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: 1980-90’s The Third Wave (?): 2000’s

Jagdish BaghwatiJagdish Baghwati““Regionalism and Multilateralism: an Overview” Regionalism and Multilateralism: an Overview” (1993)(1993)

Stages of Regional Integration

Free Trade AreaFree Trade AreaEliminating mutual trade barriers but maintaining Eliminating mutual trade barriers but maintaining external tariffs external tariffs

Customs UnionCustoms UnionFree trade area plus common external tariffFree trade area plus common external tariff

Common MarketCommon MarketCustoms Union plus free movement of Capital (ie Customs Union plus free movement of Capital (ie Labour; Technical harmonization)Labour; Technical harmonization)

Economic UnionEconomic UnionCommon Market plus Coordination of policies and Common Market plus Coordination of policies and freedom of services, single currencyfreedom of services, single currency

Political UnionPolitical UnionEconomic Union plus Common PoliciesEconomic Union plus Common Policies

BELA-BALASSA, BELA-BALASSA, 19611961

  

Scheme

FreeIntra-

SchemeTrade

CommonCommercial

Policy

FreeFactor

Mobility

CommonMonetary& FiscalPolicy

OneGovernment

Free Trade Area

O X X X X

Customs Union

O O X X X

Common Markets

O O O X X

Economic Union

O O O O X

Political Union

O O O O O

Schematic Presentation of Regional Integration

Sources of Regionalism

Welfare of MembersWelfare of Members Preferential Trade Agreements (PTAs) can Preferential Trade Agreements (PTAs) can

enhance members’ welfare if these enhance members’ welfare if these arrangements create more trade among arrangements create more trade among members than they divert from efficient members than they divert from efficient producers outside PTAsproducers outside PTAs

0 %100 %

$100 Product

0% tariff : $100100% tariff: $200

Free Trade plusFree Trade plusCustomers UnionCustomers Union

Trade Creation / Diversion Effect

The two red triangles represent The two red triangles represent the positive welfare gains from the positive welfare gains from the trade creation effect the trade creation effect

(p: price / t: tariff)(p: price / t: tariff)

After joining the customs union, the After joining the customs union, the tariff inclusive price of imports from tariff inclusive price of imports from Australia rises, but the price of Australia rises, but the price of imports from France remains the imports from France remains the same.same.

(F: France / Aus: Australia)(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 24GATT Article 24……such union or agreement such union or agreement shall notshall not on the whole on the whole be higher or more restrictive than the general be higher or more restrictive than the general incidence of the duties and regulations of incidence of the duties and regulations of commerce applicable in the constituent territories commerce applicable in the constituent territories prior to the formation of such union (CU) and Free-prior to the formation of such union (CU) and Free-trade Areatrade 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) ofFirst 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, Aft

er Hegemony) Increasing Complexity of Interest Coordination: “Transaction

Costs” Increasing Sectors: Finance, Insurance, Tele-Communication

s, Services, IT…etc

Rise of “Developmentalism” Model From “Trade Substitution” to “Developmentalism” (cf. Yasusu

ke Murakami, Anti-Classical Theory of Political-Economy) “East Asian Miracle” (World Bank) and Rise of Asian Economy

Logic of Dynamic Growth Model

CUSTOMS UNION

TECHNICALHARMONISATION

COMMUNITY METHOD

1958 1968 1972 1979 1985 1992 2000

MARKETHARMONISATION

ECONOMIC ANDMONETARY UNION

INTERNAL MARKET

WHITE PAPER

INSTITUTIONALREFORM

DEFENCE?

ENLARGEMENT

SINGLE ACT

POLITICAL UNION

ECONOMIC ANDMONETARY 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 RegionalismSecond Wave Regionalism

Third Wave Regionalism ?Third Wave Regionalism ?

Globalism / Regionalism / Bilateralismand the ‘Recursion’ of the Region

Economic Sphere Security SphereEconomic Sphere Security Sphere

Global FrameworkGlobal Framework 　 　 GATT / IMF UN / MultinationalGATT / IMF UN / Multinational

Mega-RegionalismMega-Regionalism APEC ARF / OSCE APEC ARF / OSCE

Regionalism Regionalism EU / ASEAN +3 EU / ASEAN EU / ASEAN +3 EU / ASEAN

Coalition Coalition Multilateral FTAs Anti-Terrorism Multilateral FTAs Anti-Terrorism

Bilateralism Bilateralism Bilateral FTAs Bilateral Alliance Bilateral FTAs Bilateral Alliance