News Analysis: Asia-Pacific free trade zone will lead to further economic integration

A free trade zone within the Asia-Pacific region will lead to further integration and globalization, however, APEC member economies must first overcome economic protectionism.

Feasibility and cost-benefit studies of a free trade zone covering all APEC members, agreed as part of a proposed Free Trade Area of the Asia-Pacific (FTAAP) at the 2014 APEC summit in Beijing, are currently being assessed on schedule for delivery next year.

A free trade zone encompassing the 21 APEC members, who currently account for over 50 percent of global GDP, should potentially be implemented no later than 2025 if agreements can be reached, just under 20 years after its original proposal.

The economic integration of the APEC members under FTAAP will be more effective for trade than the U.S. led Trans Pacific Partnership (TPP), but only if all members can work together, Director of the Institute of Global Finance at UNSW, Professor Fariborz Moshirian, told Xinhua.

Economic modelling in 2014 shows global income gains from the FTAAP would be more than eight times higher than the TPP.

"The main reason is that China is included in the former, but excluded in the latter," James Laurenceson, deputy director of the Australia China Relations Institute said.

Moshirian argues that in an ideal world, negotiations for regional agreements like the proposed FTAAP would go through the World Trade Organization where decisions are economically driven.

"That's the key issue," Moshirian said.

However, in the wake of the failed World Trade Organization (WTO) Doha trade negotiations that stumbled because complex issues couldn't be resolved, nations are now forming regional trade blocks, which are politically charged.

"That's the nature of the business," Moshirian said, arguing an effective WTO can bring nations together.

The largest hindrance to free trade members are going to face is the fight between nationalism and globalism, leading to wide scale economic protectionism which has been seen in country to country, or bilateral agreements.

"The solution is to have more regional integration like what we see in Europe," Moshirian said.

"Free trade by itself in the absence of integration creates nationalism, and that's why you see certain industries become too sensitive to let go politically in every country."

The recent U.S. led Trans Pacific Partnership (TPP) agreement that created a trade block for 12 countries throughout the pacific, it's argued, protected the politically sensitive industries of the United States while being at odds with the sustainable development goals of the wider pacific region.

Under free trade agreements, removing barriers to trade undoubtedly have winners and losers, but the key to succeeding is having an appropriate mechanism in place for short-term compensation.

When trade tariffs and barriers were removed in the establishment of the Eurozone, members were forced to compensate the "losers" in the process.

"That compensation doesn't mean that everyone should pay but every country that is part of the process should create a system in place where you can deploy the workers who loose their job," Moshirian said.

"If China's steel production is more efficient than Australia's, okay lets train the workers in Australia to do something else. That's really the idea."

However, in a political sense, leaving out China and Russia from the TPP is "not giving a good signal if you like," Moshirian said.

When asked if the push to set up the FTAAP was in response to the TPP, Moshirian said, "that's unfortunately the dynamic of the world," and again cemented his view that trade negotiations are best suited in a forum such as the WTO.

However, China plays an important role in the stability and continuity of the global economy, Moshirian said.

"(The) old Silk road of China which captured the imagination of people for centuries, and obviously now their (financial) contribution, I think will very very positive because we need foreign capital."

Foreign capital is a significant issue for the economic development for many parts of the world, especially for Australia, which, as history shows, cannot grow without foreign investment.

However, there will always be suspicions about sovereign capital funds, Moshirian said.

"But I think that we need to accept that the 21st century, sovereign wealth funds will become part of the capital market," Moshirian said. Endit