Nation has much to gain as the fight for free trade goes on

Greatly expanded international trade within the Asia-Pacific has fuelled regional and world economic growth.

Greatly expanded international trade within the Asia-Pacific over recent decades has fuelled regional and world economic growth. APEC members account for more than 60 per cent of the world’s population, over 40 per cent of world GDP, yet more than half of world trade.

This relatively high global trade share signifies a higher degree of globalisation than in other parts of the world, reflecting an objective of a touchstone of APEC, the 1994 Bogor Declaration that called for “free and open trade and investment in the region”. Despite equal billing for trade and investment in the Bogor Declaration, international trade growth in APEC has persistently dwarfed foreign investment growth due to the higher policy priority given to liberalising trade over investment. APEC economies have become more open to foreign trade than in the early 1990s, although Australia’s trade openness — measured as the sum of exports and imports to GDP — at about 40 per cent is one of the lowest in the region, less than Canada, China, Chile, Indonesia, Mexico and New Zealand.

Australia’s trade openness is much lower than that of South Korea, Malaysia, Singapore, Taiwan, Thailand and Vietnam, which record trade openness at more than 100 per cent. Unlike many other APEC economies, Australia’s openness ratio has remained stationary over the past decade, despite the mining boom, and coincides with the collapse in Australia’s competitiveness.

Limits to further trade liberalisation are now being reached with the termination of the Trans-Pacific Partnership by US President Donald Trump and relatively slow progress on other trade arrangements such as the Regional Comprehensive Economic Partnership and APEC’s ultimate goal of an overarching Free Trade Area of Asia and the Pacific.

Increased cross-border investment within APEC and between APEC and the rest of the world should now be seen as the most effective means of bolstering regional growth, potentially playing as important a role as expanded international trade in goods and services has in the past.

Further liberalising cross-border investment would lift production, income and living standards throughout the region via numerous channels. These include productivity gains due to greater technology transfer, exposure to best practice management, imitative behaviour by locally owned firms, and increased competition with new entrants in home markets.

At the macroeconomic level, freer foreign investment would unshackle economies with unrealised investment opportunities from the constraint of limited saving. Inward foreign investment equates to an economy’s investment-saving gap, which means the domestic real capital stock can grow faster than otherwise.

Another way of thinking about the economy-wide significance of foreign inward investment is that it measures the volume of consumption spending that residents would have to forego to lift domestic saving to the level required to fund the economy’s investment needs. Foreign direct investment, now close to $US1 trillion, has grown tenfold in APEC over the last 30 years and compares well to other regional bodies, such as the European Union and the G20. Yet while cross-border investment in APEC may appear sizeable in absolute terms, it is small relative to regional GDP and to trade flows.

If we compare the sum of exports and imports as a share of GDP to the sum of foreign investment flows as a share of GDP, without exception, trade flows clearly dominate cross-border investment for each APEC member by sizeable multiples. In short, investment openness has remained flat in the region over recent decades in contrast to highly elevated trade openness.

Foreign ownership continues to evoke unwarranted anxiety across the region. Regulatory barriers to foreign investment are a key reason investment flows are smaller than trade flows. These barriers manifest as government policy measures that distort decisions about where to invest and in what form. They include policy measures that limit share ownership and levels of foreign investment and which make firms endure costly, time-consuming screening processes to convince national authorities that proposals are in ‘‘the national interest’’.

Most APEC economies adopt some form of screening or registration of foreign investors, along with restrictions on the levels of foreign ownership of domestic firms or industries. Case-by-case judgments by government bodies are widespread in the region, as are limits on managerial control and company board membership, especially in telecommunications, broadcasting and banking sectors.

High company taxes — Australia is among the highest in the region — also worsen the foreign investment climate, along with lack of protection for intellectual property and inflexible labour markets. Reducing and harmonising ‘‘behind-the-border’’ barriers is central to fostering investment flows across APEC economies.

The international economic policy mindset needs to shift more decisively to freeing up foreign investment now that the low-hanging trade fruit has been picked.

Tony Makin is director of the APEC Study Centre and Andreas Chai is director of the Economic Analysis and Policy Group at Griffith University