APEC needs an external rebalancing makeover

A widely expressed sentiment at the inaugural Asia-Pacific Economic Cooperation (APEC) Ministerial Meeting in Canberra in November 1989 was that preserving and improving the multilateral trading system was key to the region’s economic success, and that this success benefited the world too.

If it is to remain central to regional and global success, APEC must now reach beyond its familiar trade and investment liberalisation and inclusion remit and serve as the premier Asia Pacific forum — and catalyst — for coordinating the reduction of the region’s external imbalances.

The Asia Pacific region witnessed the largest increase in external imbalances in 2024 since the pre-Global Financial Crisis boom of the mid-2000s. China’s US$1 trillion goods trade surplus in 2024 mirrored the United States’ US$1.1 trillion current account deficit. These imbalances occurred against the backdrop of rising global real interest rates, unlike the global savings glut-fuelled mid-2000s boom, which depressed rates and stimulated excess consumption in the West. The upshot is that the external surpluses and deficits of the 2020s are mostly homegrown and require domestic savings–investment rebalancing remedies that should ideally be coordinated internationally.

Resurgent external imbalances can be intensely destabilising. The multilateral trading and international monetary systems are deeply interconnected. The notion that international trade facilitates mutual prosperity is the foundational idea of the international monetary system. Modern-day central banking traces its ‘lender of last resort’ operations to international trade’s dramatic rise — and the growth of trade finance instruments — from the mid-19th century.

Conversely, external imbalances that major economies have been unwilling to resolve through trade flows have time and again been resolved through unilateralism, protectionism and default. In 1933 and in 1971, presidents Roosevelt and Nixon suspended gold and US dollar convertibility respectively. President Reagan wielded Section 301 powers — which permit unilateral responses to trade practices deemed unfair — against Japan in the 1980s with swingeing effect.

With an asymmetry emerging between global trade and financial system centrality, external imbalances are fuelling financial stability risks more lately.

Washington has effectively dropped out of major trade liberalisation initiatives. Since the late 19th century, the economy at the centre of the global system has furnished systemic stability and public goods, including open trade. Roosevelt did so at home with the Reciprocal Trade Agreement Act of 1934 and internationally with the Tripartite Agreement of 1936 — where signatories agreed not to engage in competitive currency devaluations — after suspending the gold standard. Nixon launched the General Agreement on Tariffs and Trade’s Tokyo Round of trade talks, after closing the Bretton Woods gold window.

Reagan released his Trade Policy Action Plan, which produced the Omnibus Trade and Competitiveness Act of 1988, and launched the Uruguay Round of the General Agreement on Tariffs and Trade negotiations. It is unlikely that US President Donald Trump and his successors will work as hard, to put it mildly, to liberalise bilateral and multilateral trade. An APEC that counts on ever-deeper trade integration among its major economies will quickly find itself running out of road.

APEC is the only region-wide economic platform that counts both the United States and China as members. ‘Both have skin in the APEC game. The setting in which they must deal is multilateral, and their dealings are on full display to all other 19 members’, as Peter Drysdale has observed. Its step-by-step but sustained approaches to cooperation, eschewal of binding obligations in favour of voluntary and consensus-based measures and commitment to norms-shaping arrangements that complement — not substitute for — the multilateral system is uniquely tailored to the task.

APEC must press this advantage by institutionally locking the United States and China into a flexible but concerted work program of time-bound measures to coordinate shrinking their stark external imbalances.

Washington should take credible steps to halve its fiscal deficit as a share of GDP over a five-year period. Its fiscal year 2024 deficit of 6.4 per cent of GDP — the largest in history outside of periods of war or recession — is unsustainable, even in the eyes of the Trump administration. Beijing should take comparably-sized steps to boost domestic demand over the same period. After nine consecutive quarters of deflation, Beijing must either restructure or swallow the property sector’s debts, resource local governments through expenditure reassignment and fiscal framework reform and pare down the excesses of its directed finance and overcapacity-creating industrial policy model.

Lastly, both sides of the Pacific should explore a coordinated — not crackpot — adjustment of exchange rates featuring the US dollar and key Asian trading currencies, including the Chinese yuan, Japanese yen, South Korean won, New Taiwan dollar and Vietnamese dong. Each of these major US trading partners runs a sizeable current account surplus, yet their post-pandemic real effective exchange rates are deeply undervalued.

Structural misalignment of currency rates brought down two international monetary systems in the 20th century and continues to be a key accelerant of populist ‘beggar-thy-neighbour’ appeals within the modern inflation-anchored floating rate system. For coordinated currency adjustment to succeed, the lessons of the 1985 Plaza Accord dictate that the adjustment must occur within a supportive policy framework, with fiscal policy pulling in the same direction.

APEC has been a beacon of regional trade liberalisation. With Washington relinquishing this mantle with no timetable for return, the moment is ripe for APEC to parlay its convening power into macroeconomic and external account stabilisation.