Asian regionalism: threat to the WTO-based trading system or paper tiger?

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 (see below) 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. Japan called for an Asian monetary institution. After a watering down of initial proposals, in 2000 the Chiang Mai Initiative (CMI) established swap arrangements which would provide a regional cushion to countries in a new crisis. The CMI countries were the ten ASEAN members plus China, Japan and Korea, or ASEAN+3. The CMI was, however, only a small step, and no further progress has been made on regional monetary arrangements. Indeed, the build up of reserves by Asian central banks suggests that they are looking to their national defences against any future crises.

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. The envisioned ASEAN+1 free trade area has been viewed with dismay by Japan, which feels itself being outmanoeuvred by China for regional hegemony. 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

In November 2002, ASEAN and China signed the framework agreement on Comprehensive Economic Cooperation which foreshadowed establishment of an ASEAN-China Free Trade Area within ten years. The FTA contained much exclusion, and China’s ‘early harvest’ liberalisation measures were negotiated bilaterally, starting with Thailand.3 As China proceeded with its ASEAN+1 strategy, it continued participating in the ASEAN+3 summits and in trilateral cooperation talks with Japan and Korea, but the latter revolved around setting up study groups rather than any immediate policy agenda. 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. In sum, the pattern for China, as for East Asia in general, in the first half of the 2000s was one of talking regionally but acting bilaterally.

At the eighth ASEAN+3 Summit in 2004, it was agreed to convene a regular East Asian Summit. Chinese policy-makers, recognising that Chinese overpresence might stimulate concerns within the region about a Chinese threat, were happy to let ASEAN play the leadership role, and the First East Asia Summit met in December 2005 in Kuala Lumpur. The East Asia Summit was preceded by arguments about whom to invite, with China favouring a guest list limited to ASEAN+3. Japan argued successfully for Australia, India and New Zealand to be included, so that the East Asian Summit configuration is sometimes referred to as ASEAN+6. At the summit, China argued for Russia’s inclusion, but no agreement was reached on this issue. There was also no clarification of the relative roles of the East Asian Summits and the ASEAN+3 summits in the evolving regional architecture.

One consequence of the East Asia Summit was to highlight the competition for regional leadership. Even though China gave way to Japan on the invitation list, the Summit was a Chinese initiative and Japan felt a need to respond. A Japanese proposal for an FTA among East Asia Summit participants was a non-starter, especially because it seems to be an FTA to exclude the USA. Japan’s next response was to negotiate further bilateral trade agreements. For example, when Australia had raised the prospect of an FTA in 2002, Japan (unlike the USA or China) declined to negotiate, but in 2006 Japan pushed for an FTA. Japan’s motivation was directly related to perceived competition with China, and feared loss of Australian markets to China in areas such as auto components. More specifically, Japan aimed to secure the same exemptions from foreign investment review as those contained in the Australia-US FTA, in order to facilitate Japanese investment in Australia’s energy and minerals sectors, where it sees itself in competition with China to secure resource supplies.

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 in response to the production fragmentation and networks which emerged over the last two decades. To the extent that the new RTAs include discriminatory tariffs, as in the China-ASEAN FTA, 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.

1 J. Crawford and R. Fiorentino, “The Changing Landscape of Regional Trade Agreements”, WTO Discussion Paper No.8 (World Trade Organization, Geneva, 2005) and R. Pomfret, “Is Regionalism an Increasing Feature of the World Economy?” The World Economy (forthcoming 2007).
2 Evidence of the changing trade patterns and trade networks is presented in R. Pomfret, “China and Regional Integration” in D.Greenaway, C.Milner and S.Yao (eds.) China and the World Economy: Consequences and Challenges (Palgrave, forthcoming).
3 Because the ASEAN-China free trade area is a south-south FTA, it can be negotiated under the Enabling Clause, which provides greater latitude than Article XXIV to exclude items. in the agreement. The FTA envisages tariff rates of 0—5% on ‘normal’ goods, and some 400 tariff lines at the HS 6-digit level (accounting for 10% of trade between China and the ASEAN-6 using 2001 trade data) and 500 tariff lines for Cambodia, Laos, Vietnam and Myanmar are to be exempted (M. Hedi Bchir and M. Fouquin, “Economic Integration in Asia: Bilateral Free Trade Agreements versus Asian Single Market”, CEPII Working Papers No.2006-15, Paris, October, 2006).