The Political Economy of Regionalism April 20, 2006 Regional Anatomy I Ken JIMBO

Review 1) Defining “ Regionalism ” Cognitive definition A complex of attitudes, loyalties and ideas which concentrates the individual and collective minds of people(s) upon what they perceive as ‘ their ’ region. Functional Definition: A functional relation that bundles multiple nations with their political, economic and cultural inheritance, often based on the geographical advantage

Review 2) Why ‘ Regionalism ’ matters? Deepening and widening process of globalization made ‘ region ’ in the different context How the current process of regionalism is different from ones of decades ago? Were there any historical trends or waves of ‘ making of a region ’ ?

Historical Background of Regionalism Rise and Fall of Regionalism The First Wave: 1960 ’ s The Second Wave: ’ s The Third Wave (?): 2000 ’ s Jagdish Baghwati “ Regionalism and Multilateralism: an Overview ” (1993)

Stages of Regional Integration Free Trade Area Eliminating mutual trade barriers but maintaining external tariffs Customs Union Free trade area plus common external tariff Common Market Customs Union plus free movement of Capital (ie Labour; Technical harmonization) Economic Union Economic Union Common Market plus Coordination of policies and freedom of services, single currency Political Union Political Union Economic Union plus Common Policies BELA-BALASSA, 1961

Scheme Free Intra- Scheme Trade Common Commercial Policy Free Factor Mobility Common Monetary & Fiscal Policy One Government Free Trade Area OXXXX Customs Union OOXXX Common Markets OOOXX Economic Union OOOOX Political Union OOOOO Schematic Presentation of Regional Integration

Sources of Regionalism Welfare of Members Welfare of Members Preferential Trade Agreements (PTAs) can enhance members ’ welfare if these arrangements create more trade among members than they divert from efficient producers outside PTAs Preferential Trade Agreements (PTAs) can enhance members ’ welfare if these arrangements create more trade among members than they divert from efficient producers outside PTAs 0 % 100 % $100 Product 0% tariff : $ % tariff: $200 Free Trade plus Customers Union

Trade Creation / Diversion Effect The two red triangles represent the positive welfare gains from the trade creation effect (p: price / t: tariff) After joining the customs union, the tariff inclusive price of imports from Australia rises, but the price of imports from France remains the same. (F: France / Aus: Australia)

GATT/WTO Rules and PTA GATT / WTO Rules An essential characteristic of WTO is non- discrimination between members. Under the “ most favored nation ” (MFN) clause, a WTO member must extend to all other WTO signatories the trade concessions made to any one member.

GATT/WTO Rules and PTA Regional Trade Agreements There are some exceptions to the MFN rule, which allow countries to apply lower tariffs to imports from particular countries. GATT Article 24 …such union or agreement shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union (CU) and Free-trade Area...

GATT Rational of Regionalism Characteristic of National Economy Cultivation of National Industry Consistent with GATT Ultimate Goals Deeper integration would be achieved simultaneously within those areas where politics permitted faster movement to free trade under a strategy of full and time- bound commitment

The First Wave of Regionalism Background 1950s/60s: considerations of the sustainability of the nation-state Post-Colonial nation building process Regional Frameworks Western Africa Economic Community (1956) Central-Latin America Free Trade Association (1960) Central America Common Market (1960) Caribbean Free Trade Union (1965)

Rise and Fall (Collapse) of First Wave Regionalism Member States Small and Medium-sized Economy Limited ‘ Trade Creation ’ Effect Diluted Regional Dynamism “ Trade Substitution ” Protection of Regional Industrial Sector Failure in Economic Development Limited-Scale of Industrial Transformation Limited-Scale of Technological Innovation

“ The Obsolescence of Regional Integration Theory ” Ernst Haas, 1975 The failure to replicate the European experience elsewhere National governments continued to be powerful actors outside the region – eg: in international relations inside the region – not transcending the national but instead intergovernmental where national preferences and power remained more important that the region as an actor Towards concepts of (complex) interdependence

The Rise of the Second Wave of Regionalism Europe European Union (1993) North America NAFTA (1989) Asia-Pacific APEC (1989) ARF (1994) Southeast Asia ASEAN Free Trade Area (1992) Latin America Mercosur (1995) Persian Gulf GCC (1981)

Background of the Second Wave Regionalism Weakened GATT Regime Declining of US Economic Hegemony (cf. Robert Keohane, After Hegemony) Increasing Complexity of Interest Coordination: “ Transaction Costs ” Increasing Sectors: Finance, Insurance, Tele- Communications, Services, IT … etc Rise of “ Developmentalism ” Model From “ Trade Substitution ” to “ Developmentalism ” (cf. Yasusuke Murakami, Anti-Classical Theory of Political- Economy) “ East Asian Miracle ” (World Bank) and Rise of Asian Economy

Logic of Dynamic Growth Model CUSTOMS UNION TECHNICAL HARMONISATION COMMUNITY METHOD MARKET HARMONISATION ECONOMIC AND MONETARY UNION INTERNAL MARKET WHITE PAPER INSTITUTIONAL REFORM DEFENCE? ENLARGEMENT SINGLE ACT POLITICAL UNION ECONOMIC AND MONETARY UNION Source: Esko Antola

Characters of Second Wave Regionalism Mega-Regionalism Participation of Large-scale Economy (US, EU, Japan, China) Nested-Box Model (Yamamoto, Kikuchi) Global Institution (GATT/IMF) – Mega-Regionalism － Sub- Regionalism Open Regionalism Harmonization with Global Institutions/Frameworks Non-Discriminatory Trade Liberalization “ Soft-Regime ” Building

Stagnation of Second Wave Regionalism? Stagnation of WTO Process (Global) Doha Round Process Seattle Meeting (1999) Cancun Meeting (2003) Hong Kong Meeting (2005) Stagnation of APEC Process (Regional) Bogor Declaration (1995) and Follow-on Process Rise of Bilateral FTAs (Bilateral)

Rise of Bilateralism? Flawed Effectiveness of ‘ Open Regionalism ’ Inclusiveness vs. non-criteria Consensus vs. ineffectiveness Rise of Bilateral Rational Choice of Government Bilateral FTAs Ad-hoc Cooperation Functional Cooperation

Rise of the Third Wave of Regionalism? Level of Cooperation/ Integration Timelines Second Wave Regionalism Third Wave Regionalism ?

Globalism / Regionalism / Bilateralism and the ‘ Recursion ’ of the Region Economic Sphere Security Sphere Global Framework GATT / IMF UN / Multinational Mega-Regionalism APEC ARF / OSCE Regionalism EU / ASEAN +3 EU / ASEAN Coalition Multilateral FTAs Anti-Terrorism Bilateralism Bilateral FTAs Bilateral Alliance