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News Release

New East Asian Blocs Could Alter Global Trading System

May 25, 2001

Contact:    C. Fred Bergsten    (202) 328-9000
    Robert Scollay

Washington, DC—The past two years have seen the emergence of over 20 new proposals for preferential trading arrangements in the Asia-Pacific region. A number of additional configurations at the bilateral, subregional, and regional levels are in various stages of consideration. This new study analyzes the trade and overall economic effects of 30 different possibilities, ranging from small bilateral deals (e.g., Singapore-New Zealand) to megaregional arrangements (e.g., an East Asia Free Trade Area and the Free Trade Area of the Americas) and global liberalization in the World Trade Organization.

The new developments in the Asia Pacific could result in a patchwork of overlapping trade deals. They could be divisive, leading to trade conflicts and creating multiple headaches for business. On the other hand, they could be a catalyst for renewed liberalization at the global level.

The extreme outcome might be the emergence of an East Asian or Western Pacific trade bloc. Northeast Asia-including China, Japan, and South Korea, and accounting for over 20 percent of world GDP-would form the core of such a bloc. Until recently, Northeast Asian countries had refused to become involved in preferential trade agreements. This has now changed. Japan and Korea are actively pursuing such agreements. China has proposed a China-ASEAN arrangement. This shift removes one significant obstacle to creation of an East Asian or Western Pacific trade bloc although a number of other important impediments do of course remain.

The "ASEAN plus three" group-comprising China, Japan, South Korea, and the ten members of ASEAN-provides the natural basis for a comprehensive East Asian trade bloc. The "ASEAN plus three" leaders recently directed their governments to study the idea. Parallel emergence of an East Asian or Western Pacific trade bloc, and the Free Trade Area of the Americas (FTAA), would see the Asia-Pacific region split into separate trade blocs on either side of the Pacific-the outcome that APEC was designed to avoid.

The United States has a major stake in these developments. The Asia-Pacific region accounts for almost 50 percent of world trade and more than 50 percent of world output. East Asia accounts for approximately one-third of US trade, broadly comparable to the share of its NAFTA partners. In contrast, the United States conducts only about 5 percent of its trade with South America.

An East Asian or Western Pacific trade bloc would have clearly negative implications for US economic interests. The Scollay/Gilbert simulations indicate, for example, that a Western Pacific trade bloc would largely negate any economic gains the United States might otherwise enjoy from the FTAA.

For East Asia, on the other hand, economic logic strongly favors an East Asia-wide trade bloc rather than more limited groupings. The latter would be a recipe for potentially serious conflict because of the sharply negative economic effects on East Asian countries excluded from the arrangements. One of the risks for East Asia is that economic logic will not prevail, however, and political considerations will steer the region toward more divisive and less economically beneficial configurations.

Despite the potential for separate trade blocs to develop on opposite sides of the Pacific, transpacific trade remains vitally important for both the United States and East Asia. The fact that many of the new bilateral and plurilateral proposals involve transpacific partnerships, such as the US-Singapore and "P-5" initiatives, clearly reflects a desire to preserve a transpacific dimension to Asia-Pacific economic integration. By far the most important transpacific trade flows are those between the United States and Northeast Asia, however, and these flows so far remain outside the scope of any of the proposed new arrangements.

APEC''s transpacific dimension, on the other hand, does encompass these key trading relationships. This continues to be a major potential advantage that APEC-wide liberalization offers to countries on both sides of the Pacific. Not surprisingly, the Scollay/Gilbert simulations show that APEC-wide liberalization almost invariably offers the countries of the region superior economic outcomes to any of the new preferential configurations on offer, as indicated in the following table:

Effect on economic welfare (percent of GDP)
S. Korea
Japan-Korea FTA
ASEAN plus three FTA
Western Pacific FTA
APEC liberalization (MFN)
APEC preferential liberalization

The proliferation of proposed preferential arrangements indicates, however, that APEC''s members may have lost faith in its ability to deliver on its promises. Action will have to be taken to restore that faith if APEC''s potential is to be realized.

If this is to occur, it is likely that the initiative will have to be taken by the United States. Although APEC-wide liberalization offers additional benefits to the East Asian economies, they have a viable alternative in the possible East Asian trading bloc. Moreover, suspicion that the United States is not serious about liberalization in the APEC context is one of the factors contributing to the loss of confidence in that institution. Although APEC-wide liberalization may not offer it sizeable economic benefits, the incentive for the United States to take the initiative is that revitalization of the APEC-wide approach to liberalization may enable it to avoid the negative consequences for itself of the establishment of an East Asian trade bloc.

A longstanding US objection to APEC liberalization on an unconditional most-favored-nation basis is that it allows the European Union to benefit as a "free rider". This objection loses its force if APEC liberalizes on a preferential basis, since the EU then experiences a loss of economic welfare (although the outcome for the United States also deteriorates slightly in this case). The EU might thereby be encouraged to give a higher priority to successful multilateral negotiations that would globalize the APEC actions.

The Scollay/Gilbert simulations also show that multilateral liberalization clearly remains the first-best option for the countries of the region as well as for the world as a whole. APEC members stand to make particularly strong economic gains from global liberalization and thus should be strong supporters of further progress in multilateral negotiations in the WTO.

One positive consequence of the prospect of the emergence of an East Asian trade bloc-in addition to highlighting anew the potential advantages of APEC-may be to increase the incentive for the world''s major powers to seek meaningful negotiations in the WTO. Not only the United States but also the EU will suffer a negative economic impact from the formation of an East Asian or Western Pacific trade bloc. Multilateral liberalization via the WTO can help offset these results.

If the East Asian trade bloc and the FTAA do proceed in tandem, the result will not only be a split in the Asia-Pacific region but also the establishment of a tripolar world trading system centered around blocs in Europe, the Western Hemisphere, and East Asia. Numerous commentators have expressed concern that such large blocs may be tempted to aggressively pursue their short-term interests, leading to destructive trade wars. On the other hand, given that multilateral liberalization is the first best scenario for all three blocs, they will have a substantial incentive to cooperate to ensure the effectiveness of the WTO in averting such an outcome. The end result might therefore be to strengthen the WTO rather than weaken it.

About the Authors

Robert Scollay is director of the New Zealand APEC Study Center and a senior lecturer in the Economics Department of the University of Auckland. Recent visitorships have been at the Institute for International Economics, UNCTAD (Geneva), Bocconi University (Milan), Universidad del Pacifico (Lima), and the Institute of Southeast Asian Studies (Singapore). He is also New Zealand convenor of the Trade Policy Forum of the Pacific Economic Cooperation Council where he has been involved in a number of studies on APEC trade issues. He has undertaken consultancies for several international organizations including the World Bank, UNCTAD, ESCAP, the Pacific Islands Forum, and the Commonwealth Secretariat.

John P. Gilbert is currently a postdoctoral fellow in the Department of Agricultural Economics at Washington State University. He was previously a research economist at the New Zealand APEC Study Center. He has published several articles on international trade theory and policy in journals including World Economy, Developing Economies, Economics Letters, History of Political Economy, and Southern Economic Journal.

About the Institute

The Institute for International Economics is a private, nonprofit research institution for the study and discussion of international economic policy. The Institute, directed by C. Fred Bergsten, provides fresh analyses of key economic, monetary, trade and investment issues and recommends practical policy approaches for strengthening public policy toward these important topics. The Institute receives funding from a large number of private foundations and corporations.