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Understanding East A
Cross-Regionalism:
An Analytical Framewor
Mireya Solis And Saori N. Katada
Introduction
political TheBy thenewlatewave
economy today. of Eastregionalism
1990s, even Asia, a region has become an important feature of global
previously characterized by a near absence of formal free trade agreements
(FTAs) and regional institutions, was engaged in a remarkable number of
negotiations toward inter-state cooperation in the areas of finance and trade.
As table 1 shows, East Asia was engaged in 112 FTAs (in force, under
negotiation or under study) as of June 2007, and there are more to come.
Hence, East Asia's appetite for regional integration is already evident.
However, a key feature of East Asian FTA diplomacy remains unacknowledged
and therefore unaccounted for: the activism displayed in seeking preferential
trading relations with countries outside the region.1
The spread of such cross-regional initiatives leads us to contend that the
still prevalent view of economic integration as a region-bound phenomenon
is empirically outdated, so the motives and implications of cross-regionalism
* We would like to express our gratitude to the Center for International Studies (CIS) at
University of Southern California for generous support and funding for the conference on cross-
regionalism held in the fall of 2005, which brought together all the contributors of this special issue.
We are very thankful for the insightful comments from all our discussants and participants of the
conference and, in particular, for the very generous support of Barbara Stallings and Stephan Haggard.
John Ravenhill also read our papers and gave us useful suggestions. We also thank Jason Enia for his
excellent research assitance. Mireya Solis' research was assisted by a grant from the Abe Fellowship
Program administered by the Social Science Research Council and the American Council of Learned
Societies in cooperation with and with funds provided by the Japan Foundation Center for Global
Partnership.
1 In this special issue, we adopt a pragmatic definition of region as a "contiguous territorial
area having sufficiently clear internal cohesion and definitive external boundaries," which matches
the characterization by the World Bank and the Organization for Economic Co-operation and
Development (OECD) of East Asia as comprising Northeast and Southeast Asia, but excluding the
United States, any of the Latin American countries, Australia, New Zealand, and the Pacific Island
states. See TJ. Pempel, "Introduction: Emerging Webs of Regional Connectedness," in TJ. Pempel,
ed., Remapping East Asia: The Construction of a Region (Ithaca NY, Cornell University Press, 2005), p. 4.
229
Map 1
Cross-Regional RTAs as of February 2005
Source: Jo-Ann Crawford and Roberto V. Fiorentino. 2005. "The Changing Landscape of
Regional Trade Agreement," WTO Discussion Paper #8, p. 22. Map III: Cross-Regional
RTAs as of February 2005.
2 The World Trade Organization's (WTO) own nomenclature also has obscured, rather than
clarified, the importance of cross-regionalism by loosely using the term "Regional Trade Agreements
(RTAs)" to cover all preferential trade deals within and beyond regions. To avoid such confusion, we
make an explicit distinction between regional (RTAs) and cross-regional trade agreements (CRTAs) .
Whenever we refer to preferential trade agreements in general we use the neutral term FTA (or free
trade agreement) .
3 Edward Mansfield and Helen Milner, "The New Wave of Regionalism," International Organization,
vol. 53, no. 3 (1999), pp. 590-91.
4 The one exception is the United States-Israel FTA which preceded the North American Free
Trade Agreement (NAFTA). However, Israel has always been a key strategic priority for the United
States deserving special treatment, and in all other instances CRTAs for Europe and North America
came after their main regional blocs were firmly in place.
230
5 In this way we offer an explanation of cross-regionalism that is distinct from the oft-noted
motivations behind the selection of cross-regional partners: special security relations (US-Israel) ,
former colonial ties (EU-South Africa) , and natural resource diplomacy (Japan and Gulf states, in
negotiation) .
231
A Cross-Regional World
6 For a more detailed discussion of the reasons behind the proliferation of FTAs, see Jo-Ann
Crawford and Roberto V. Fiorentino, "The Changing Landscape of Regional Trade Agreements,"
WTO Discussion Paper no. 8 (World Trade Organization, Geneva, Switzerland, 2005), p. 16.
i Scholars have explained this shortage of formal institutions in Asia in various ways ranging
from relative disparity shift hypothesis (Grieco); network replacing institutions (Katzenstein and
Shirashi) ; domestic preferences of regional powers (Haggard) ; the region's external reliance especially
on the United States (Crone); to historical US lack of interest in regional mechanisms in Asia
(Katzenstein and Hemmer) . See Joseph Grieco, "Systemic Sources of Variation in Regional
Institutionalization in Western Europe, East Asia, and the Americas," in Edward D. Mansfield and
Helen V. Milner, eds., The Political Economy of Regionalism (New York: Columbia University Press, 1997);
Peter Katzenstein and Takashi Shiraishi, eds., Network Power: Japan and Asia (Ithaca NY: Cornell
University Press, 1997); Stephan Haggard, "Regionalism in Asia and the Americas," in Mansfield and
Milner, eds., The Political Economy of Regionalism; Donald Crone, "Does Hegemony Matter?: The
Reorganization of the Pacific Political Economy," World Politics, vol. 45 (1994), pp. 501-25; and Peter
Katzenstein and Christopher Hemmer, "Why is There No NATO in Asia? Comparative Identity,
Regionalism, and the Origin of Multilateralism," International Organization, vol. 56, no. 3 (2002), pp.
575-607.
232
The vertiginous pace with which East Asian governments have negotiated
FTAs is evident in table 1. Interestingly, a large number of these preferential
trade deals comprise cross-regional partners. Thus, a noteworthy
development in East Asia's regionalism frenzy is the simultaneous effort to
negotiate intra-regional and cross-regional FTAs. As chart 1 below demon-
strates, all three regions, Europe, North America and Asia, currently engage
in CRTAs. The difference is, however, that both the European Union (EU)
and the North American countries extended most of their cross-regional
interests after they solidified their respective regional arrangements. The
EU only signed its first CRTA with Turkey in 1996, several decades after the
initiation of the process of regional integration.11 The same is true for the
8 Edward Lincoln, East Asian Economic Regionalism (Washington DC: The Brookings Institution,
2004), pp. 169-73.
» For example, Paul Bowles, Regionalism and Development alter the Global Financial Crises,
New Political Economy, vol. 5, no. 3 (2000), pp. 433-55; Michael Wesley, "The Asian Crisis and the
Adequacy of Regional Institutions," Contemporary Southeast Asia, vol. 21, no. 1 (1999), pp. 54-73; and
Christopher W. Hughes, "Japanese Policy and the East Asian Currency Crisis: Abject Defeat or Quiet
Victory?" Review of International Political Economy, vol. 7, no. 2 (2000), pp. 219-53.
10 The most prominent theoretical work on the "domino theory of regionalism" is by Richard E.
Baldwin, "The Causes of Regionalism," The World Economy, vol. 20, no. 7 (1997), pp. 865-88. See also
Walter Mattli, The Logic of Regional Integration: Europe and Beyond (Cambridge; Cambridge University
Press, 1999).
11 Although Europe has had preferential economic relations with former colonies through the
Yaounde and Lome Conventions, these were not structured around FTAs, but rather entailed non-
reciprocal trade concessions, aid and political dialogue. Ravenhill offers an excellent analysis of the
233
European Free Trade Area (EFTA), whose first CRTAs were with Turkey in
1992 and Israel in 1993. The United States signed one CRTA before NAFTA,
with Israel in 1985, although mostly for strategic reasons. The next CRTA
for the United States would wait another 15 years with the agreement signed
with Jordan in 2001. In sharp contrast, East Asia CRTA negotiations began
to take place simultaneously with bilateral and minilateral negotiations within
the region, raising the question: why?
Chart 1
Note: Intra-regional RTAs are double-counted (e.g., one for Japan and one for
Singapore).
* Asia includes both Northeast and Southeast Asia, but excludes South Asia as well
as the Middle East.
** EC/EU is counted as one unit.
*** Thg number for Oceania is small due to the few countries included in this
geographical group.
**** Africa includes North Africa.
Source: JETRO, Sekai to Nihon no shoyou na FTA ichiran (A list of major FTAs of Japan and
the World), December 2005 <http://www.jetro.go.jp/jpn/reports/05000906, online
access, February 2006>.
reasons why the EU pushed for the negotiation of FTAs with African, Caribbean and Pacific (ACP)
countries in the late 1990s. See John Ravenhill, "Back to the Nest? Europe's Relations with the African,
Caribbean and Pacific Group of Countries," in Vinod K. Aggarwal and Edward A. Fogarty, eds., EU
Trade Strategies. Between Regionalism and Globalism (New York: Palgrave Macmillan, 2004).
234
Table 1
Type of
Countries Agreement Status Year
ASEAN-AFTA RTA In effect 1965,1992
AFTA+CER RTA Agreed to negotiate Scheduled:
2005
ASEAN+China RTA In effect 2003
ASEAN+India CRTA In effect 2004
ASEAN+Japan RTA Under negotiation 2005
ASEAN+ Korea RTA In effect 2006
(except Thailand)
ASEAN+3 RTA Summit conference 2005
Singapore+EFTA CRTA In effect 2003
Singapore-Australia CRTA In effect 2003
Singapore - Bahrain CRTA Pre-Negotiation 2004
Singapore-Canada CRTA Under Negotiation 2001
Singapore-Chile CRTA Under Negotiation 2000
Singapore - Chile - CRTA Under Negotiation 2003
New Zealand
235
Type of
Countries Agreement Status Year
Korea-EFTA CRTA In effect 2006
Korea-EU CRTA Under Negotiation 2007
Korea-Chile CRTA In effect 2004
Korea -India CRTA Study 2005
Korea-Japan RTA Under Negotiation 2003
Korea - Malaysia RTA Proposal for study 2004
Korea-Mexico CRTA Official Discussions/ 2004
study
Korea-New Zealand CRTA Official Discussions/ 1999
study
Korea-Singapore RTA In effect 2006
Korea-Thailand RTA Understudy 2001
Korea-USA CRTA Signed 2007
Japan-Canada CRTA Proposal/ Study 2002
Japan-Chile CRTA Signed 2007
Japan-Mexico CRTA In effect 2005
Japan-Thailand RTA Signed 2007
Japan-Phillipines RTA Signed 2006
Japan-Indonesia RTA Basic Agreement 2006
Japan-Malaysia RTA In effect 2006
Japan-Vietnam RTA Under Negotiation 2007
Japan-Bahrein RTA Understudy 2005
Japan-India CRTA Under Negotiation 2007
Japan-Switzerland CRTA Under Negotiation 2007
Japan-Australia CRTA Under Negotiation 2006
Japan-GCC CRTA Under Negotiation 2006
Philippines-USA CRTA Proposal 2002
Philippines - China RTA Under Negotiation
Malaysia - Australia CRTA Under negotiation 2005
Malaysia-India CRTA Under Negotiation 2005
Malaysia-Pakistan CRTA Under Negotiation 2005
Malaysia - New Zealand CRTA Under negotiation 2005
China - Hong Kong RTA In effect 2005
China - Macao RTA In effect 2004
China - SACU CRTA Agreed to negotiate 2004
China - GCC CRTA Agreed to negotiate 2004
China - New Zealand CRTA Under Negotiation 2004
China -Chile CRTA Signed 2005
China -Australia CRTA Under Negotiation 2005
Hong Kong - New Zealand, CRTA Under Negotiation 2001
Taiwan (China) - Panama , CRTA In effect 2004
Taiwan (China) - USA
236
Type of
Countries Agreement Status Year
8 provinces (Guangdong, RTA In effect 2004
Guizhou, Hainan, Jiangxi, Hunan,
Fujian, Yunnan, Sichuan) + 1
autonomous region (Zhonggu
Guangxi Zhuangzu Zizhiqui) +
2 special administrative areas
(Hong Kong, Macao)
Japan - Korea - China RTA Official discuss/study 2000
Pacific 5 RTA Proposal 1998
Pacific 5 - Mercosur - Turkey - CRTA News reports
Afghanistan - Indonesia -
Pakistan -Japan, etc.
USA - Brunei - Myanmar - CRTA Partly Under
Cambodia - Indonesia - Laos - Negotiation
Malaysia - Philippines -
Singapore - Thailand - Vietnam
Korea - Argentina - Brazil - CRTA Agreed to study
Paraguay - Uruguay
Source: JETRO, Sekai to Nihon no shoyou na FTA ichiran, December 2005 <http://
www.jetro.go.jp/jpn/reports/05000906, on-line access, February 2006>
Updates made by authors from WTO data base and relevant government websites.
The literature on the "new wave" of regionalism of the late 1980s and
1990s does not entertain the possibility that cross-regional arrangements
could have a major role to play in our understanding of regionalism.12 A
somewhat scant literature on the phenomenon of cross-regionalism exists,
however. On the theoretical front, Aggarwal and Koo advocate a nuanced
distinction among "trade governance measures."13 One of the criteria they
employ to categorize various trading arrangements in the world is physical
proximity, with a distinction made between "geographically concentrated"
and "geographically dispersed" trading arrangements.14 In this way, these
authors explicitly acknowledge the presence of cross-regional dynamics. The
thrust of their analysis, however, is the categorization of a variety of
237
arrangements that fall under the rubric of regional institutions and not a
discussion of the interaction between geographically dispersed and
concentrated FTAs. Aggarwal and Fogarty focus on the EU's attempts to
promote counterpart coherence (by developing cooperation dialogues
among regional entities) ,15 and Hanngi, Roloff and Ruland discuss the forms
and functions of inter-regional relations as a part of institutional balancing.16
Both arguments are different from what we document in East Asia: a much
more fragmented negotiation process where there is no tight regional block
(customs union) but rather where bilateral RTAs and CRTAs dominate the
trade negotiation scene.
Among economists, the best-known debate on the subject centres on
the natural trading partner hypothesis endorsed by Wonnacot and Lutz,
Summers, and Krugman, and rejected by Bhagwati and Panagariya.17 The
proponents of the hypothesis insist that when FTA partners are "natural
partners" with high initial volume of trade and a close distance between
them, their FTA engagement maximizes trade creation and efficiency gains.18
Its opponents, however, argue that the welfare implications of cross-regional
and intra-regional FTAs are not so straightforward given the reduction of
transportation costs and the elasticity of export supply curves. While this
debate among economists continues to generate new insights,19 it is
insufficient to explain East Asian cross-regionalism because a host of other
factors - and not exclusively efficiency gains - are likely to influence a
government's decision to engage simultaneously in preferential trading
negotiations with its neighbours and its extra-regional partners.
Finally, the concept of "open regionalism" actually helps in theorizing
about the origin of cross-regionalism.20 Invoking Pempel's notion of
15 Vinod K. Aggarwal and Edward A. Fogarty, "Between Regionalism and Globalism: European
Union Interregional Trade Strategies," in Aggarwal and Fogarty, eds., EU Trade Strategies: Between
Regionalism and Globalism.
16 Heiner Hanggi, Ralf Roloff and Jurgen Ruland, "Interregionalism: A New Phenomenon in
International Relations," in Heiner Hanggi, Ralf Roloff and Jurgen Ruland, eds., Interregionalism and
International Relations, (London: Routledge, 2006) .
17 See Paul Wonnacott and Mark Lutz, "Is There a Case for Free Trade Areas?" in Jeffrey J.
Schott, ed., Free Trade Areas and US Trade Policy (Washington DC: Institute for International Economics,
1989); Larry Summers, "Regionalism and the World Trade System," Symposium Sponsored by the
Federal Reserve Bank of Kansas City, Policy Implications of Trade and Currency Zones, 1991; Paul Krugman,
"The Move to Free Trade Zones," Symposium Sponsored by the Federal Reserve Bank of Kansas City,
Policy Implications of Trade and Currency Zones, 1991; Jagdish Bhagwati and Arvihd Panagariya,
"Preferential Trading Areas and Multilateralism - Strangers, Friends, Or Foes?" in Jagdish Bhagwati
and Arvind Panagariya, eds., The Economics of Preferential Trade Agreements (Washington DC: AEI Press,
1996).
18 Wonnacot and Lutz, "Is There a Case for Free Trade Areas," pp. 62-72.
19 For example, see Maurice Schiff, "Will the Real "Natural Trading Partner" Please Stand Up?"
World Bank, Development Research Department, 1999.
20 APEC best exemplifies the notion of "open regionalism" - that is, a negotiated trade
liberalization effort whose benefits are always extended to non-APEC members on the basis of most
favoured nation status.
238
21 Kanishka Jayasuriya, "Embedded Mercantilism and Open Regionalism: The Crisis of a Regional
Political Project," Third World Quarterly, vol. 24, no. 2 (2003), pp. 339-41. See also TJ. Pempel, Regime
Shift: Comparative Dynamics of the Japanese Political Economy (Ithaca NY: Cornell University Press, 1997).
22 At the time of writing (probably either late 2002 or early 2003) , he remained skeptical about
the conclusion of both the Japan-Mexico or South Korea-Chile agreements, for both Japan and South
Korea remained fairly resistant to the idea of liberalizing their respective agriculture sectors. See
John Ravenhill, "The New Bilateralism in the Asia Pacific," Third World Quarterly, vol. 24, no. 2 (2003),
p. 314 and footnote 29.
23 Christopher M. Dent, "Networking the Region? The Emergence and Impact of Asia-Pacific
Bilateral Free Trade Agreement Projects," The Pacific Review, vol. 16, no. 1 (2003), pp. 1-28.
239
24 Vinod K Aggarwal and Shujiro Urata, eds., Bilateral Trade Agreements in the Asia-Pacific: Origins,
Evaluation, and Implications (London: Routledge, 2005).
25 Mireya Solis, "Japan's New Regionalism: The Politics of Free Trade Talks with Mexico ," Journal
of East Asian Studies, vol. 3 no. 3 (2003), pp. 377-404. Mark Manger, "Competition and Bilateralism in
Trade Policy: The Case ofjapan's Free Trade Agreements," Review of International Political Economy, vol.
12, no.5 (2005), pp. 804-28.
26 Min Gyo Koo, "From Multilateralism to Bilateralism? A Shift in South Korea's Trade Strategy,"
in Aggarwal and Urata, eds., Bilateral Ttade Arrangements in the Asia-Pacific.
27 Jose L. Tongzon, "Research Notes: US-Singapore Free Trade Agreement: Implications for
ASEAN," ASEAN Economic Bulletin, vol. 20, no. 2 (2003), pp. 174-78.
240
Economic factors
28 This group of fifteen East Asian economies includes ASEAN, Japan, Korea, China, Taiwan and
Hong Kong. Figures are taken from Masahiro Kawai, "East Asian Economic Regionalism: Progress
and Challenges," Journal of Asian Economics, vol. 16 (2005), p. 32.
29 The index value for East Asia is 2.2, while it is 2.5 for NAFTA and 1 .7 for Europe; see Kawai, East
Asian Economic Regionalism," p. 32. The intra-regional trade intensity index takes into account the
weight of a region in the overall world economy to avoid overestimating the importance of intra-regional
trade for regions that are registering above-average growth. See Lincoln, East Asian Economic Regionalism.
30 See Walter Hatch and Kozo Yamamura, Asia in Japan s Embrace: Building a Regional Production
Alliance (Cambridge: Cambridge University Press, 1996) ; Roger van Hoesel, New Multinational Enterprises
from Korea and Taiwan: Beyond Export-led Growth (New York: Routledge, 1999) ; Mireya Soils, Banking on
Multinationals: Public Credit and the Export of Japanese Sunset Industries (Stanford: Stanford University
Press, 2004).
31 Lincoln, East Asian Economic Regionalism, p. 47.
241
index has fluctuated between 2.5 and 2.2 between 1980 and 2003. Moreover,
the importance of extra-regional MNCs remains evident. For example,
between 1990 and 2002, the United States was the largest foreign investor in
Asian newly industrialized economies (NIEs) and in China (with $70.6 and
$42.7 billion, respectively) . Only in the case of the ASEAN-9 was most of the
FDI intra-regional (with Japan as the largest foreign investor with a cumulative
total of $19.8 billion) . European multinationals were also active in the region,
representing 14 percent of foreign investment in Asian NIEs, 22 percent in
the ASEAN-9, and a smaller 6.2 percent in China during this same period.32
In fact, Lincoln argues that one of the most important developments on
the trade front in East Asia is a redirection of intra-regional trade away from
Japan and into China. Particularly notable are Japan's increasing imports
from China (from 4 to 17 percent of total imports between 1981 and 2001)
and growing exports from the rest of Asia to China (from 5 to 12 percent in
the same period). Both trends reflect the rapid rise of China as a major
trading nation. Although these are indeed important changes, the main
continuity is also equally revealing; the United States continues to be the
most important trading partner for the region.33 Between 1980 and 1989,
24.4 percent of East Asian exports were directed to the American market.
And between 1995 and 2004, the United States remained the main
destination market capturing 20.7 percent of total exports.34
This overview of economic trends in East Asia demonstrates that, despite
fairly intense intra-regional economic activities, countries in the region
remain heavily dependent on extra-regional markets - especially the United
States - as outlets for their exports and as sources of FDI. Therefore, to the
extent that these East Asian countries wish to consolidate or expand access
to some of their main markets of destination, they will frequently look across
the Pacific and outside their immediate economic region.35
The security environment in East Asia has not been conducive to the
creation of regional trade governance institutions for at least three main
reasons: the prevalence of a hub-and-spoke alliance system, the open dislike
32 All figures from Kawai, "East Asian Economic Regionalism," pp. 32- 33.
33 Lincoln, East Asian Economic Regionalism, pp. 51, 55, 58.
34 IMF, Direction of Trade Statistics.
35 See Naoko Munakata, "Has Politics Caught up with Markets? In Search of East Asian Economic
Regionalism," in Peter J. Katztenstein and Takashi Shiraishi. eds., Beyond Japan: The Dynamics of East
Asian Regionalism (Ithaca NY: Cornell University Press. 2006) . However, as we will elaborate later on in
this and the subsequent articles in this volume, the objective of securing preferential access with key
extra-regional economic partners is by no means the most important rationale behind many cases of
East Asian cross-regionalism. Rather, more defensive economic reasons (counter trade diversion) or
security and leverage motives frequently guide the selection of cross-regional partners at this early
stage in East Asia's FTA diplomacy.
242
of the extra-regional hegemon for exclusive Asian bloc initiatives, and the
unabated historical and regional tensions among neighbours in East Asia.
First, the historical context is important to understand the emergence
and persistence of a hub-and-spoke alliance system in Asia. In sharp contrast
to the development of a trans-Atlantic alliance in the form of die North
Adantic Treaty Organization (NATO) , a trans-Pacific collective defense system
never materialized in East Asia.36 In order to understand Asia's "organization
deficit" and the prevalence of bilateral security arrangements, Calder and
Ye argue that it is necessary to factor in historically contingent choices. In
particular, the Chinese intervention in the Korean War exerted a powerful
influence in the institutional infrastructure for Asia. Confronted with this
crisis, the US government shelved its preferred project of a region-wide
collective security mechanism (the Pacific Pact) in favour of a network of
bilateral alliances with selected Asian countries (the San Francisco system).
The desire to reach an early peace settlement with Japan, given concerns
over aggressive Chinese behaviour, was at the heart of this decision. The
implications of this security arrangement for the future of Asian regionalism
were, of course, enormous. Instead of forging a security bond that could
help these nations overcome their distrust and manage regional frictions,
they remained isolated from one another interacting individually with the
United States as their main bilateral security partner.37 The absence of a
minilateral collective security organization in East Asia, therefore, hindered
the construction of regional economic regimes in as much states are more
likely to trade with their allies since they do not fear the security externalities
of such economic exchange.38
Second, the United States has influenced the fate of Asian regionalism
not only in its role as the architect of the underlying security structures that
condition trade choices, but also by actively discouraging the emergence of
an Asian economic bloc. Contrary to its permissive attitude towards European
integration, the United States has frowned upon purely Asian integration
initiatives.39 In the aftermath of World War II, the United States came to
support the European Community project for three main reasons: to
strengthen its allies, to promote demand for American goods and investment
as European nations recovered and to encourage more prosperous European
nations to make a larger contribution to the defense burden.40
243
41 Yoichi Funabashi, Asia Pacific Fusion: Japan's Role in APEC (Washington DC: Institute for
International Economics, 1995), pp. 105-18. Ellis Krauss, "Japan, the US, and the Emergence of
Multilateralism in Asia," The Pacific Review, vol. 13, no. 3 (2000), pp. 473-94.
42 See Saori N. Katada, Banking on Stability: Cross-Pacific Dynamics of International Financial Crisis
Management (Ann Arbor: University of Michigan Press, 2001 ) . The one important exception was China,
which opposed the AMF. Bowles notes that the Chinese opposed the idea because they feared this
initiative would enhance Japan's leadership position in the region, while Amyx notes that the Japanese
government, going through the Hong Kong Monetary Authority first, made it harder for the Chinese
authorities to reach a decision. Paul Bowles, "Asia's Post-Crisis Regionalism: Bringing the State Back
In, Keeping the (United) States Out," Review of International Political Economy, vol. 9, no. 2 (2002), pp.
255-56; Jennifer Amyx, "What Motivates Regional Financial Cooperation in East Asia Today?" Asia
Pacific Issues, no. 76 (February 2005) , pp.2-3.
43 The United States has not reacted strongly against its exclusion from the East Asia Summit
held in Kuala Lumpur because it remains skeptical it can yield an inclusive regional block given the
open disagreements between China and Japan over the future evolution of this forum.
44 Lincoln, East Asian Economic Regionalism, pp. 256-57.
244
45 Gilbert Rozman, Northeast Asia 's Stunted Regionalism: Bilateral Distrust in the Shadow of Globalization
(Cambridge: Cambridge University Press, 2004) .
46 The factors that have led to the souring of the Sinojapan bilateral relations are many, including
the phasing out of Japanese official development assistance (ODA) loans, a bilateral trade imbalance
and occasional trade wars, the exploitation of gas reserves on the East China Sea, pending territorial
disputes, the Japanese bid for a permanent seat at the UN Security Council, controversy over the
official visits in Japan to the Yasukuni shrine, approval of history books that downplay wartime atrocities
and the antijapanese riots in China.
47 Authors' interviews with officials from Japan External Trade Organization (JETRO) , Ministry
of Economy, Trade, and Industry (METI), and Japanese politicians, summer 2005.
245
Table 2
Economic
Market access The search for new and/ or expanded market access through
preferential trade and investment liberalization.
Trade diversion The attempt to avoid exclusion and level the playing field by
countering trade and investment diversion effects of existing
FTAs.
Seeurily Security
Economic motives
The search for new and/or expanded market access through preferential
trade and investment liberalization is undoubtedly a powerful determinant
of partner selection. An FTA can serve as an institutional device to create
246
48 Ernst Haas, Beyond the Nation-State (Stanford: Stanford University Press, 1964). Although
economic objectives (managing growing interdependence) are of central importance in explaining
the demand for regional integration, neofunctionalism is essentially a political explanation in that it
explains how the lobbying activities of interest groups to establish supranational institutions that
erode state autonomy will move forward the integration process. We thank an anonymous reviewer
for pressing us to clarify this important point.
49 See Mattli, The Logic of Regional Integration. In fact, Bhagwati, Greenaway and Panagariya argue
that the trade creation effect may be larger in cross-regional FTAs (contrary to the expectations of the
natural trading partner hypotheses) due to the reduction in transportation costs and the greater
elasticity of export curves with more distant partners. See Jagdish Bhagwatti, David Greenaway and
Arvind Panagariya, "Trading Preferentially: Theory and Policy," The Economic Journal, vol. 108 (1998),
pp. 1128-48.
50 See Gene M. Grossman and Elhanan Helpman, "The Politics of Free-Trade Agreements," The
American Economic Review, vol. 85, no. 4 (1995), pp. 667-90. In fact, preferential rules of origin are now
considered one of the most pernicious elements of FTAs in that they provide an effective and hidden
form of protection for bloc producers. We thank Steph Haggard for pointing this out to us. Some of
the best works on rules of origin are by Anne O. Krueger, "Free Trade Agreements as Protectionist
Devices: Rules of Origin." Working Paper no. 4352 (Cambridge: National Bureau of Economic
Research, 1993) ; and Antoni Estevadeordal and Kati Suominen, "Rules of Origin in Preferential Trading
Arrangements: Is All Well with the Spaghetti Bowl in the Americas?" Economia (2005), pp. 63-103.
51 See Baldwin, "The Causes of Regionalism."
247
248
55 See Mansfield and Milner, "The New Wave of Regionalism"; Mattli, The Logic of Regional.
Integration; World Bank, Trade Blocs (New York: Oxford University Press, 2000); Vinod K. Aggarwal,
"Bilateral Trade Arrangements in the Asia-Pacific," in Aggarwal and Urata, eds., Bilateral Trade
Arrangements in the Asia-Pacific, Stephen Hoadley, Negotiating Free Trade: The New Zealand-Singapore CEP
Agreement (Wellington: New Zealand Institute of World Affairs, 2002) .
56 Zheng Bijian, "China's 'Peaceful Rise' to Great-Power Status," Foreign Affairs, vol. 84, no. 5
(2005), pp. 18-24.
5V Elaine S. Kwei, "Chinese Trade Bilateralism: Politics still in command," in Aggarwal and Urata,
eds., Bilateral Trade Arrangements in the Asia-Pacific, p. 133., And Wong and Chan point to lack of
complementarities in trade structures between China and ASEAN; see John Wong and Sarah Chan,
"China-ASEAN Free Trade Agreement: Shaping Future Economic Relations," Asian Survey, vol. 43,
no. 3 (2003), pp. 516-23.
58 World Bank, Trade Blocs, p. 19.
59 Alejandro Ibarra-Yunez, "Spaghetti Regionalism or Strategic Foreign Trade: Some Evidence
for Mexico," Journal of Development Economics, vol. 72 (2003) , pp. 567-84/
249
Leverage motives
Cross-regional negotiations do not take place in a vacuum. On the contrary,
governments frequently pursue simultaneously inter- and intra-regional
negotiations. What happens in one negotiating front can affect what ensues
in the other, and states have not missed this point. In fact, an important
motive in embarking early on in cross-regionalism is to acquire leverage
over the evolution of intra-regional integration through at least two main
mechanisms, capacity building and precedent setting.
Just as East Asia embraced FTA diplomacy for the reasons noted above,
the lack of regional know-how in the negotiation of such agreements became
readily apparent.60 East Asian governments seeking "on-the-negotiation"
training by teaming up with consummate preferential traders had to look
beyond the region.61 Therefore, an important motive in the selection of
cross-regional FTAs, we posit, is the need to develop negotiating techniques
and qualified bureaucratic cadres so as to avoid entrapment in
disadvantageous commitments and/or to gain advantage in future FTA
negotiations with larger economic partners.
Governments may also embark on cross-regional integration in order to
set precedents - both domestically and internationally - which can be useful
in future FTA negotiations. A powerful insight from the literature on
intergovernmentalism is that states favour preferential integration
negotiations to gain leverage over domestic interest groups.62 States can use
selective trade liberalization to minimize the future political clout of import-
competing industries expected to shrink after exposure to international
competition.63 FTA commitments can also help lock in these reforms. CRTA
negotiations, therefore, allow states to win their political battles at home,
paving the way for more vigorous regional integration diplomacy.
Internationally, states can use CRTAs to boost their reputation as reliable
FTA partners, and to establish precedents in key areas (e.g., exclusion of
60 Jiro Okamoto, "Introduction," injiro Okamoto, ect., Whither Free Trade Agreements? Proliferation,
Evaluation, and Multilateralization (Tokyo: Institute of Developing Economies, 2003).
61 Aggarwal and Koo make exactly the same argument when they note that Korea selected Chile
as its first FTA partner with the explicit goal of capacity building (for a more expansive discussion of
this issue see the article by Park and Koo in this volume). See Aggarwal and Koo, "Beyond Network
Power," p. 7.
62 Andrew Moravcsik, "Preferences and Power in the European Community: A Liberal
Intergovernmental Approach," Journal of Common Market Studies, vol. 31, no. 4 (1993), pp. 473-524.
63 Ronald Rogowski, Commerce and Coalitions: How Trade Affects Domestic Political Alignments
(Princeton: Princeton University Press, 1989).
250
251
Table 3
Economic
Market Access Thailand and Korea: Gain access to the key American
market
Reinforce security Korea: Improve ties with its main security partner, the
arrangements United States
Raise international China: Emphasize through FTA policy the cooperative
status aspects of China's economic rise
Thailand and Korea: Emerge as trade hubs through the
development of an FTA network
Leverage
Capacity Building Korea, Japan, China, Malaysia: Learn from consummate
FTA negotiators in a risk-free environment due to modest
liberalization adjustment costs. This "on-the-negotiation"
training for bureaucratic cadres deemed useful to engage
later on in FTA negotiations with larger economic partners
Creating Korea and Japan: Use FTA negotiation to win domestic
precedents battles on economic reform and agricultural liberalization
and gain international credibility as an FTA negotiator
On the other hand, Thailand has emphasized an FTA
"lite" approach to minimize domestic restructuring
China: Use CRTAs to advance recognition of China as a
"market economy/' a precedent that could be of
252
64 The same reservation applies to the efforts of Thailand and Korea noted above to position
themselves as trade hubs: access to their FTA network is contingent on the compliance with different
rules of origin.
253
responded with a CRTA initiative with Mexico, Canada or the United States
to counteract the one case where it suffered greatly from trade diversion,
NAFTA's strict origin rules for textiles. In sharp contrast, trade diversion was
the driving force behind Japan's negotiation of a CRTA with Mexico. When
specific Japanese industries (government procurement, automobiles and
electronics) suffered tangible losses as Mexico's FTAs altered the rules of
market operation, they mobilized to secure similar preferences through a
CRTA.
These differences aside, many of the CRTAs analyzed in this special issue
do share some important common traits. One important trend is the decision
of some East Asian countries to negotiate a CRTA with the United States.
This move does represent a fundamental challenge for Thailand and Korea.
As Hoadley reports, Thailand and the US are at loggerheads over crucial
issues, such as intellectual property protection, and talks have been suspended
amid domestic political backlash and political crisis for the Thaksin
administration. As Park and Koo remind us, despite proactive position of
the Roh administration and Korea's foreseen security benefits, the Korea-
US FTA negotiation had to overcome serious hurdles regarding agricultural
liberalization and the movie screen quota. Therefore, despite the major
prospective welfare gains, the jury is still out on how the FTAs with the United
States will impact East Asia's intra- and cross-regional FTA dynamics.
And yet there are numerous other cross-regional initiatives which actually
only promise modest aggregate economic benefits that demand explanation.
We argue that leverage gains arising from cross-regionalism are crucial to
understand the motivations of East Asian nations to negotiate with small
cross-regional economic partners (see tables 2 and 3). All the East Asian
nations studied here have used their cross-regional FTA initiatives for capacity-
building purposes in a low-risk environment. By teaming up with consummate
FTA negotiators from outside the region, countries like Korea, China and
Japan could learn the ropes of negotiating preferential market access without
incurring large economic and security costs. The small overall volume of
trade between countries in these CRTAs meant fewer adjustment costs from
trade liberalization, but geographical distance and the absence of security
rivalries also meant that these CRTAs would minimize negative security
externalities, such as the often-noted concern of strengthening through
economic cooperation a potential military foe. These CRTAs were considered
advantageous as well in that they constituted relatively self-contained trade
negotiation exercises unlikely to be "contaminated" by the volatility of
intractable historical, territorial, or leadership disputes.
In fact, the governments' interests in leverage emerges as the key
analytical variable linking cross-regional overtures with simultaneous
negotiation processes at the WTO and at intra-regional levels. This is true
not only because bureaucratic cadres in East Asia receive on-thejob training
from extra-regional FTA counterparts which influence their subsequent FTA
254
Conclusion
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