THE EVOLUTION OF APEC AND ASEM: …basc.berkeley.edu/wp-content/uploads/2011/03/the...Free Trade Agreement (NAFTA), bilateral free trade agreements (FTAs) both inside and outside a

copy Brill Leiden 2005 EJEAS 42Also available onlinemdashwwwbrillnl

2005048 EJEAS 42 Proef 3 21-10-20051554 page 233

THE EVOLUTION OF APEC AND ASEMIMPLICATIONS OF THE NEW EAST

ASIAN BILATERALISM

VINOD K AGGARWAL AND MIN GYO KOO

Abstract The traditional institutional equilibrium in East Asiamdashthe embraceof the WTO at the multilateral level and a focus on market-driven informalintegration at the sub-multilateral levelmdashis under heavy strain IncreasinglyEast Asian countries are pursuing greater institutionalisation at the sub-multilateral level weaving a web of preferential arrangements in responseto similar strategies pursued by the US and the EU This article examinesthe likely path of trading arrangements in Northeast Asia its implicationsfor East Asia and the future of APEC and ASEM We propose an institu-tional bargaining game approach focusing on goods countriesrsquo individualbargaining situations and the fit with existing arrangements and allowing anexploration of the evolution of trading arrangements in East Asia An EastAsian trading bloc has both benign and pernicious elements depending onthe ideas and beliefs held by regional actors The contribution of a prospec-tive East Asian bloc to APEC and ASEM primarily depends on the balanceof interests between the US and the EU concerning East Asia In view of thetremendous political and economic uncertainty in the global economy thepath to freer trade in Northeast Asia East Asia and the world system is likelyto be a bumpy one

I Introduction

East Asian countries have proven to be loyal supporters of the post-war multilateral trading regimes of the General Agreement on Tariffsand Trade (GATT) and World Trade Organisation (WTO) despitetheir early reluctance to do so The inclusion of East Asian countriesculminated in the accession of China which became a member ofWTO in December 2001 after fifteen years of prolonged negotiationsfollowed by Taiwan which secured membership in January 2002

At the same time East Asiarsquos economic integration at the regionallevel has lacked significant formal institutionalisation Even the Asso-ciation of Southest Asian Nations (ASEAN) arguably the most suc-cessful of regional groupings in East Asia has eschewed full commit-ment to the elimination of tariffs and other trade barriers Another

234 vinod k aggarwal and min gyo koo

2005048 EJEAS 42 Proef 3 21-10-20051554 page 234

institutional experiment the Asia-Pacific Economic Cooperation(APEC) created in 1989 remains a consultative forum for trade andinvestment liberalisationmdashrather than a body that has led to signif-icant liberalisation And the European counterpart to APEC AsiaEurope Meeting (ASEM) has remained highly under-institutionalisedas indicated by its name and has only been in existence since 19961

Despite its institutional weakness in a formal sense East Asiarsquoseconomic integration often characterised by its market-driven andinformal nature has been impressive in a practical sense as indicatedby soaring intra-regional trade and investment flows Throughoutthe 1980s and 1990s the network of Japanese multinationals andoverseas Chinese played a critical role in forming virtual East Asianeconomic integration For many observers of East Asian regionalismthis informal network-style integration was seen as a viable substitutefor formal institutionalisation of regional economic affairs2

Currently the traditional institutional equilibrium of East Asianeconomic integrationmdashthe embrace of the WTO at the multilat-eral level and a focus on market-driven informal integration at theregional levelmdashis under heavy strain As an alternative a growingnumber of East Asian countries have begun the pursuit of greaterinstitutionalisation at the sub-multilateral level actively weaving aweb of preferential arrangements with countries both within and out-side the region departing from their traditional commitment to theWTO

We have seen many countriesrsquo commitment to a broad-based mul-tilateral trade regime eroding steadily Although the July 2004 Genevameetings restarted the Doha Round of WTO negotiations the deba-cle in Seattle in 1999 and the failed 2003 ministerial meeting in Can-cun still cast their shadow over the multilateral global negotiations

1 Peter J Katzenstein lsquoIntroduction Asian regionalism in contemporary perspec-tiversquo in Peter J Katzenstein and Takashi Shiraishi (eds) Network Power Japan and Asia(Ithaca Cornell University Press 1997) Vinod K Aggarwal and Charles Morrison(eds) Asia-Pacific Crossroads Regime Creation and the Future of APEC (New York St Mar-tinrsquos Press 1998) John Ravenhill Asia-Pacific Economic Cooperation (APEC) The Construc-tion of Pacific Rim Regionalism (Cambridge Cambridge University Press 2002) WimStokhof and Paul van der Velde (eds) ASEM the AsiandashEurope Meeting A Window ofOpportunity (New York Kegan Paul International 1999) Julie Gilson lsquoWeaving a newSilk Road Europe meets Asiarsquo in Vinod K Aggarwal and Edward Fogarty (eds) EUTrade Strategies Between Regionalism and Globalism (New York Palgrave 2004) Chia SiowYue lsquoEconomic cooperation and integration in East Asiarsquo Asia-Pacific Review Vol 11No 1 (2004) pp 1ndash19 Heiner Haumlnggi Ralf Roloff and Juumlrgen Ruumlland (eds) Inter-regionalism and International Relations A Stepping Stone to Global Governance (OxfordshireRoutledgeCurzon 2005)

2 Katzenstein lsquoIntroduction Asian regionalism in contemporary perspectiversquo

the evolution of apec and asem 235

2005048 EJEAS 42 Proef 3 21-10-20051554 page 235

At the transregional level APEC as a formal mechanism to facilitateeconomic integration has not advanced and the US has increasinglyused this forum to discuss security rather than economic issues Forits part ASEM appears to be similarly paralysed with wide-rangingdiscussion of security and economic security that has little bindingeffect on states Moreover the US and the EU seem quite willing toactively pursue various types of preferential arrangementsmdashdespitetheir purported support of the WTO With respect to informal mar-ket integration the unprecedented economic shocks at the end of the1990s have shown that the seemingly dense networks of Japanese andoverseas Chinese business are quite vulnerable Many leaders fromEast Asian countries began to believe that tighter institutionalisationat the regional levelmdashrather than loosely structured regional produc-tion networksmdashcould provide a better commitment mechanism forassuring a market for their firmsrsquo products

This article examines the origins of bilateral preferential tradearrangements (PTAs) in East Asia and explores whether these PTAswill enhance or undermine broader accords such as APEC andASEM A key question is the extent to which bilateral accords willconform to Article 24 of the GATTWTO a decisive factor in assess-ing their impact This issue is taken up in Section II which beginsby categorising the varieties of trade governance measures accord-ing to the number of participants and the degree to which individualarrangements are geographically concentrated or dispersed Buildingupon this more fine-tuned typology we offer an institutional bargain-ing game approach to more adequately analyse the process by whichvarious types of trading arrangements have been developed and theirfit with existing institutions In Section III we briefly analyse the cur-rent institutional status of APEC and ASEM We then apply our insti-tutional bargaining game approach to the evolution of East Asiarsquosnew appetite for bilateralism focusing on the Northeast Asian Three(China Japan and South Korea) which has yet to become a cohesivegroup despite calls for such development Based on our institutionalbargaining game factors Section IV then explores the principal pathsthat might lead to a trilateral PTA among China Japan and SouthKorea This analysis allows us to investigate how minilateral region-alism in Northeast Asia might facilitate the formation of East Asiancommunity and demonstrate the conditions under which we mightexpect reinvigoration of the stalled transregional and hybrid interre-gional fora of APEC and ASEM respectively In Section V we drawconclusions and implications for a global trading regime


2005048 EJEAS 42 Proef 3 21-10-20051554 page 236

II Theorising About the Modes of Trade Governance

Two important steps are needed to understand the evolution of tradearrangements We must first adequately classify them and then wemust understand the driving forces behind their origins evolution andimpact

Varieties of Trade Governance

East Asian countries like others elsewhere have utilised a host ofmeasures to regulate trade flows Yet many analysts have conflateddifferent types of arrangements and used them synonymously Forexample the term lsquoregional agreementrsquo has been used to refer towidely disparate accords such as APEC ASEM North AmericanFree Trade Agreement (NAFTA) bilateral free trade agreements(FTAs) both inside and outside a region and even sectoral agreementssuch as the Information Technology Agreement (ITA)3 This concep-tual ambiguity and under-differentiation of the dependent variablemakes it more difficult to analyse specific outcomes and impairs ourtheoretical analysis of trading arrangements

To remedy this problem we classify trade arrangements on fivedimensions First we examine whether states act unilaterally or en-gage in bilateral minilateral or multilateral agreements Second weconsider product coverage with a range from narrow (a few products)to broad (multi-product) in scope Third geographical scope differ-entiates between arrangements that are concentrated geographicallyand those that bind states across great distances A fourth dimensionaddresses whether the nature of these measures has been either mar-ket opening (liberalising) or market closing (protectionist) Fifth onecan also look at the degree of institutionalisation or strength of agree-ments4 Table 1 develops a typology of trade agreements that exam-

3 See for example Mansfeld and Milner (Edward Mansfield and Helen MilnerlsquoThe new wave of regionalismrsquo International Organization Vol 53 No 3 [1999] p 592)who recognise the problematic nature of the term lsquoregionalismrsquo but then proceed touse this term in their analysis

4 Of these five the dimension of geography is potentially the most controver-sial Many scholars regard a region as a geographically specified area (Mansfieldand Milner lsquoThe new wave of regionalismrsquo) Conversely othersmdashparticularly withinthe constructivist campmdashdefine regionalism in non-geographic terms such as cul-tures languages religions and ethnic backgrounds (Katzenstein lsquoIntroduction Asianregionalism in contemporary perspectiversquo) Indeed the question of how to define aregion remains highly contested and physical distance is hardly the only relevant fac-tor in defining a lsquogeographic regionrsquo Yet for analytical simplicity we maintain that


2005048 EJEAS 42 Proef 3 21-10-20051554 page 237

Table 1 Varieties of Trade Governance Measures in East AsiaSource Adapted from Vinod K Aggarwal lsquoEconomics international tradersquo in

PJ Simmonds and Chantal de Jonge Oudraat (eds) Managing a GlobalizingWorld Lessons Learned (Washington DC The Carnegie Endowment for

International Peace 2001) updated as of April 2005 with illustrative examples

ines some illustrative arrangements by East Asian countries focusingon the number of participants and geographic coverage for presenta-tion purposes5

Unilateral liberalisation (cell 1) includes measures taken by Singa-pore and Hong Kong The Individual Action Plans (IAPs) of APECalso fall in this category Other than these few cases however unilat-eral trade liberalisation efforts have been relatively rare in East Asiaas in other regions

The prospective JapanndashSouth Korea and South KoreandashChinaFTAs fall in the category of bilateral regionalism (cell 2) As suggestedby the gravity model creating a natural trading bloc between a pairof neighbouring countries can maximise the benefit from geographicproximity and economic size

The category of bilateral transregionalism (cell 3) includes the bilateralFTAs between Singapore and New Zealand (2000) Japan and Sin-

distance matters due to transportation costs We define a pair of countries as geo-graphically concentrated if they are contiguous on land or within 400 nautical milesotherwise we view them as being geographically dispersed According to our defini-tion for example the East Asian Economic Caucus (EAEC) and APEC fall in thesame category of geographically dispersed minilateralism while ASEAN is consid-ered as an example of geographically concentrated minilateralism

5 We will consider all the five elements in the following scenario analysis of EastAsian trade arrangements in Section IV


2005048 EJEAS 42 Proef 3 21-10-20051554 page 238

gapore (2002) South Korea and Chile (2002) the US and Singapore(2003) and South Korea and Singapore (2004) as well as prospectiveFTAs between South Korea and Mexico and Singapore and ChileA majority of existing East Asian bilateral transregionalism has beendriven thus far by lsquotrainingrsquo or lsquocapacity-buildingrsquo purposesmdashratherthan by purely economic incentivesmdashsince many in the region havelittle prior experience in PTA formation6

Cell 4 focuses on geographically focused minilateral regionalism thathas traditionally been referred to as lsquoregionalismrsquo Examples includethe ASEAN Free Trade Area (AFTA) and the ASEANndashChina Frame-work FTA In Northeast Asia Japan China and South Korea areincreasingly discussing the potential benefits of institutionalising eco-nomic relations among themselves This type of trading arrangementhas attracted the most scholarly attention commensurate with therise of regional trading arrangements since the 1960s However cell2 and to some extent cell 5 have also been considered lsquoregionalismrsquoalthough conceptually each may have different implications

Cell 5 refers to minilateral transregional agreements which representan important recent development in trade arrangements that linkcountries across continents7 If an accord links two customs unionsor free trade agreements together this is a case of lsquopure interregion-alismrsquo such as the Europian Union (EU)ndashMercosur accord Thesetypes of agreements do not currently exist in the Asia-Pacific If acustoms union negotiates with countries in different regions but notwith a customs union or free trade agreement we refer to this aslsquohybrid interregionalismrsquo (eg ASEM the prospective ASEANndashJapanCloser Economic Partnership agreement and the ASEAN Plus Three[APTmdashASEAN countries plus Japan China and South Korea] Ifan accord links countries across two regions where neither of the twonegotiates as a grouping then we refer to this as lsquotransregionalismrsquo(eg the East Asian Economic Caucus [EAEC] and APEC)

Finally cell 6 points to multilateral globalism such as the GATTand its successor organisation the WTO Though highly success-ful throughout the post-war period multilateral trade forums at theglobal level have increasingly encountered difficulties in hammeringout new terms of trade liberalisation This in turn has fuelled interest

6 Min Gyo Koo lsquoFrom multilateralism to bilateralism A shift in South Korearsquostrade strategyrsquo in Vinod K Aggarwal and Shujiro Urata (eds) Bilateral Trade Arrange-ments in the Asia-Pacific Origins Evolution and Implications (New York Routledge 2005)

7 Aggarwal and Fogarty EU Trade Strategies Many analysts lump their examina-tion of accords such as NAFTA with the EUrsquos efforts to link up with Mercosur or withAPECmdashwhich seems potentially inaccurate for the purposes of developing causalaccounts of these arrangements


2005048 EJEAS 42 Proef 3 21-10-20051554 page 239

in preferential arrangements at the sub-multilateral level or at multi-lateral sectoral agreements such as the ITA Basic Telecom Agree-ment (BTA) and Financial Services Agreement (FSA) Many schol-ars have rejected arguments about the need for an alternative to theGATT on both theoretical and empirical grounds and there is alively debate on the impact such accords might have on the globalmulti-product approach to liberalisation

As will be discussed in detail in Section III the institutional equilib-rium in East Asia is currently shifting from a multilateral broad-basedapproach (cell 6) to sub-multilateral options including bilateral region-alism (cell 2) bilateral transregionalism (cell 3) minilateral regional-ism (cell 4) and minilateral transregionalism (cell 5)

An Institutional Bargaining Game Approach

To analyse the dynamics among various types of trading arrange-ments and the likely evolution of new institutional equilibrium weuse an institutional bargaining game approach8 As illustrated in Fig-ure 1 we begin by identifying an initial impetus for a new tradestrategy The process of a shift from an initial institutional equilib-rium to a new one generally comes about with an external shockmdashproblems with extant international institutions or a financial crisis forexamplemdashthat creates pressure for change Countries respond to suchexternal shocks in various ways based on the lsquogoodsrsquo involved in thenegotiations their individual bargaining situationsmdashconsisting of theinternational position domestic political structure and beliefsmdashandthe context of the existing institutional environment

With respect to goods an external shock may stimulate or impedethe provision of public goods common pool resources (CPRs) inclu-sive club goods or private goods These various goods signify thedegree to which actors can exclude others (private and club goodsvs others) and the extent to which there is non-rivalry in consumption(public and club goods vs others) Some see trade liberalisation as apublic good while others see it more in club good terms

While there are many factors that might affect national prefer-ences the most significant elements that influence responses to anexternal shock and a subsequent change in the provision of goodsinclude (1) an actorrsquos international position as defined by its overallpower and its specific economic competitiveness in trade and security

8 Vinod K Aggarwal (ed) Institutional Designs for a Complex World BargainingLinkages and Nesting (Ithaca Cornell University Press 1998)


2005048 EJEAS 42 Proef 3 21-10-20051554 page 240

Figure 1 The Origins of Preferential ArrangementsSource Adapted from Vinod K Aggarwel (ed) Institutional Designs for a Complex World

Bargaining Linkages and Nesting (Ithaca Cornell University Press 1998)

matters (2) the makeup of its domestic coalitions reflecting pressuregroups and political regime type and (3) elite beliefs and ideologies

With respect to international position a countryrsquos relative eco-nomic development as well as economic size is a key determinantof trade strategies For instance a country with a large market is morelikely to entice others to seek it out as a trading partner rather thanthe other way around Security concerns may also drive an interest inpreferential arrangements as a means of linking onersquos fate to anothercountry Countries may prefer trade with their allies avoiding tradewith enemies because the (relative) gains realised from free trade cancause changes in the relative distribution of power in politics and mil-itary affairs9

The second dimension of individual bargaining situations concernsa statersquos domestic coalitions and regime type which reflect the extentto which states are responsive to demands by various groups eitherfor or against trade liberalisation To some scholars it is mainlydomestic pressure groups that determine countriesrsquo trade policies10

Others argue that both international and domestic pressures affectinga countryrsquos choices are filtered into real outcomes through a statepower structure and regime type11

9 Joanne Gowa Allies Adversaries and International Trade (Princeton Princeton Uni-versity Press 1994)

10 Gene Grossman and Elhanan Helpman lsquoThe politics of free-trade agreementrsquoThe American Economic Review Vol 85 (1995) pp 667ndash690

11 Helen Milner lsquoIndustries governments and regional trade blocsrsquo in Edward


2005048 EJEAS 42 Proef 3 21-10-20051554 page 241

The third and last dimension of individual bargaining situationsconcerns elite beliefs and ideologies about the causal connectionsamong issues and the need to handle problems on a unilateral bilat-eral minilateral or multilateral basis12 The setback in Seattle whichrevealed the erosion of commitments of the big playersmdashparticularlythe US and the EUmdashto the WTO has significantly weakened thetraditional confidence of other smaller member countries in multi-lateralism This has led to the growing perception by policymakersand business leaders that bilaterally or minilaterally based agreementscould substitute for multilateral liberalisation13

With respect to institutional fit new preferential arrangements orthe modification of existing ones are influenced especially in EastAsia by the context of broader institutional arrangements such asthe WTO and APEC From a theoretical perspective we can definefour types of connections among institutions (1) nested links wherebyarrangements conform to broader accords (2) horizontal connectionswhereby arrangements reflect a division of labour among institutionswithout any hierarchy among institutions (3) overlapping agreementswhich may create tension among institutions and (4) independentinstitutions which do not overlap and thus have little or no inter-action with existing institutions in functional terms If institutionsalready exist and could potentially overlap with each other actorscontemplating institutional innovation must decide how important itis to reconcile institutions through nested or horizontal connectionsthat promote a division of labour

For example APECrsquos founding members as well as ASEM haveworried about undermining the GATT and the WTO as its successorand sought to nest these two institutions under the rubric of lsquoopenregionalismrsquo14 APEC members claimed that this approach would bea better alternative to using Article 24 of the GATT which requires

Mansfield and Helen Milner (eds) The Political Economy of Regionalism (New YorkColumbia University Press 1997)

12 Peter Haas lsquoIntroduction epistemic communities and international policy coor-dinationrsquo International Organization No 46 Vol 1 (1992) pp 1ndash35 Andrew MoravcsikThe Choice for Europe Social Purpose and State Power from Messina to Maastricht (IthacaCornell University Press 1998)

13 Vinod K Aggarwal lsquoEconomics international tradersquo in PJ Simmons andChantal de Jonge Oudraat (eds) Managing a Globalizing World Lessons Learned (Wash-ington DC The Carnegie Endowment for International Peace 2001)

14 As Aggarwal (Vinod K Aggarwal lsquoComparing regional cooperation efforts inthe Asia-Pacific and North Americarsquo in Andrew Mack and John Ravenhill [eds]Pacific Cooperation Building Economic and Security Regimes in the Asia Pacific Region [BoulderWestview 1995]) has noted however the concept of lsquoopen regionalismrsquo is fuzzy andmay simply have been used to paper over differences among members of APEC


2005048 EJEAS 42 Proef 3 21-10-20051554 page 242

that customs unions and free trade areas should cover lsquosubstantiallyall tradersquo among the participants

An alternative mode of reconciling institutions would be simplyto create lsquohorizontalrsquo institutions that would create an institutionaldivision of labour as exemplified by the International Monetary Fund(IMF) and the World Bank with the former focusing on short-termbalance of payment lending and the latter on longer-term structuraldevelopment (although in practice this has not always been the case)

By contrast lsquooverlappingrsquo arrangements can create conflict becauseof the potential for task competition For example in the case ofbilateral FTAs countries have claimed that these arrangements arenested with GATTWTO Article 24 and that they are even seen to beWTO enhancing But as Ravenhill argues this claim is dubious withmany sectors being excluded and new names being devisedmdashsuch asthe economic partnership agreement (EPA) between Singapore andJapan15 Efforts to create an Asian Monetary Fund (AMF) also reflectthe debate over institutional conflict

Lastly an example of lsquoindependentrsquo institutions is the case of theNorth Atlantic Treaty Organisation (NATO) and APEC While theUS is a member of both these institutions have different institutionalmissions and thus do not create any conflict It is worth noting thatpreviously independent institutions (such as the International LabourOrganisation and WTO) may be linked over time and may be seen tobe overlapping and potentially create conflict

III East Asiarsquos Search for a new Trade Strategy

We next examine the impetus for a new trade strategy in East Asiausing our institutional bargaining game approach It is our belief thata new institutional equilibrium depends heavily on developments inits northeast sub-region within the context of broader changes inEast Asia Before turning to this task we first consider how EastAsian states have been active participants in linking up with both theAmericas and Europe The first arrangement APEC goes back to1989 and is a classic transregional arrangement in our terminologyThe second ASEM goes back to only 1996 and reflects a hybridinterregional arrangement with the EU negotiating as a group under

15 John Ravenhill lsquoThe political economy of the new Asia-Pacific bilateralismbenign banal or simply badrsquo in Vinod K Aggarwal and Shujiro Urata (eds)Bilateral Trade Arrangements in the Asia-Pacific Origins Evolution and Implications (New YorkRoutledge 2005)


2005048 EJEAS 42 Proef 3 21-10-20051554 page 243

EU Commission leadership and Asians negotiating as members ofAPT In our brief historical survey of these two arrangements as aprelude to understanding the likelihood of their dynamic evolutionwe emphasise two points First both arrangements have come underchallenge with the Asian crisis of 1997ndash1998 weakening both as forafor trade liberalisation Second the 11 September 2001 attack hasshifted the scope in part of both organisations away from economicissues to security ones (as well as other issue-areas)

APEC New Mission or Faltering Transregionalism16

APEC currently groups 21 economies with the professed aim ofliberalising trade and investment in the Asia-Pacific region As a tradeliberalisation forum APEC began to take on a significant role in1993 when heads of states met in Seattle giving the Uruguay Roundof negotiations a strong boost By indicating its willingness to moveforward with trade liberalisation in what was then the most dynamicregion of the global economy the US was able to encourage the EUto be more forthcoming At least in the minds of some observersAPEC had proved its benefit in serving as a building block for tradeliberalisation on a global level

In November 1994 the members of APEC issued the Bogor Dec-laration at their annual meeting in Indonesia This agreement setAPEC members on the road to trade liberalisation with a targetfor achieving open trade for developed nations by the year 2010 anddeveloping nations by 2020 A year later APEC leaders then met inOsaka to hammer out the details of how to reach the free trade goalAPEC members continued to espouse the principle of lsquoopen regional-ismrsquo arguing for the nesting of APEC within the WTO but withoutthe creation of a formal free trade area or customs union as permittedunder Article 24 of the GATT

In 1996 in Manila APEC shifted from emphasising the benefits oftransregionalism in building and reinforcing globalism to expoundingthe potential benefits of sectoralism The US pressed to use APECto leverage trade liberalisation in the WTO specifically in an effortto push negotiations forward in information technology APEC mem-bers agreed to an APEC-wide liberalisation programme in this sector

16 This section draws on Aggarwal and Kwei (Vinod K Aggarwal and ElaineKwei lsquoAsia-Pacific Economic Cooperation [APEC] transregionalism with a newcausersquo in Heiner Haumlnggi Ralf Roloff and Juumlrgen Ruumlland [eds] Interregionalism andInternational Relations A Stepping Stone to Global Governance (Oxfordshire RoutledgeCur-zon 2005)


2005048 EJEAS 42 Proef 3 21-10-20051554 page 244

and this effort can be seen as using sectoralism regionally to pur-sue sectoral liberalisation globally With this success the US beganto pursue a minilateral sectoral path with enthusiasm pressing forEarly Voluntary Sectoral Liberalisation (EVSL) as a nine-sector pack-age at the Vancouver Summit in 1997 This strategy initially appearedto be viable but quickly ran into difficulties At the Sixth LeadersrsquoSummit in November 1998 in Kuala Lumpur Japan (with supportfrom other Asian countries) refused to liberalise trade in fishing andforestry products and the package was deferred to the WTO for fur-ther debate What seemed in the mid-1990s to be a promising avenueto pursue trade liberalisation (at least from the American perspective)in the worldrsquos most dynamic region began to look more like a deadend or at the very least a very bumpy road

With respect to finance APEC failed to take any significant role inthe resolution of the regionrsquos problems resulting from the 1997ndash1998financial crisis The success of the US and the IMF in forestalling thecreation of a rival financial institution was embodied in the Novem-ber 1997 Vancouver APEC summit meeting leadersrsquo endorsement ofthe so-called Manila framework which called for the IMF to take thelead in providing emergency loans to Thailand Indonesia and SouthKorea with APEC members taking only a secondary role if neces-sary Thus with the APEC action providing a seal of approval for theUSndashIMF backed plan the AMF idea was put on hold

In short in both trade and finance APEC appeared to have beenmarginalised At the 1999 Auckland leadersrsquo meeting the only move-ment in trade was the call by the APEC Business Advisory Coun-cil (ABAC) members for economies to avoid imposing tariffs on e-commerce At a two-day meeting in June 2000 in Darwin APECagreed to an extension of the moratorium on the imposition of cus-toms duties on e-commerce until the next WTO ministerial confer-ence17 In its key recommendations for 2000 ABAC requested thatmembers tackle the growing issue of non-tariff barriers within IAPsto remove impediments associated with standards and conformanceand to support sectoral governmentndashbusiness dialogue to promoteAPECrsquos facilitation agenda18

While the financial crisis appeared to have eviscerated APEC the911 attacks found the US on a mission to rally international sup-port in the fight against terrorism Security concerns dominated theleadersrsquo discussions in Shanghai (2001) and Los Cabos (2002) over-

17 Financial Times 8 June 2000 p 1218 Business briefing Whatrsquos Happening in APEC Vol 10 (Singapore APEC October

2000)


2005048 EJEAS 42 Proef 3 21-10-20051554 page 245

shadowing conventional lsquoeconomicrsquo issues For example the US hasled a drive to increase security in shipping containers and cooper-ation in customs and immigration Stronger controls over financialinstitutions were partially motivated by the imperative to freeze assetsof suspected terrorist organisations19

Recent summit meetings in Thailand (2003) and Chile (2004) havecontinued this emphasis on security although trade and financialissues continue to be debated With respect to trade APEC has beenused as a forum to press for continued progress in the Doha Roundrather than fostering trade liberalisation in APEC per se In financethere has been progress in creating a regional bond market thatwould reduce costs of financing for smaller businesses By far the mostaggressive initiatives however have been taken in the security realmalthough this has generated considerably controversy The US pushedfor control of Man-Portable Air Defence Systems and called forincreased port and cargo security and efforts to attack transnationalterrorist groups

In sum APEC has now become significantly broader in scope butat the cost of its institutional strength Despite various calls for thecreation of a more developed secretariat and an emphasis on tradeliberalisation through this forum little progress has been made onthis score The likelihood of significant changes in APEC is a topicthat we turn to in Section IV

ASEM From Hybrid to Pure Interregionalism

ASEM symbolises the most ambitious effort towards free trade andpolitical dialogue between Europe and East Asia ASEM currentlyincludes all APT member countries and primarily strives to establishan AsiandashEurope free trade area Given the high degree of economicinterdependence between the two regions with East Asia being thesecond most important market for EU exports after North Americaand its leading partner for imports it is hardly surprising that freetrade talks have begun to solidify between the two economic power-houses Nonetheless as Joumlrn Dosch has noted AsianndashEuropean rela-tions remain at a low level due in part to lack of historical and culturalties20

In 1994 driven in part by fear of being marginalised by the USemphasis on East Asia through APEC the EU issued a publica-

19 Associated Press lsquoAPEC leaders pledge to boost tradersquo 28 October 200220 Joumlrn Dosch lsquoChanging security cultures in Europe and Southeast Asia implica-

tions for inter-regionalismrsquo Asia Europe Journal Vol 1 No 4 (2003) pp 483ndash501


2005048 EJEAS 42 Proef 3 21-10-20051554 page 246

tion focusing on a new strategy towards East Asia Singapore tookthe initiative and proposed a meeting of ASEAN members and theEU resulting in the first ASEM leadersrsquo meeting in March 1996in Bangkok Little of substance took place at this meeting but theagenda from the outset included political economic and social is-suesmdasha much broader agenda scope than APECrsquos initial steps Ofgreatest significance was the fact that ASEM included the then sevenmembers of ASEAN as well as China South Korea and Japan thusinitiating consultations among these states

As Gilson notes ASEM has fostered the creation of an East Asianidentity and increased the counterpart coherence of the region par-ticularly in the context of the failure of APEC to take any signifi-cant initiatives in resolving the financial crisis21 She argues that thisongoing interaction between the EU and Asians has fostered the cre-ation of APT grouping which has now taken on a life of its owndistinct from a grouping that came together initially to meet with theEU While European success in integration provides a role model forcloser relations among East Asians the differences in economic strat-egy have further reinforced an lsquoAsian Wayrsquo that is distinct from boththe EU and the US22

The second meeting in London in 1998 took place in the context ofthe Asian financial crisis and proved to be extremely contentious TheEU supported the IMF conditionality approach to resolving the crisisand did not prove to be particularly receptive to helping in resolvingthe crisis and the regionrsquos need for an inflow of funds An alternativeto the IMF in the form of an AMF did not secure European support(and elicited active US opposition)23 One of the key developmentsin the London Summit was an AsiandashEurope Vision Group (AEVG)similar to APECrsquos Eminent Persons Group The AEVG in 1999recommended increasing trade with a goal of free trade by 2025and increasing macroeconomic coordination But at the same timethe group did not propose any significant institutionalisation of therelationship

The meeting between South and North Korean leaders in June2000 overshadowed the third meeting in Seoul in October 2000This meeting caused tensions among Europeans on how best to dealwith North Korea and also was marked by disputes over human

21 Gilson lsquoWeaving a new Silk Road Europe meets Asiarsquo p 7322 Gilson lsquoWeaving a new Silk Road Europe meets Asiarsquo p 7423 Suthiphand Chirathivat and Corrado Molteni (eds) EUndashASEAN Economic Rela-

tions The Impact of the Asian Crisis on the European Economy and the Long-Term Potential(Baden Baden Nomos Verlagsgesellschaft 2000)


2005048 EJEAS 42 Proef 3 21-10-20051554 page 247

rights24 The EU has refused to allow participation by Myanmardespite its having been admitted to ASEAN in 1997 The meeting wasalso marked by a significant non-governmental organisation (NGO)presence

Subsequent meetings of ASEM in September 2002 and October2004 in Copenhagen and Hanoi respectively showed the impact ofbroader developments in setting the agenda for ASEM This is obvi-ously logical but also demonstrates an absence of a strong internallygenerated momentum to address either economic or security issuesin the ASEM forum per se At the Copenhagen meeting the empha-sis was given to both security to cooperate on international terror-ism and trade to bolster the prospects for the Doha Round Atthe Hanoi meeting the potential collapse of a summit meeting wasaverted by a compromise that Myanmar would not send any high-level officials to the meeting in keeping with the EUrsquos criticism ofits human rights policies Moreover these meetings have been usedas a counter to both EU and East Asian concerns about US unilat-eral policies with calls for more cooperation in anti-terrorist activitiesthrough the UN and a more general orientation towards a multilat-eral approach

On the whole however ASEM has clearly done little to fosterany degree of economic integration between the EU and East AsiaMoreover its lack of institutionalisation appears to be a growinghindrance to serving as a forum for any significant policy initiativesAs with APEC many of ASEMrsquos problems appear related to the lackof consensus on a meta-regime for ASEMmdashagreement on principlesand norms about the role of the institution ASEM is additionallyburdened given both the issue scope and the number of members Inthis light it is not particularly surprising that at least with respect totrade liberalisation the focus of East Asian countries (and the EU) hasincreasingly turned to a bilateral route25

24 Stephanie Lawson ASEM and the Politics of Regional Identity National EuropeCentre Paper No 26 (Canberra ANU 2002)

25 Christopher M Dent lsquoThe AsiandashEurope Meeting (ASEM) and inter-regional-ism towards a theory of multilateral utilityrsquo Asian Survey Vol 44 No 2 (2004) pp213ndash236 Chia Siow Yue and Joseph LH Tan ASEAN and EU Forging New Linkagesand Strategic Alliances (Singapore Institute of Southeast Asian Studies 1997) Ravenhill(John Ravenhill lsquoUS and EU regionalism the case of the Western Pacific rimrsquo paperpresented at a conference at USD January 2004) notes with surprise that the EU hasfailed to engage East Asians on a bilateral FTA basis especially in view of the effortsof Singapore and others in the region to secure such an accord


2005048 EJEAS 42 Proef 3 21-10-20051554 page 248

East Asiarsquos New Appetite for Bilateralism

In post-war East Asia several efforts have been made to create astronger institutional manifestation of regional economic ties butthese efforts have barely succeeded26 Analysts have spilled much inkin debating the uniqueness of East Asian regionalism that is oftencharacterised by market-driven informal integration Among oth-ers the networks of Japanese transnational corporations and over-seas Chinese are seen to have played a key role in forming a vir-tual economic community in the absence of formal institutionalisa-tion of regional economic affairs27 The openness of the US marketnatural forces of proximity and the vertical and horizontal integra-tion of regional economies through Japanese investment along withoverseas Chinese business networks seemed to have produced greatereconomic interdependence without substantial institutionalisation atthe regional level

In the 1990s however the traditional institutional equilibrium inEast Asia became increasingly unstable Many countries in the regionbegan to actively embrace the latest wave of PTAs in an attempt toinstitutionalise their economic ties and as a response to similar movesby the US and the EU Although many countries continue to pay lipservice to their commitment to multilateral globalism the erosion oftheir confidence is visible in various parts of the region28

The pressure for a shift from the traditional institutional equilib-rium to a new one came about through two external shocksmdashonepolitical and one economic in nature First broader security shiftssuch as the end of the Cold War made it politically easier for EastAsian countries to consider regional institutionalisation29 The end ofbipolarity has reduced the significance of Cold War perceptions anddivisions breaking down barriers that had precluded regional integra-tion between capitalist and communist blocs Moreover the US has

26 Kent Calder and Min Ye lsquoRegionalism and critical junctures explaining theldquoorganization gaprdquo in Northeast Asiarsquo Journal of East Asian Studies Vol 4 No 2 (2004)pp 191ndash226

27 Walter Hatch and Kozo Yamamura Asia in Japanrsquos Embrace Building a RegionalProduction Alliance (Cambridge Cambridge University Press 1996) Mitchell Bernardand John Ravenhill lsquoBeyond product cycles and flying geese regionalization hier-archy and the industrialization of East Asiarsquo World Politics Vol 47 No 2 (1995) pp171ndash209 Katzenstein lsquoIntroduction Asian regionalism in contemporary perspectiversquo

28 Yue lsquoEconomic cooperation and integration in East Asiarsquo29 John Ravenhill lsquoA three bloc world The new East Asian regionalismrsquo Interna-

tional Relations of the Asia-Pacific Vol 2 No 2 (2002) pp 167ndash195


2005048 EJEAS 42 Proef 3 21-10-20051554 page 249

increasingly pursued a multi-pronged trade strategy including bilat-eral and minilateral trade agreements

The second and most critical turning point came in the wake ofunprecedented economic shocks in the last years of the decade towhich the seemingly dense networks of Japanese and overseas Chi-nese investment turned out to be quite vulnerable To some extentthe impact of the particular pattern of Japanese and overseas Chineseinvestment contributed to the damaging crisis30 The rapid expansionof Japanese and overseas Chinese regional production networks inEast Asia in the 1980s and early 1990s began to show a tendency tofollow investment fads rather than market demand creating overca-pacity in similar manufacturing sectors such as electronics and auto-mobiles

East Asian economies could delay the ultimate bursting of theirbubble as long as they were able to find export markets wherethey could sell the investment-fuelled output that vastly exceeded theabsorption capacity of domestic consumers However the structuralproblems finally exacted a heavy toll in the closing years of the1990s For East Asian countries (with the exception of China) theseemingly endless export boom of the 1980s and early 1990s beganto face problems in the mid-1990s At the end of 1990s the lsquotradetrianglersquo that had linked Japanese (and overseas Chinese) capitaldeveloping East Asian manufacturing capacities and Western marketswas apparently in trouble31

One major option for the crisis-ridden countries and their affectedneighbours was to secure preferential access and create a more diver-sified export market In other words the new trend in East Asiareflects a convergence of interests in securing inclusive lsquoclub goodsrsquoin the face of anaemic if not shrinking export prospects Many EastAsian countries came to recognise that tighter institutionalisationmdashrather than loosely structured production networksmdashmight be a bet-ter commitment mechanism for providing economic security Withtraditional broad-based mechanisms within the WTO APEC

30 Walter Hatch Grounding Asiarsquos Flying Geese The Costs of Depending Heavily onJapanese Capital and Technology NBR Briefing (Seattle The National Bureau of AsianResearch 1998)

31 TJ Pempel lsquoRegional ups regional downsrsquo in TJ Pempel (ed) The Politics ofthe Asian Economic Crisis (Ithaca Cornell University Press 1999) Fu-Kuo Liu lsquoA criti-cal review of East Asia and Northeast Asian regionalism the impact of the 1997ndash1998financial crisis and beyondrsquo in Christopher M Dent and David W Huang (eds)Northeast Asian Regionalism Learning from the European Experience (London RoutledgeCur-zon 2002)


2005048 EJEAS 42 Proef 3 21-10-20051554 page 250

and ASEM offering no salient solutions East Asian countries quicklyturned towards PTAs to assure a market for their products

Turning to the first element of individual bargaining situationsnamely an actorrsquos international position the dynamics between tworegional rivalsmdashJapan and Chinamdashis of particular importance toboth Northeast and Southeast Asia32 In the wake of the aforemen-tioned external shocks in the 1990s the new dynamics of rivalrybetween Japan and China are now playing a critical part in shap-ing the newfound rush to PTAs Besides standard welfare calcula-tions for both Japan and China emerging interest in PTAs providesa convenient venue to vie for regional economic leadership In theregional context of growing Sino-Japanese rivalry small and medium-sized countries pursue PTAs in order to strengthen their bargainingposition and diplomatic weight33

In East Asia individual bargaining situations in terms of pres-sure groups and regime type have changed significantly as a resultof the financial crisis and the end of the Cold War State structuresvary significantly in the region ranging from highly democraticmdashegJapan and South Koreamdashto highly authoritarianmdasheg China andCambodiamdashregimes Though with different degrees many govern-ments in the region experienced challenges to their political legiti-macy and actual political turnover by groups and individuals whohad previously tolerated cronyism and familism Such a developmentin the regime structure as well as societal pressures has altered theeconomic payoffs facing individual countries as they march towardsmore democratic regimes rendering intergovernmental cooperationmore likely and the requirements of institution-building less daunt-ing In South Korea for example a reformist internationally mindedpolitical leadership and a fluid social coalition that emerged in thewake of the 1997ndash1998 financial crisis paved the way for promotingPTA negotiations34

32 Calder and Ye lsquoRegionalism and critical juncturesrsquo33 This point was driven home most dramatically with regard to ASEAN At the

APT meeting in Brunei in 2001 China proposed an ASEANndashChina FTA and signeda surprise agreement in February 2003 with the ten ASEAN countries pledging freetrade by 2010 Challenged to do the same Japan proposed a JapanndashASEAN FTAat the ASEAN Summit of 2002 It also hosted the ASEANndashJapan CommemorativeSummit in December 2003 confirming its enthusiasm for promoting collaborationwith ASEAN members South Korea has recently jumped on board as well (TJ Pem-pel and Shujiro Urata lsquoJapan the politics of bilateral trade agreementsrsquo in VinodK Aggarwal and Shujiro Urata (eds) Bilateral Trade Arrangements in the Asia-PacificOrigins Evolution and Implications (New York Routledge 2005) Koo lsquoFrom multilater-alism to bilateralismrsquo)

34 Koo lsquoFrom multilateralism to bilateralismrsquo


2005048 EJEAS 42 Proef 3 21-10-20051554 page 251

In addition countriesrsquo changing perceptions regarding the impor-tance of supporting multilateral institutions have affected the strengthand scope of preferential mechanisms Many East Asian trade expertsnow are part of an lsquoepistemic communityrsquo which shares the view thatpreferential arrangements can be trade enhancing and serve a sim-ilar purpose of multilateral trade liberalisation35 On the one handmany of the recent PTAs in East Asia attempt to cover broader areasand elements like trade in services factor mobility investment rulesintellectual property rights and government procurement indicatingtheir nature of WTO-plus or institutional division of labour On theother hand cases of negative diffusion are also increasing in numberas countries make a bolder move towards PTAs that are clearly atodds with at least the spirit of the multilateral rules of GATTWTOIn this case the Japanese have followed the EU precedent in theirnegotiations of the JSEPA the few products in the ultra-sensitive agri-cultural sector that Singapore exported to Japan were excluded fromthe liberalisation provisions Other East Asian countries have quicklysignalled that they intend to follow Japanrsquos precedent36

Finally the existing institutional context at the broad-based inter-national level drives the political initiatives and intrinsic interest tocreate PTAs in East Asia With the WTO APEC and ASEM unableto deliver on trade liberalisation there is a growing incentive for EastAsians to find an lsquoinsurance policyrsquo to realise free trade at the bilat-eral level Among East Asian countries China appears to be the onlyexception in this regard China had spent the lionrsquos share of its diplo-matic capital on securing WTO membership For Chinese leadersno serious distraction from multilateral schemes is desirable since itwould likely taint one of their biggest diplomatic achievements inrecent years It is not surprising that China appears to be movingsomewhat more slowly than its neighbours with regard to PTAs Inaddition Chinarsquos dazzling economic performance makes the need forinclusive club goods less compelling to it than to its trade-dependentneighbours As Kwei argues China is more likely to engage in lsquoone-to-manyrsquo negotiations or lsquohybrid bilateralrsquo arrangements rather thanpure bilateral PTAs except where security or political imperativesdominate37

35 In Japan for example free trade advocates now see PTAs as devices that wouldachieve economic restructuring in ways that would be more palatable than eithersweeping domestic reform programmes or commitment to more comprehensiveglobal free trade measures (Pempel and Urata lsquoJapan the politics of bilateral tradeagreementsrsquo)

36 Ravenhill lsquoUS and EU regionalism the case of the Western Pacific rimrsquo37 Elaine Kwei lsquoChinese bilateralism politics still in commandrsquo in Vinod K Ag-


2005048 EJEAS 42 Proef 3 21-10-20051554 page 252

In sum although the East Asian countriesrsquo pursuit of PTAs doesnot mean that they downplay the significance of the broad-based mul-tilateral trade systems the policy departure is obvious and significantThe latest enthusiasm for PTAs in East Asia seems to revolve arounda bilateral FTA as a popular mode of participation while there arealso strong indications of minilateral participation such as APT andthe ChinandashASEAN Framework FTA38 To this point East Asiarsquos newappetite for PTAs is geographically open On the one hand thesePTAs go beyond the traditional concept of a region defined by geo-graphical proximity On the other hand while some PTAs go beyondthe concept of geographical region other transregional and (hybrid)interregional initiatives have emerged that attempt to formalise theemergent concept of an East Asian Community (EAC) with multiplecrosscutting linkages of trade and investment promoted by the APTinitiative39

IV East Asian Bilateralism and the Dynamics of APEC and ASEM

How will the newfound enthusiasm for bilateralism in East Asiaaffect extant broad-based international institutions such as the WTOAPEC and ASEM In this section we focus on possible institutionalpaths that East Asia is likely to take by focusing on the latest trendin bilateralism of the Northeast Asian Three countries This sub-region is particularly important since it is not only at the heart ofEast Asiarsquos new rush towards bilateralism but also is the principallocomotive of regional growth Relying on a two-tiered bottom-upapproach we first explore various paths that might lead NortheastAsian bilateralism to some type of market-opening Northeast AsianFTA (NEAFTA) and then we consider the most likely paths that theinterim outcomes might take beyond Northeast Asia to understandthe implications for APEC and ASEM

garwal and Shujiro Urata (eds) Bilateral Trade Arrangements in the Asia-Pacific OriginsEvolution and Implications (New York Routledge 2005)

38 Christopher M Dent lsquoNetworking the region The emergence and impact ofAsia-Pacific bilateral free trade agreementsrsquo Pacific Review Vol 16 No 1 (2003) pp1ndash28

39 Douglas Webber lsquoTwo funerals and a wedding The ups and downs of region-alism in East Asia and Asia-Pacific after the Asian crisisrsquo Pacific Review Vol 14 No 3(2001) pp 339ndash372


2005048 EJEAS 42 Proef 3 21-10-20051554 page 253

From Bilateral Regionalism to Minilateral Regionalism

To systematically construct our simplified scenarios we assume a cer-tain hierarchical order among the variables in our institutional bar-gaining game Drawing on the factors illustrated in Figure 1 we givepride of place to the status of extant broad-based international institu-tions as a primary source of initial impetus for change We assume thatthe status of the WTO and APEC may stimulate or impede the pro-vision of trade liberalisation as a public good40 Specifically we believethat the weakness of each of these institutions will encourage the pur-suit of a club good whereas their strength will discourage incentivesfor pursuing club goods We consciously choose not to include ASEMas a source of initial impetus since it would unlikely have an indepen-dent influence generated by its own internal mechanism as we haveargued previously

Given the nature (market opening) and geographic coverage(Northeast Asia) of a prospective PTA individual bargaining situa-tions and institutional context will determine the other elements ofbargaining outcomes namely the number of participants (one two orthree) strength of institutions (for example the degree to which theagreements are binding and the presence of dispute settlement proce-dures) and scope of products included We focus on three variablesin order of their presumed significancemdashthe institutional strengthof the WTO and APEC alliances and economic complementarybetween countries We draw the following causal relationships fromour theoretical and empirical observations the number of partici-pants strength and scope of a prospective NEAFTA are a negativefunction of the strength of the WTO and APEC and a positive func-tion of alliancesmdashparticularly a Sino-Japanese alliance41mdashand eco-

40 Strictly speaking the WTO and APEC are club goods to the extent that itrequires membership to benefit from trade liberalisation that they materialise Withthe formerrsquos global membership and the latterrsquos spirit of lsquoopen regionalismrsquo theirprovision of the broadest club good virtually serves as global public goods

41 It is quite plausible to assume that the current quasi-alliance relationship be-tween Japan and South Korea will persist and is likely to evolve into a full-fledgedalliance in the foreseeable futuremdashgiven their strong bilateral ties with the US andcommon security threat from North Korea As such the question of alliance inNortheast Asia really comes down to whether China and Japan could form analliance (albeit an uneasy one) through a Franco-German type of rapprochementSouth Korea would unlikely choose to remain excluded if a Sino-Japanese alliancecame into being This alliance hypothesis is predicated on the assumption thatcountries prefer to form PTAs with their allies rather than with their enemiesbecause of the security externalities of trade As noted in our theory section therelative gains realised from preferential trade can cause changes in the relative


2005048 EJEAS 42 Proef 3 21-10-20051554 page 254

Figure 2 Paths to Minilateral Regionalism in Northeast Asia

nomic complementarity (see Figure 2)42

If both the WTO and APEC are strong there is little raison drsquoecirctrefor a NEAFTA Essentially all the incentives for securing club goods(even through bilateral agreements) would be gone with the broad-based institutions operating and dominating the institutional space(outcome I in Figure 2)

A combination of a strong WTO and a weak APEC creates someincentives for pursuing club goods thereby permitting institutionalroom for either trilateral or bilateral regionalism in Northeast AsiaIf a positive albeit tentative alliance-type relationship between Chinaand Japan came into existence (and thus a trilateral alliance includ-ing South Korea) a weak but broad NEAFTA might be a possibility(outcome II) The logic here is that the strength of the WTO woulddissuade a major focus on club goods But the weakness of APECwould motivate politically allied Northeast Asian countries to form aNEAFTAmdashimmediately or by merging separate bilateralsmdashin orderto maximise the benefit from the geographic proximity and size oftheir economies By contrast if there is no Sino-Japanese alliance aNEAFTA would be highly unlikely due to strong relative gains con-cerns between the two regional rivals Yet this does not eliminate thepossibility of bilateral alliances between Japan and South Korea andpotentially between China and South Korea Given the weakness ofAPEC bilateral PTAs between these two dyads would remain a viable

distribution of power thereby leading countries to avoid entering into PTAs withtheir enemies

42 It is worth noting that while economic complementarity is likely to createreduced protectionist pressures direct competition may actually enhance economicgrowth and efficiency Intra-industry trade would fall somewhere in between withdiminished protectionist pressures but some competitive stimulus


2005048 EJEAS 42 Proef 3 21-10-20051554 page 255

option but their strength is likely to be weak in the presence of a strongWTO (outcome III)

A combination of a weak WTO and a strong APEC is likely toresult in a very weak NEAFTA The WTOrsquos weakness would moti-vate the three countries to pursue trilateral club goods even with-out formal alliance arrangements among themselves since a strongAPEC would decrease relative gains concerns In this case howevera NEAFTA would be reduced to a caucus of the three countrieswithin APECmdashrather than a separate strong negotiating bodymdashsinceAPEC operates as a principal locus of trade liberalisation (outcomeIV)

Finally if both the WTO and APEC are weak considerable insti-tutional space and a multiplicity of options are likely to emerge IfChina and Japan reach a political alliance (thereby leading to a tri-lateral alliance in the region) the formation of a strong NEAFTAis highly likely In this case the scope of a resulting NEAFTA ishinged upon economic complementarity If economic complementar-ities exist among the three countries they will broaden the scope ofproduct coverage (outcome V) If there are weak economic comple-mentarities we can expect a strong but narrow (or sectoral) NEAFTA(outcome VI) By contrast if there is no alliance between China andJapan a NEAFTA is not a possibility (outcome VII)

From Minilateral Regionalism to Minilateral Trans- and Inter-regionalism

Using the lsquoinstitutional maprsquo that we have drawn thus far we fur-ther explore the paths that each of these seven hypothetical outcomeswould likely take beyond the geographic horizon of Northeast AsiaWe expand the list of our assumptions to include ideational andstrategic variables (1) an emerging sense of East Asian communitymay reinforce the formation of an East Asian bloc either open orclosed and (2) if the strategic environment surrounding East Asiais hostilemdashmeaning that the US and the EU both become exclu-sively inward-lookingmdashthe resulting East Asian bloc will be closedin nature otherwise a prospective East Asian bloc will remain openand may revitalise both or either one of APEC and ASEM as transre-gional andor interregional fora (see Figure 3)

We can expect that a combination of no NEAFTA and no bilater-als (outcome I) will have little impact on broad-based internationalinstitutions thereby leaving APEC strong as initially assumed whilemaking ASEM weak or even becoming defunct if a strong WTO anda strong APEC take up most of the institutional space available inEast Asia (outcome A)


2005048 EJEAS 42 Proef 3 21-10-20051554 page 256

Figure 3 Paths from Minilateral Regionalismto Minilateral TransregionalismInterregionalism

A combination of a strong WTO and a weak APEC will leaveASEAN broad but weak As shown in the path towards outcome B aweak and broad NEAFTA (outcome II) will have little impact on bothAPEC and ASEM if it is combined with a weak and broad ASEANA combination of no NEAFTA and weak bilaterals (outcome III) willhave the same result if it is combined with a weak and broad ASEAN(outcome B)

Given the assumption of a strong APEC a NEAFTA as a caucusof APEC (outcome IV) is likely to be combined with a weak andbroad ASEAN Such a nested albeit weak status of East Asiarsquossubregional institutions may consolidate APEC as a transregionalinstitution The hypothetically weak status of the WTO might allowASEM to continue to function within the institutional landscape ofEast Asia but its strength and scope is highly likely to be limited(outcome C)

How would a strong and broad NEAFTA (outcome V) evolve beyondNortheast Asia This type of NEAFTA is most likely to be combinedwith a strong and broad ASEAN since the WTO and APEC bothare assumed to be weak thereby leaving greater institutional roomfor ASEAN as a provider of club goods43 In this scenario the mostlikely outcome is an interregional arrangementmdashthat is a bilateral

43 If ASEAN fails to strengthen despite the need for club goods a strong andbroad NEAFTA may link up with a weak ASEAN to form a hybrid interregionalarrangement such as an East Asian FTA (EAFTA) which currently manifests itself in


2005048 EJEAS 42 Proef 3 21-10-20051554 page 257

arrangement between two separate PTAsmdashpossibly in the form of anASEAN Plus NEAFTA (APN) (outcome D) With respect to the likelyinfluence of a prospective APN on either APEC or ASEM this is oneof the most interesting scenarios that call for further exploration towhich we turn at the end of this section

What about paths from outcome VI In this case we could endup with the formation of an exclusive if not pernicious lsquoFortressAsiarsquo commensurate with the oft-voiced fears of a lsquoFortress Europersquoand lsquoFortress Americarsquo The strategic relationship between NortheastAsia and the rest of the world will be of key significance here Mostimportantly if the US continues its focus on the Free Trade Area ofAmericas (FTAA) and the EU continues on an eastward and possiblysouthward expansion path others may feel excluded Under thesecircumstances the decade-long perception between Northeast andSoutheast Asians that Western regional arrangements are formingagainst them may well rekindle the Mahathir-promoted notion of anexclusive East Asian bloc (outcome E)

In outcome VII although we rule out a trilateral alliance two sep-arate dyadsmdashJapanndashSouth Korea on the one hand and ChinandashSouthKorea on the othermdashare likely to have strong incentives to secureclub goods through bilateral arrangements between themselves Inthis case the strength of bilateral arrangements would be heighteneddue to the weakness of both the WTO and APEC and these bilat-erals would operate as the dominant mode of trade liberalisation inNortheast Asia If an individual dyad has strong economic comple-mentarity it might result in a strong and broad bilateral arrangement(outcome F) This path can lead to benign bilateralism if it catalysesa competitive dynamic to liberalise among other countries therebyenhancing the institutional strength of a supposedly weak WTO44

By contrast if an individual dyad has weak economic complemen-tarity it might lead to a strong but narrow bilateral accord (outcomeG) In this case it is plausible that the Northeast Asian countries maybe polarised between two campsmdashChina versus Japanmdashon a sectoralbasis thereby undermining regional integration efforts Ultimately apernicious web of competitive sectoral bilaterals would likely damageother broad-based multilateral trading accords if any45

the reverse form of APT or EAC where ASEAN is united but South Korea Japanand China are not

44 Jeffrey J Schott lsquoFree trade agreements US strategy and prioritiesrsquo unpub-lished manuscript (Washington DC Institute for International Economics 2004)

45 Douglas A Irwin lsquoMultilateral and bilateral trade policies in the world tradingsystem an historical perspectiversquo in Jaime de Melo and Arvind Panagariya (eds)


2005048 EJEAS 42 Proef 3 21-10-20051554 page 258

Finally if an East Asian grouping such as APN is created thatproves stable the growing interconnectedness and the networkednature of interstate economic activities may produce an increasingawareness and sense of community among East Asian countries46

As APN countries become more confident in their ability to cre-ate their own transregional grouping they might be more willingto extend their industrialisation efforts to the transregional level ofAPEC thereby giving it new life This could also lead to more of aninterregional rather than a transregional outcome with the AustraliaNew Zealand Closer Economic Relations (CER) Agreement APNand NAFTA (or FTAA) operating within APEC as three distinct hubsSimilarly the increasing sense of community within East Asia couldfacilitate the ASEM forum leading to pure AsiandashEurope interregion-alism Aside from the emerging sense of community among EastAsian countries we maintain that the specific transregional andorinterregional outcome will be determined by the trade strategies ofthe US and the EU Among other factors we note their respectivepreference for East Asia as a trading partner region We discuss fourpossible outcomes below accordingly

First if both the US and the EU have a strong focus on East Asiaboth APEC and ASEM might be enhanced As noted above the USmay use APEC to leverage trade liberalisation in the WTO specif-ically in an effort to push the stalemated multilateral negotiationsforward Driven by fear of being marginalised by the US empha-sis on East Asia the EU may be tempted to reinforce its focuson East Asia through ASEM (outcome H) In theory however amore likely outcome is that one of the two institutions will becomestronger at the expense of the other The logic behind this predic-tion is that East Asia may choose either to balance American uni-lateralism with the EU or to bandwagon the US supremacy basedon capabilities and their perceptions of threats Given their tradi-tional security and economic ties with the US East Asian countriesare more likely to join the US camp at the expense of alliance withthe EU Therefore APEC will be strengthened while ASEM is weak-ened

New Dimension in Regional Integration (Cambridge Cambridge University Press 1993)Vinod K Aggarwal and John Ravenhill lsquoUndermining the WTO the case againstldquoopen sectoralismrdquorsquo Asia-Pacific Issues Vol 50 (2001) pp 1ndash12 Jagdish N BhagwatiFree Trade Today (Princeton Princeton University Press 2002)

46 Takashi Terada lsquoConstructing an ldquoEast Asianrdquo concept and growing regionalidentity from EAEC to ASEAN+3rsquo Pacific Review Vol 16 No 2 (2003) pp 251ndash277Yue lsquoEconomic cooperation and integration in East Asiarsquo


2005048 EJEAS 42 Proef 3 21-10-20051554 page 259

Second if the US alone maintains a high degree of focus on EastAsia as a trading partner region APEC as an institutional bridge thatlinks the US (and North and South Americas) to East Asia will bestrengthened By contrast ASEM as a principal institutional vehiclebetween Europe and East Asia will be further undermined if the EUtrade strategy is exclusively focused on Eastern and Southern Europeas well as the Western Hemisphere In this scenario the increasinglycomplex interregional relationships and a deep and broad scope ofactivities across the Pacific Ocean will be managed within a strength-ened APEC (outcome I)

Third if the EU alone maintains strong focus on East Asia but theUS increasingly turns towards South America and possibly EuropeASEM will be strengthened whereas APEC will be significantly weak-ened ASEMrsquos heretofore putative attempt to enhance a partnershipof European and Asian lsquoequalsrsquo will be finally materialised as thelsquocounterpart coherencersquo is made comparably equal on the East Asianside (outcome J)47

Fourth and finally if neither the US nor the EU has a strong tradefocus on East Asia both APEC and ASEM will be undermined (out-come K) It is plausible that the US trade strategy becomes exclu-sively focused on the Western Hemisphere (eg Central AmericanFTA [CAFTA] andor FTAA) and that the EU continues its focuson an eastward and southward expansion path This outcome canpossibly lead to the Fortress scenario as discussed above (outcome E)

V Conclusion and Implications

At the turn of the new millennium the traditional institutional equi-librium in East Asiamdashthe embrace of the WTO at the multilaterallevel and a focus on market-driven informal integration at the sub-multilateral levelmdashis under heavy strain A growing number of North-east and Southeast Asian countries are pursuing greater institutional-isation at the sub-multilateral level actively weaving a web of prefer-

47 The logic behind this outcome is that the EU may see interregionalism as aninitial piece of an emerging common foreign and security policy that seeks to extendEuropean influence in various strategic regions through a lsquohub-and-spokersquo modelwith the EU at the centre of a series of economic relationships In most interregionalrelationships the EU would be the dominant side and thus could largely dictatethe terms of these institutionalised relationships To a certain extent this Europeanstrategy could be seen as classic balancing behaviour and a response to Americanpursuit of a similar strategy particularly through APEC and FTAA (Aggarwal andFogarty EU Trade Strategies p 12)


2005048 EJEAS 42 Proef 3 21-10-20051554 page 260

ential arrangements This article examined the likely path of tradingarrangements in Northeast Asia and explored its likely implicationsfor East Asia and the future of APEC and ASEM

We have found conventional accounts of trading arrangementswanting By and large the focus of most studies has been on a ratherdiffuse notion of lsquoregionalismrsquo that does not adequately capture thevarieties of trade governance measures To remedy this lacuna wedeveloped a more fine-grained synthetic typologymdashunilateral bilat-eral minilateral and multilateralmdashand showed how this approach canhelp us to classify East Asian trading arrangements more systemati-cally

Explaining the large variety of trading accords poses a challengeIn an effort to understand the diversity of accords we proposedan institutional bargaining game approach which focuses on goodscountriesrsquo individual bargaining situations and the fit with existingarrangements With respect to goods we assumed that any distur-bances in the provision of trade liberalisation as a public good moti-vate countries to seek for club goods In looking at countriesrsquo individ-ual bargaining situations we focused on their international strategicand economic interests their social coalitions and regime types andtheir beliefs about the value of pursuing trading arrangements in theproliferation of PTAs in the other parts of the world

The institutional bargaining approach allowed us to explore howtrading arrangements have evolved in East Asia We showed how thechanging nature of broader institutions interacted with country char-acteristics to alter institutional payoffs in the region In particular thepursuit of club goods has replaced a more generalised commitmentto public goods in the aftermath of the Asian financial crisis and theshift in US policy away from pure multilateral trade approaches Thistrend has undermined the myth that loose-structured production net-works in East Asia could be a viable alternative to tighter formalinstitutionalisation

We then explored possible paths to formal economic integrationin Northeast Asia We argued that the strength or weakness of theWTO and APEC opens up or closes institutional space by affectingthe provision of public goods and thus the incentives for club goodsIf the WTO and APEC weaken further a NEAFTA could well be apossibility Yet much depends on the possibility of a Sino-Japanesealliance and economic complementarity between individual coun-tries We then examined possible development of a NEAFTA intobroader transregionalism and interregionalism As our scenario anal-ysis indicates a NEAFTA has both benign and pernicious elementsdepending on the ideas and beliefs held by regional actors


2005048 EJEAS 42 Proef 3 21-10-20051554 page 261

The possible contribution of a prospective East Asian bloc toAPEC and ASEM primarily depends on the balance of interests betweenthe US and the EU concerning East Asia as their trading partnerregion If the US maintains a strong focus on East Asia APEC islikely to be enhanced at ASEMrsquos expense By contrast if the EUincreasingly turns towards East Asia ASEM might be enhanced atthe cost of APEC If both the US and the EU show a diminishedinterest in East Asia or increasingly are at odds with it on trade policyan emerging East Asian bloc would likely follow suit of a FortressEurope andor a Fortress America

In sum we are literally at a fork in the road of choosing trad-ing arrangements In view of the tremendous political and economicuncertainty in the global economy the path to freer trade in North-east Asia East Asia and the world system is likely to be a bumpy one

Berkeley APEC Study Center (BASC)University of California

vinodberkeleyedumingyogmailcom


2005048 EJEAS 42 Proef 3 21-10-20051554 page 234

institutional experiment the Asia-Pacific Economic Cooperation(APEC) created in 1989 remains a consultative forum for trade andinvestment liberalisationmdashrather than a body that has led to signif-icant liberalisation And the European counterpart to APEC AsiaEurope Meeting (ASEM) has remained highly under-institutionalisedas indicated by its name and has only been in existence since 19961

Despite its institutional weakness in a formal sense East Asiarsquoseconomic integration often characterised by its market-driven andinformal nature has been impressive in a practical sense as indicatedby soaring intra-regional trade and investment flows Throughoutthe 1980s and 1990s the network of Japanese multinationals andoverseas Chinese played a critical role in forming virtual East Asianeconomic integration For many observers of East Asian regionalismthis informal network-style integration was seen as a viable substitutefor formal institutionalisation of regional economic affairs2

Currently the traditional institutional equilibrium of East Asianeconomic integrationmdashthe embrace of the WTO at the multilat-eral level and a focus on market-driven informal integration at theregional levelmdashis under heavy strain As an alternative a growingnumber of East Asian countries have begun the pursuit of greaterinstitutionalisation at the sub-multilateral level actively weaving aweb of preferential arrangements with countries both within and out-side the region departing from their traditional commitment to theWTO

We have seen many countriesrsquo commitment to a broad-based mul-tilateral trade regime eroding steadily Although the July 2004 Genevameetings restarted the Doha Round of WTO negotiations the deba-cle in Seattle in 1999 and the failed 2003 ministerial meeting in Can-cun still cast their shadow over the multilateral global negotiations

1 Peter J Katzenstein lsquoIntroduction Asian regionalism in contemporary perspec-tiversquo in Peter J Katzenstein and Takashi Shiraishi (eds) Network Power Japan and Asia(Ithaca Cornell University Press 1997) Vinod K Aggarwal and Charles Morrison(eds) Asia-Pacific Crossroads Regime Creation and the Future of APEC (New York St Mar-tinrsquos Press 1998) John Ravenhill Asia-Pacific Economic Cooperation (APEC) The Construc-tion of Pacific Rim Regionalism (Cambridge Cambridge University Press 2002) WimStokhof and Paul van der Velde (eds) ASEM the AsiandashEurope Meeting A Window ofOpportunity (New York Kegan Paul International 1999) Julie Gilson lsquoWeaving a newSilk Road Europe meets Asiarsquo in Vinod K Aggarwal and Edward Fogarty (eds) EUTrade Strategies Between Regionalism and Globalism (New York Palgrave 2004) Chia SiowYue lsquoEconomic cooperation and integration in East Asiarsquo Asia-Pacific Review Vol 11No 1 (2004) pp 1ndash19 Heiner Haumlnggi Ralf Roloff and Juumlrgen Ruumlland (eds) Inter-regionalism and International Relations A Stepping Stone to Global Governance (OxfordshireRoutledgeCurzon 2005)

2 Katzenstein lsquoIntroduction Asian regionalism in contemporary perspectiversquo


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