East Asian Regionalism: A Comparison with Europe

Richard E. Baldwin Professor of International Economics Graduate Institute of International Studies, Geneva rbaldwin@MIT.edu

Organisation of my talk
European Experience (Briefly) Lessons for todays Asia Burn paths and Endpoints
Where Asian regionalism is going and how

My recommendations

Evolution of European Regionalism

West European Trade Arrangement in early 1950s Organisation of European Economic Cooperation (OEEC)

OEEC

Evolution of European Regionalism

In late 1950s, Western Europe splits in two
Some want deeper integration (federalists) Some want free trade only (intergovernmentalists)
OEEC 1958 EEC is formed by the Six federalist

(France, Germany, Italy and 3 Benelux nations) Deep economic + some political integration Agriculture treated separately (CAP)

1960, in reaction other West Europeans form:

EFTA European Free Trade Association Free trade only, Agriculture is excluded UK leads but EFTA is 1-nation-1-vote

Evolution of European Regionalism

West European Trade Arrangements in 1960s 2 Non-overlapping Circles EEC6

EFTA7

UK

Note 1: EEC market was more than twice the size of the EFTA market

Note 2: UK is biggest economy, but in the small arrangement

Evolution of European Regionalism

EEC and EFTA liberalisation proceeded Between bloc discrimination appeared
EEC firms lost relative competitiveness in EFTA EFTA firms lost relative competitiveness in EEC

EEC was bigger, so EFTA firms lost more Domino theory part 1:
Trade diversion creates new political forces in nations excluded from big market.

In 1961, UK applied to join EEC!

Evolution of European Regionalism

Domino theory part 2:
As some members apply or join, remaining outsiders face discrimination in a bigger market In remaining outsiders, this further strengthens political forces for joining Other remaining nations may join

UK application triggered applications from Denmark, Norway, and Ireland France blocked EEC enlargement until 1973

Evolution of European Regionalism

1973 EEC enlargement triggered second domino effect
Threat of new discrimination led to signing of FTAs between EEC and all remaining EFTA nations

Evolution of European Regionalism

West European Trade Arrangements in 1970s = 2 Concentric Circles UK Switched to EEC remaining EFTAns & EEC sign FTAs EEC-9 This made West Europe a virtual free trade area for manufactures EFTA

Evolution of European Regionalism

As EU economic integration deepens More EFTAns drawn into EU When USSR breaks up All Central Final result: Europeans apply Domino effects imply 2 trade blocs collapse to 1

Lesson for todays Asia

Once regional integration starts it is hard to resist Domino theory predicts all arrangements will eventually collapse into one Loose historical analogy
Japans position in Asia today is like UKs position in Europe in 1950s
Biggest market but reluctant regionalist

China is like France was

Triggers regional economic integration mainly for political reasons

Burn Paths and Endpoints

Real regionalism has not yet started in East Asia
ASEAN economies too small for AFTA to matter

Two sparks are likely

China-AFTA integration Japan-Korea FTA

Domino theory predicts either will produce East Asia wide free trade area in manufactures BUT different Burn paths and Endpoints

Burn Paths and Endpoints

PATH #1: Step 1: China-AFTA trade is liberalised with no WTO discipline
Result: fragmented & non-transparent preferences China economic dominance means design likely to be biased toward wishes of Chinese exporters

Step 2: Japan and Korea ask to join Endpoint:

China-AFTA ad hoc preferential trade arrangement becomes foundation of East Asian FTA

Burn Paths and Endpoints

PATH #2: Step 1: Japan-Korea FTA with WTO discipline
Result: Zero tariffs on substantially all trade in Korea-Japan market Combined GDP = 17% of world income

Step 2: China and ASEANs ask to join Endpoint:

Japan-Korea FTA becomes foundation of East Asian FTA

Burn Paths and Endpoints

Path #2 better for Asia & Rest of World
WTO disciplined

Additional considerations for Japan-Korea FTA

It must anticipate enlargement

3 possible models for docking arrangements #1: Hub-and-Spoke type (bilaterals with Japan)
Bad for China and ASEANs

#2: NAFTA type (matrix of bilaterals creates virtual free trade area)
Too many bilaterals (Asean10+3 = 78 FTAs) No hegemon in East Asia

Burn Paths and Endpoints

#3: European Free Trade Association type Duty free market access is pooled New members get zero tariff access to other members market, and provide duty free preference to all members
For included products (all manufactures)

Intergovernmental structure
One vote per nation Decisions by concensus No hegemon needed

Concluding remarks
WTO only may have been Japans best strategy China-AFTA deal makes Plan A obsolete
Asian regionalism will happen. Only question is how

Time to go to Plan B Avoid UKs mistake of wishful thinking

They hoped EEC would fail, then applied to join 3 years after it started. UK had no input into foundation of todays European integration: Treaty of Rome

Concluding remarks
Japan and Korea should design foundation in consultation with China and ASEANs No use starting before Japan-Korea FTA looks inevitable
Designing in docking arrangements makes JapanKorea FTA less threatening to China+ASEANs EFTA provides best model for free-trade-only regionalism

END
Thank you for listening

End of presentation

Evolution of European Regionalism

OEEC

Evolution of European Regionalism

West European Trade Arrangements in 1950s Organisation of European Economic Cooperation (OEEC)

In late 1950s, Western Europe splits in two

OEEC Some want deeper integration (federalists) Some want free trade only (intergovernmentalists)

1958 EEC is formed by the Six

(France, Germany, Italy and 3 Benelux nations)

1960, EFTA European Free Trade Association

Evolution of European Regionalism

West European Trade Arrangements in 1960s 2 Non-overlapping Circles EEC6
Iceland

EFTA7
Finland

UK
Ireland

Spain

Greece

UK is biggest economy at the time, but in the small arrangement

Evolution of European Regionalism

West European Trade Arrangements in 1970s UK + 2 Switch to EEC EFTAns and EEC sign FTAs EFTA7 EEC-9

Evolution of European Regionalism

As EU economic integration deepens More EFTAns drawn into EU When USSR breaks up All Central Final result: Europeans apply 2 trade blocs collapse to 1

Evolution of European Regionalism

West European Trade Arrangement in early 1950s Organisation of European Economic Cooperation (OEEC)

OEEC OEEC = 17 nations Todays EU15 + Iceland & Norway