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Friday, June 22, 2007

"Asian Regionalism: Threat to the WTO-Based Trading System or Paper Tiger?"

Are Asian regional trade agreements "a threat to the multilateral global trading system and to other regions’ economic prosperity?" Richard Pomfret, writing at VoxEU, says there are more important things to worry about:

Asian regionalism: threat to the WTO-based trading system or paper tiger?, by Richard Pomfret, VoxEU: The GATT/WTO system is based on the principle of nondiscrimination, the unconditional MFN principle enshrined in Article I of the GATT. Despite several waves of regional trading arrangements (RTAs) led by Europe in the 1950s and 1960s and by Europe and North America in the1980s and early 1990s, the multilateral trading system prospered and the establishment of the WTO in 1995 reflected this strength.

The number of RTAs has mushroomed since the early 1990s in apparent conflict with the multilateralism of the WTO. Some observers saw regionalism as a major new feature of the global economic landscape.

Many of the 1990s RTAs were, however, a fall-out from the end of Communism as countries dissolved and Comecon was replaced by a web of new RTAs in Eastern Europe; the increased number of RTAs was a symptom of regional disintegration, not integration. With the EU enlargements, this episode began drawing to a close, although the cumulative chart of RTAs on the WTO website ... does not subtract the 60+ RTAs that became void after the EU’s expansion in 2004.[1]

Since the turn of the century, attention has turned east as over 70 RTAs have been signed by East Asian countries. This is striking because during earlier post-1947 waves of RTAs, the only serious Asian agreement was ASEAN and this had little impact on trade. China, Japan, Korea, Mongolia and Taiwan stood out as practically the only countries showing complete respect for the MFN principle.

The first stimulus for Asian regionalism was the 1997 Asian Crisis, and the perceived inadequate response by multilateral institutions, especially the IMF. ... A new chapter opened in the fourth quarter of 2000 when the three major trading nations of the North Pacific announced steps to initiate preferential trade agreements (Japan/Singapore, US/Singapore, and China/ASEAN). Since then, the focus of Asian regionalism has been on trade, as about 70 trade agreements have been signed by East Asian countries.

How important have these agreements been? Some have had little real content. The US negotiations have tended to be single-issue (often TRIPS-Plus) focused. Japanese negotiators have been stymied by an inability to discuss agriculture, so that the Japan-Thailand RTA ended up with trivial terms (easier work permits for Thai cooks in Japan and lower tariffs on components imported by Japanese carmakers’ subsidiaries in Thailand). Korea was cautious, and until 2007 limited its negotiations to minor trading partners such as Chile or New Zealand.

The most surprising contributor to the “noodle bowl” of intra-Asian RTAs has been China. Since its WTO accession in 2001, China has abandoned its total commitment to multilateralism and embraced regionalism, most notably in its 2002 agreement with ASEAN. ... Thus, Asian regionalism is posing challenges to international relations, but what is its economic basis and likely economic impact?

The catalyst for China’s questioning of multilateralism was a sense that its support for the US-led response to the 1997 Asian Crisis had been underappreciated, and this was exacerbated by the spring 1999 US bombing of the Chinese Embassy in Belgrade. A deeper force underlying China’s regionalism has been a rapid growth in intra-regional trade in East Asia. The trend began when Japanese firms moved production activities offshore following the large yen appreciation that began in 1985, although in the early 1990s Asian exports still went overwhelmingly to OECD countries. After the mid-1990s, intra-industry trade accounted for an ever-increasing share of Asian trade, and China’s role in intra-regional production networks emerged as a major feature. Interest in an institutional framework for reducing transactions costs on trade within East Asia accompanied these denser Asian production networks.[2]...

For China (as for Korea) there are deep-seated historical obstacles to cooperation with Japan, which were highlighted by the violent anti-Japanese demonstrations in several Chinese cities in spring 2005. ...[T]he pattern for China, as for East Asia in general, in the first half of the 2000s was one of talking regionally but acting bilaterally. ...

Although regionalism may be viewed as an alternative to multilateralism, in the East Asian context there may be little conflict between the two, at least in their economic consequences. Duty payments on intra-Asian trade tend to be low as a result of trade liberalisation and of the prevalence of duty-drawback systems... To the extent that the new RTAs include discriminatory tariffs, ... they tend to be narrow in scope and coverage, with trivial economic impact. To the extent that bilateral or regional agreements include trade-facilitating measures, progress in reducing trade costs by improved customs operation and so forth tends to benefit all trades and in practice is non-discriminatory. To the extent that they simplify foreign investment procedures and intra-firm trade, they may start as bilateral but are likely to proliferate until multilateral.

Since China secured WTO membership in 2000/1, a major vehicle for its regional leadership aspirations has been trade agreements. The various East Asian groupings have allowed China to assert its regional hegemony, and Japan has so far clearly come off second-best despite still having a larger economy than China’s. Moreover, the flourishing of bilateral agreements as the highest profile trade policy agenda has left Taiwan totally sidelined. The politics of using RTAs in a quest for regional hegemony are, however, problematic; they can be corrosive of regional integration, wasteful of policy-making capacities, sucking oxygen from reform momentum, and causing negative reactions which lead to poor dynamics. A negative economic consequence of using RTAs for political ends is the lack of transparency about which rules actually apply; even when RTAs are implemented many traders continue to trade on an MFN basis rather than invoking bilateral agreements, e.g. less than 15% of Singapore’s trade with preferred partners is conducted under the terms of bilateral agreements

In sum, the recent East Asian regional agreements are less threatening to the world trade system than they may appear. They do not threaten the MFN tariff structure in a meaningful way, and if they can promote trade facilitation this will likely benefit Asia-traders from all countries. The major threat is political rather than economic, if the struggle for Asian leadership becomes disruptive to harmonious relations. Non-Asian policy-makers should worry more about soothing these antagonisms than about the economic threat of Asian regionalism.

    Posted by on Friday, June 22, 2007 at 03:06 PM in Economics, International Trade, Policy, Politics | Permalink  TrackBack (0)  Comments (1)

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