia’s villages – but also relieve some of the region’s internal energy dependency tensions. This was pushed by some members, like Australia, but not really on the agenda, which is set by the host country (it should be remembered that Russia is an energy exporter).

And with all the attention focussed on improving food supply chains and securing food production, it is perhaps all the more worrying that in several of the member economies, over the past two decades, the economic gap has grown not shrunk. This means that the rich are getting richer, and the poor and getting even poorer.

What most usually remember from APEC is the family photo at the end – with leaders dressed in culture clothing of the host country. But that tradition has become irrelevant.  Some wonder if the same could be said about the meetings themselves.

In truth, probably not. These economies are becoming more and more intertwined and interdependent, whether they like it or not. For example, just a few days ago, a Russian car plant opened in Vladivostok producing, for the first time ever, Mazda cars, the brand of the Japanese giant. It was inspiring to see two engineers – one Russian, one Japanese – built one car with one manual. This is the direction the world appears to be taking. The leaders here acknowledge that. The question is: can a body like APEC, where the resolutions are non-binding, really force them to play by the rules? “Do as I say, not as I do” may eliminate some barriers, but it will artificially create new ones. That will be APEC’s biggest challenge.

A deserted island is lonely

In the Biblical chapter of Genesis, it notes, “It is not good that man should be alone.” Had a nation-state with multi-trillion dollar GDPs existed back then, the same may have been said about the institutions themselves. In general, economies cannot thrive in isolation. The DPRK is one such example, the soaring rial currency in Iran is another. I could not help but wonder about the economic opportunities that would exist if Israel – and a future Palestinian state – were park of a larger, regional trading union? The former French President Nicholas Sarkozy floated around the idea of a Mediterranean Union, consisting of Greece, Turkey, Cyprus, Lebanon and Israel. Nevermind the politics – none of those neighbors really likes the others – but the idea is the same: that each economy could reach greater potential if it liberalized trade within its region.

Imagine looking East, rather than West, to Israel’s border with Jordan. There has been talk of a free trade area in their shared southern plains or all along the Jordan River – on both sides. There was discussion of a bi-national airport north of Eilat in which the runways would be shared but passengers would be shuttled left-or-right to the country of their choice. Imagine would sort of hub such an airport could be for the region and the world, positioned in between Europe, Africa, the Middle East and Asia. When I mention this, I am told “…then we will all since Kumbaya together.” But economics always wins over politics, so I’ll bring the guitar.

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