The Political Economy of Regionalism

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The Political Economy of Regionalism

• April 20, 2006
• Regional Anatomy I
• Ken JIMBO

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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

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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?

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Historical Background of Regionalism

• Rise and Fall of Regionalism
• The First Wave 1960s
• The Second Wave 1980-90s
• The Third Wave (?) 2000s

Jagdish Baghwati Regionalism and
Multilateralism an Overview (1993)
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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
• Common Market plus Coordination of policies and
  freedom of services, single currency
• Political Union
• Economic Union plus Common Policies

• BELA-BALASSA, 1961

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Schematic Presentation of Regional Integration
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Sources of Regionalism

• 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

0
100 Product 0 tariff 100 100 tariff
200
100
Free Trade plus Customers Union
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Trade Creation / Diversion Effect
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)
The two red triangles represent the positive
welfare gains from the trade creation effect (p
price / t tariff)
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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.

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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...
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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

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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)

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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

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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

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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)

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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, ITetc
• 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

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Logic of Dynamic Growth Model
Source Esko Antola
POLITICAL UNION
COMMUNITY METHOD
TECHNICAL HARMONISATION
SINGLE ACT
DEFENCE?
ENLARGEMENT
CUSTOMS UNION
INTERNAL MARKET
INSTITUTIONAL REFORM
MARKET HARMONISATION
WHITE PAPER
ECONOMIC AND MONETARY UNION
ECONOMIC AND MONETARY UNION
1958 1968
1972 1979
1985 1992 2000
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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

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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)

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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

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