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Imagine an international regime with these institutional features:

1. Virtually free trade in goods and services, including a "mutual recognition" system whereby compliance with regulatory requirements in one jurisdiction (eg qualifications to practice law or requirements to offering securities to the public) basically means exemption from compliance with regulations in the other jurisdiction. And for sensitive areas, such as food safety, there is a trans-national regulator.

2. Virtually free movement of capital, underpinned by private sector and governmental initiatives.

3. Permanent residence available to nationals from the other jurisdiction (and strong pressure to maintain flexible rules about multiple nationality).

4. Treaties for regulatory cooperation, simple enforcement of judgments (a court ruling in one jurisdiction is treated virtually identically to a ruling of a local court), and to avoid double taxation (including a system for taxpayer-initiated arbitration among the member states).

5. Government commitment to harmonising business law more widely, eg now for consumer and competition law.

No, the answer is not the obvious one: I am NOT talking about the European Union (EU). I am referring to the Trans-Tasman framework built up between Australia and New Zealand, particularly over the last decade, sometimes through treaties (binding in international law) but sometimes in softer ways (eg parallel legislation in each country). And since both countries are actively pursuing bilateral and now some regional Free Trade Agreements (FTAs), especially in the Asia-Pacific region, can't at least some of these Trans-Tasman initiatives become a template for a broader "Asia Pacific Community"?

This question is particularly timely as the new DPJ-led government in Japan, has declared its support not only for the WTO system but also for FTAs, particularly in the Asian region. It also advocates improvements in food and consumer product safety measures. Whether or not Australia is considered part of Asia, either by Japan or itself, the two countries are continuing bilateral FTA negotiations in the context of growing involvement in regional arrangements in the Asia-Pacific region. Such developments constitute one theme at the NZ Centre for International Economic Law conference, “Trade Agreements: Where Do We Go From Here?”, over 22-23 October 2009 in Wellington. Below is an edited introduction to my four-part paper, now available in further updated form as a Sydney Law School Research Paper. Powerpoint slides are also available in PDF here.

More and more countries are entering into bilateral FTAs, including now throughout the Asia-Pacific region. This was not such a problem when the world economy was growing, but it and the multilateral WTO regime are now in crisis. Inefficient “trade diversion” is likely even if bilateral FTA partners begin to connect up under regional FTAs, as under the recent ASEAN-Australian-NZ Free Trade Agreement (AANZFTA). This is because greater liberalization already achieved between bilateral FTA partners tends to be preserved under such regional agreements. And burgeoning FTAs diminish the incentives for national governments to press for a new multilateral system.

Some therefore call for a “crisis Round” to try to revive the system, but that seems unlikely. Another impediment is that the persuasiveness of conventional economic models, and market forces as the best way to maximize socio-economic growth, are under broader threat in the wake of the Global Financial Crisis (GFC) and now the meltdown in most real economies.

One way forward is to concede that FTAs, already mostly sub-optimal from an narrow economic perspective, should include elements of “fair trade” – not just “free trade”. Indeed, many economists might agree that if politicians, government officials and an increasingly broad array of stakeholders are increasingly investing so much time and resources in negotiating various FTAs anyway, the additional marginal costs involved in agreeing on some further matters may be quite minimal. Those costs are likely to be outweighed by marginal benefits, in the form of reductions in a variety of transaction costs currently incurred in managing risks in cross-border trade and investment. Legal practitioners do tend to be more aware of those costs and risks than governments and businesspeople. But anyway they also generally recognise many values other than those reflected in cost-benefit analysis, such as participation rights or maintaining the coherence and overall integrity of a regulatory system.

In striving to balance free and fair trade nowadays, a rough analogy would be the ways in which the European Union (EU) has evolved so it is no longer just an economic community. Despite – or perhaps because of – the steady expansion of EU membership, it has addressed concerns about democratic legitimacy and accountability, alongside its original core objectives of free movement in people, capital, goods and services. The EU has achieved this over many decades, often by trial-and-error and in a variety of ways, ranging from core or additional treaties, diverse European law harmonization measures, through to “soft law” initiatives.

This analogy seems particularly timely for the Asia-Pacific region, for three main reasons. First, our region certainly remains diverse in terms of social and legal or political systems, but economic integration has burgeoned since the 1980s and will intensify even further as pan-Asian production networks (strongly connected with Japan) turn away from European and US markets in the wake of the GFC. The “diversity gap” is narrowing significantly as the EU itself expands and becomes more diverse, at least when compared to East Asia, Australia and New Zealand.

Secondly, there remains considerable interest in Australian Prime Minister Kevin Rudd’s for a new “Asia Pacific Community”. Proposed last year in rather inchoate form, including whether and how this new concept might include any EU-like institutional features, in December it will be discussed by regional leaders in Sydney and probably then at the APEC meeting in Singapore. Many remain skeptical. But Yukio Hatoyama also wrote shortly before Japan’s general election this year about the need now to strengthen institutions in Asia, ranging from financial system infrastructure to human rights institutions. And his new government now appears to be pressing for some sort of East Asian Community (centred on Japan and China, initially without the US).

Thirdly, throughout the region, considerable distrust has re-emerged about leaving socio-economic ordering to outright market fundamentalism. Although some assert that market forces have long prevailed in Japan, for example, most agree instead that post-War Japanese capitalism has maintained distinctive norms (such as close business-government relations) and institutions (such as “main banks”) that help explain why even the far-reaching reforms to corporate governance since the 1990s still only amount to a gradual transformation. Rudd has consistently protested about the excesses of market fundamentalism, although it remains to be seen whether for example how far this will translate into reforms to consumer protection legislation in Australia – likely also to be followed in New Zealand. Such views underpinned his electoral victory in 2007 (although a wind-back of labour market deregulation was a much higher profile issue), but also Hatoyama’s election victory this August. The new Japanese government appears likely to intensify measures to promote consumer rights and product safety, while simultaneously promoting actively both the WTO system and bilateral or regional FTAs.

What is likely therefore to emerge – or, at least, what we should now be encouraging – is deeper and broader economic integration in the Asia-Pacific (or at least Australasia) that simultaneously incorporates regulatory safeguards to meet the challenges and expectations of our brave new post-GFC world. These innovations may be built into FTAs or negotiated out alongside them, but it needs to be done in a more concerted and comprehensive manner. Part II below therefore explains various options for promoting “free but fair” movements of capital, people and services. Part III addresses free movement of consumer goods combined with better safety regulation: the WTO backdrop, the European approach, and some Asia-Pacific developments (especially Trans-Tasman). Part IV concludes that such initiatives to marry liberalisation with contemporary public interest concerns are essential to sustainable development in the Asia-Pacific region – and hence, potentially, to reinvigorating the multilateral order.

[For more in response to Euro-skeptics, see also my blog on the East Asia Forum]

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Japanese Law in Asia-Pacific Socio-Economic Context
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