While the pathway to the Free Trade Area of the Asia-Pacific (FTAAP) has been intensely discussed with a focus on its architecture, something has been missing: how to link trade and investment liberalization with inclusive growth of the APEC economies. The APEC economies have been increasingly open to trade and investment, but domestic distortions persist. The consequences have been less beneficial effects of trade and investment liberalization to domestic stakeholders. In particular, less-advantageous minorities have become more vulnerable to external economic shocks. If these failures are not urgently and seriously addressed, political support for further integration towards the FTAAP will continue to weaken. This reckoning has led to this paper.
   This paper offers policy options to make the FTAAP more conducive to inclusive growth of the APEC economies. Policy proposals are offered in two fronts. At negotiations, a grand compromise between advanced and developing economies should be sought to make negotiations agenda more comprehensive and balanced. Under this grand bargain, protected sectors in advanced economies ? potential exporting sectors for developing economies ? would be opened in exchange for more commitment in new rules by developing economies. To make this grand bargain politically possible, each side should do its homework domestically. Empowering human capital and skill upgrading programs will be urgent and imperative, along with designing more effective trade adjustment assistance programs. To enhance the possibility of achieving this comprehensive and balanced agenda, and to ensure all are on board, a two-track commitment should be designed. At the domestic front, major distortions which have obstructed a more inclusive integration in the past should be urgently corrected. Specifically, policy preference for incumbents should be removed; labor markets should become less rigid; capital markets should be accessible to all; and social safety nets should be strengthened.
 

Executive Summary

Ⅰ. Introduction

Ⅱ. Why ‘Inclusive Integration’?

1. What is ‘Inclusive Integration’?
2. Trade Liberalization and Inequality
3. Cost of Less-Inclusive Integration

Ⅲ. FTAAP: Current State of Play and Missing Link

1. Pathway to the FTAAP
2. Assessment of Scenarios
3. Missing Link in the Current Scenarios

Ⅳ. Strategy for Realizing Inclusive Integration with the FTAAP

1. Negotiations Front
2. Domestic Policy Front

Ⅴ. Conclusion

References