Trade Trends and Insitutional Design

in the Asia-Pacific

Vinod K. Aggarwal Professor and Director

Berkeley APEC Study Center 802 Barrows Hall, #1970 University of California

Berkeley, California 94720-1970 Tel.: 510-642-2817

Email: vinod@berkeley.edu

Min Gyo Koo Associate Professor

The Graduate School of Public Administration Seoul National University

599 Gwanak-ro Gwanak-gu Seoul 151-742, Korea

Tel: 82-2-880-8535 E-mail: mgkoo@snu.ac.kr

October 7, 2013

Prepared for “The Trans-Pacific Partnership and Taiwan's Future Development Strategy,” sponsored by the Center on Democracy, Development, and the Rule of Law and co-sponsored by the The Walter H. Shorenstein Asia-Pacific Research Center at Stanford University, October 11-12, 2013. This paper draws on a paper by Vinod Aggarwal presented at a PECC-ADBI-IDB conference in July 2010 as well as our forthcoming chapter in the Oxford Handbook of International Relations of Asia edited by Saadia Pekkanen, John Ravenhill, and Rosemary Foot.

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I. Introduction

Despite the formal weakness of Asian institutions, its postwar economic integration has

been impressive, an achievement indicated by soaring intra-regional trade. In the late

1990s, it was widely held that the network of Japanese multinationals and overseas

Chinese businesses played a critical role in forming a virtual Asian economic

community. Other analysts pointed to a similar role by U.S. firms in setting up

productions networks in the region, particularly in the electronics sector. For many Asia

scholars, such an informal, network-style integration was seen as a viable substitute for

formal institutionalization of regional trade relations (Encarnation 1999; Katzenstein

2005).

The lament that Asia lacks regional trade institutions has now been replaced by

criticism of the excessive number of institutional fora that address trade issues wholly or

in part in the region. Aside from the World Trade Organization (WTO), we currently have

the ASEAN Free Trade Agreement (AFTA)1, ASEAN plus 3 (Japan, China and South

Korea), RCEP or Regional Comprehensive Economic Partnership (ASEAN plus 6

adding India, Australia and New Zealand),, Shanghai Cooperation (SCO, including

China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan), Asia Pacific

Economic Cooperation (APEC), TPP (Trans-Pacific Partnership), and the South Asian

Association for Regional Cooperation (SAARC) under whose auspices we have seen

the creation of a South Asian Preferential Trade Area and a South Asian Free Trade

1 The Association of Southeast Asian Nations (ASEAN) was formed in 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand. Since then, membership has expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam.

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Area.2 The most important locus of trade arrangements until recently, however, is

undoubtedly the active pursuit of bilateral trade accords, as Asian countries negotiate a

flurry of accords both regionally and transregionally (Ravenhill 2001; Pempel 2005,

2010a; Aggarwal and Koo 2005, 2008; Aggarwal and Urata 2006; Dent 2006; Solís,

Stallings and Katada 2009; Aggarwal and Lee 2011). The TPP effort, which came about

with the U.S. joining the original Pacific 4 (P4) agreement among Brunei Darussalam,

Chile, Singapore, and New Zealand, and now which includes Australia, Malaysia, Peru,

Vietnam, Canada, Mexico, and Japan, reflects an effort to reconcile differing bilateral

FTAs. RCEP similarly endeavors to rationalize the multiplicity of accords among

ASEAN members and Japan, Korea, China, India, Australia, and New Zealand.

This paper focuses on three key questions. First, how can we explain Asian

countries’ trade patterns and analytically characterize the landscape of regional trade

institutions in a more systematic fashion, while still remaining sensitive to the variety of

different institutional characteristics? Second, how can we account for the formal and

informal trade institutional outcomes that we see in terms of the variation across

dimensions? Third, can we say something about the likely future trajectory of different

trade arrangements in the region and how they may be reconciled with one another?

To address these questions, Section II of the paper begins by specifying key

patterns in Asian trade over the past three decades. Section III specifies a number of

dimensions on which institutions can be analyzed, and graphically illustrates them using

these elements. Section IV examines each of the major trade accords in the Asia

2 APEC currently has 21 members, including Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, South Korea, Mexico, Malaysia, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, Taiwan, Thailand, the United States, and Vietnam.

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Pacific. In conclusion, Section V speculates on the likely trajectory of the trading

architecture in the Asia-Pacific in light of this analysis.

II. Trade Trends in the Asia Pacific

Asia’s remarkable economic integration for the past three decades can be best

indicated by the region’s soaring share of trade in global trade as well as the significant

intra-regional trade flows. In 1980, the total value of trade conducted by twenty-six

Asian countries was $566 billion, constituting 15% of the world’s total trade.3 Within

three decades, Asia’s share of world trade had doubled, reaching 30% in 2010. Intra-

regional trade has soared from 30% of Asia’s total trade in 1980 to 48% in 1997.

Although in decline, as countries such as China have pushed exports to the U.S. and

EU, the intra-regional share remains significant at around 35% in recent years.

Table 1 Here

For many Asian countries, the United States was one of the most important

trading partners, as illustrated by the share of their trade with the U.S. compared to their

total trade, around 20% from 1980 to 2000. In recent years, however, the significance

of the U.S. as a bilateral trading partner for most Asian countries ( with the exception of

China) has been marked by a decrease in the U.S. share in their total trade, falling to 11%

in 2010.

Table 2 Here

Most importantly, the expanding regional production network centered on China

3 Twenty-six Asian countries include: Afghanistan, Bangladesh, Brunei, Cambodia, China, Hong Kong, India, Indonesia, Japan, Kazakhstan, Korea (South), Kyrgyzstan, Laos, Malaysia, Mongolia, Myanmar, Nepal, Pakistan, Philippines, Singapore, Sri Lanka, Tajikistan, Thailand, Turkmenistan, Uzbekistan, and Vietnam. North Korea and Taiwan are not included due to data limitations.

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has reduced Asia’s dependence on the U.S. market. As shown in Figure 1, China’s

share in intra-Asian trade has grown rapidly from 18% in 1980 to 47% in 2010, while its

share in Asia’s total trade has grown less quicklyfrom 5% in 1980 to 16% in 2010. The

U.S. market remains significantly important to Asian countries only as a final destination

of their exports, processed and assembled from intermediate parts in China. Many

experts note that Asian countries have been shielded from the 2008 global economic

crisis thanks to the ‘China factor’ (Pempel 2010b).

Figure 1 Here

II. Characterizing the Trade Institutional Landscape in the Asia Pacific

Until the 1970s, the primary institution that regulated national trade policies, and hence,

trade flows in Asia, was the General Agreement on Tariffs and Trade (GATT). But, East

Asian countries in particular appeared to have little interest in formalizing regional

institutions, with ethic Chinese and Japanese and U.S. corporate networks serving as

the needed linkages among economies in the region. Yet, beginning in the early 1990s

with the end of the Cold War, and particularly in the aftermath of the 1997-98 Asian

financial crisis, concern grew among East Asian states about the need to pursue greater

institutionalization beyond these networks (Aggarwal and Koo 2008).

Table 3 illustrates the historical evolution of already existing and newly created

accords. As the table indicates, the most salient features in the development have been

the creation of minilateral accords with several countries in the 1990s and the

proliferation of bilateral (preferential) free trade agreements in the 2000s.

Table 3 Here

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In an effort to more comprehensively consider these accords, it is useful to

consider eight main features, grouped into three categories (Aggarwal and Lee 2011).4

First, from an individual country’s foreign policy perspective, actors choose: (1) the

number of accords sought (for instance, bilateral PTAs and/or minilateral and global

multilateral agreements); and (2) the regional sequencing of trade agreements.5

Second, in terms of the characteristics of agreements, countries may have

differing preferences with respect to three dimensions: (1) actor scope, which refers to

whether the agreement is bilateral, minilateral or multilateral;6 (2) geography, which

refers to whether the agreements are focused within or outside the region;7 and (3) the

size of partners, large or small.

Third, we can look at the specific characteristics of agreements on three

dimensions: (1) issue scope, i.e., the range of issues that a policy or arrangement deals

with, running from narrow to broad; (2) the nature of the agreements, ranging from

market opening or closing; and (3) the institutional strength of the arrangement being

negotiated.

Holding the actor’s choice about the number of accords sought and the regional

sequencing of agreements constant, Figures 2A-2D illustrate the varying characteristics

of some prominent agreements in Asia.

4 Aggarwal 2001 and Aggarwal and Koo 2008 develop these ideas at length, both from a theoretical and empirical perspective on Asia. 5 One could of course look at other sequencing choices such as moving from bilateral to minilateral or multilateral to minilateral, and so on. 6 Because we are interested in negotiated accords, we do not consider unilateral measures to control or manage economic flows. See Aggarwal 2001 for a discussion of this question. 7 Of course, the very question of what constitutes a region is contested.

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Figure 2A-2D here

With respect to actor scope and geography, we can see that we have increasing

numbers of actors in each accord (ASEAN to APEC being the range). In addition, the

variation in terms of geographical focus, and the size of partners follows the numbers

quite directly. With respect to specific institutional characteristics, as is readily evident,

most agreements are very weak in terms of organizational structure, which can be seen

as formal or informal focuses on centralization (a secretariat), control (collective

decisionmakingprocedures), and flexibility (limits on ad hoc measures). The issue-

scope and nature of all agreements tends to be quite broad and relatively liberal—which

is likely tied to their relative weakness as countries that are not really constrained in

their actions and can set broad goals.

The trend that we currently see in terms of the institutional change of these

agreements poses an interesting question. Why have these accords evolved in the way

we see and what role have key powers such as the U.S., China, Japan, South Korea,

and India played in this change? To consider these questions, we turn to the discussion

of an institutional design framework.

III. Designing Trade Institutions

The design of new institutions or modification of old ones is a problem that

confronts all national decision-makers. As they make decisions on how to proceed,

actors must make choices about the relative benefits of new versus modified ones, the

types of institutional characteristics they favor, and how institutions they create or

modify will fit with existing ones (Aggarwal 1998). In Asia, as noted earlier, the GATT

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was the dominant institution for many years in terms of managing state trade behavior.

Of course, not all countries were members of the GATT, and China, for example, only

joined the WTO in 2001. Other states in the region were also not founding members of

the GATT, South Korea for example joined in 1967. The puzzle is: Why have actors in

the region decided to pursue options other than the GATT/WTO to govern trade

relations?

In terms of analytical approaches, theories of international relations can shed

light on the formation and evolution of international institutions. Among the different

schools of thought, structural realists argue that institutions are at best epiphenomenal,

with little constraining effects on states (Waltz 1979; Mearsheimer 1994/5). By contrast,

neorealist institutionalists argue that dominant powers (hegemons) may wish to create

institutions to facilitate the management of the system (Grieco 1990). 8 Neoliberal

institutionalists, by contrast, give greater weight to the importance of institutions, arguing

that they can reduce transaction costs by disseminating information and lowering

organizational costs of negotiating agreements. For them, institutions may strongly

increase the incentives of actors to keep cooperating, even in the face of a declining

hegemon (Keohane and Nye 1977; Keohane 1984; Aggarwal 1985; Milner and

Moravcsik 2009). Constructivists view institutions as being fundamentally important in

the international system and argue that they help actors define their interests and

possibly even change them. To explain the origins of institutions, they highlight the

interplay of politicians and experts, arguing that international institutions may decline in

8 See Aggarwal 1998 for a discussion of different schools of thought on institutional design as well as the introduction to this volume.

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the absence of cognitive consensus—even if power shifts do not take place (Haas

1980).

In an effort to more systematically examine the changing patterns of trade, both

intra-regional and extra-regional, and the design and evolution of trade institutions, we

focus on an institutional bargaining approach that draws on several elements of these

theoretical approaches, but more directly focus on the process of institutional design.

The institution bargaining game discussed here consists of several phases (see Figure

3).

Figure 3 here

In the first phase, some shock (e.g. end of the Cold War) or secular trend

(growing Chinese imports into the U.S.) is likely to alter the payoffs from existing trade

arrangements.9 Based on the interplay of existing institutions and goods, countries will

have varying interests in pursuing new institutions or agreements, or simply choosing to

modify them based on their ‘individual situations.’ Goods refer to whether benefits are

public, common pool resources (with crowding as in the case of a limited market), club

good (with benefits accruing only to members), or private. These ‘situations’ reflect the

foreign policy interests of states, driven by their material relative systemic capabilities,

their domestic political dynamics based on state-society relations, and their ideological

interests.

Depending on this choice and still dependent on the individual situations,

countries must then decide on both the number of trade accords and their sequencing.

Based on bargaining with one or more states, the resulting agreements or institutions

9 Of course, institutional creation may take place in an issue area ‘vacuum’ as in the case of the creation of the GATT. In view of our focus on the more recent past, we take the existence of an institution (i.e., the GATT) as a given.

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can be characterized, as noted, in terms of actor scope, geography, size of countries,

issue scope, nature, and strength. Finally actors must decide how, if at all, to reconcile

the new or modified institution with any pre-existing ones, an issue to which we next

turn.

The final decision node concerns the question of institutional reconciliation.

Simply put, if new institutions are created or existing ones modified, should they be

‘reconciled’ with existing ones? If actors do choose to reconcile institutions, they must

consider whether there will be some hierarchical order (‘nested institutions’) or some

type of division of labor among institutions (‘horizontal linkage’). Although institutional

reconciliation is an important question for decision makers for either issue- or regionally-

based accords, here we focus on regionally-based reconciliation.10 An example of

nesting regional institutions is the development of APEC in 1989 and its relationship to

the GATT. APEC’s founding members were extremely worried about undermining the

GATT and sought to reconcile these two institutions by focusing on the notion of ‘open

regionalism.’ APEC members saw this as a better alternative to using Article 24 of the

GATT, which permits the formation of free trade areas and customs unions to justify this

accord. Although the interpretation of open regionalism continues to be contested, the

idea behind this concept was that while the members of APEC would seek to reduce

barriers to goods and services amongst themselves, they would do so in a GATT-

consistent manner.

An alternative mode of reconciling institutions would be to simply create

‘horizontally linked’ institutions that deal with separate but related activities. For

10 See Aggarwal 1998 for a discussion of issue-area nesting and horizontal linkages.

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example, the ASEAN Regional Forum deals primarily with security while APEC (which

also has a somewhat different membership) has been more trade focused.

IV. The Evolution of APEC and TPP, AFTA, ASEAN plus 3 and RCEP, SCO, and SAARC The institutional bargaining approach can be used to examine the evolution of Asia-Pacific

trade agreements. We first consider some stylized examples of how the framework we

have discussed can be used for this purpose, and then turn to a discussion of the

perspectives of the U.S., China, Japan, South Korea, and India on the future trade

trajectory in the region.

APEC, FTAAP, and TPP

The problems in the GATT Uruguay Round and changes in the European Community

provided a key impetus for APEC’s creation in 1989. With the Europeans moving forward

to a unified market and the impasse in GATT negotiations, Australia, Japan and other like-

minded countries were concerned about the externalities resulting from European

integration. For many state and nonstate actors in the region, the discussions about trade

liberalization under the GATT’s auspices resulted in unsatisfying payoffs, ultimately

catalyzing APEC’s formation (Aggarwal and Morrison 1998; Ravenhill 2001).

In APEC’s case, with respect to institutional characteristics, the actual membership

of this multilateral arrangement, both in terms of actor scope and geography, has been

open to considerable ongoing debate. There was already debate over the inclusion of the

U.S. at the very beginning when APEC was created. The question of how binding APEC

should be and its degree of institutionalization has been particularly controversial (Kahler

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2000). Whereas the U.S. and others have pushed for binding rules and procedures, most

notably with recent interest in a Free Trade Area of the Asia Pacific (FTAAP), many Asian

countries have shown considerable reluctance to move in this direction. The issue of

regime nature has been much less contentious, with all countries at least formally

supporting an open liberal arrangement. Issue scope has been open to more debate, with

some fear of the U.S. setting the agenda. But over time, APEC has begun to expand its

mandate. In some cases, as when security appeared to dominate the U.S. agenda after

9-11, this issue expansion has been criticized as undermining APEC’s core mission—a

shift that would create overlapping mandates.

In terms of the bargaining process leading to APEC, we have seen a multilateral

approach to this institution’s creation. In contrast to the hegemonic leadership of the U.S.

in the post-WW II era, in this case, Australia jointly worked with Japan and the U.S. to

develop APEC. Since then, although the major powers have had more say in APEC’s

evolution, middle-level powers continue to play a key role.

With APEC faltering in its effort to promote open trade (despite the recent decision

to claim victory by developed countries in meeting the Bogor Goals in 2010), the U.S. and

others have sought to revitalize APEC in various ways, most prominently through using

APEC as a vehicle to create a Free Trade Area of the Asia Pacific (FTAAP) and more

recently the TPP. Under the Bush Administration in 2006, the U.S. shifted its position to

support FTAAP, an idea in which it had previously shown little interest despite enthusiastic

support from the APEC Business Advisory Council (ABAC). Shortly before the Vietnam

summit, President Bush endorsed the idea of pursuing an FTAAP in a speech in

Singapore.

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This idea has found its strongest advocate in the writings of Fred Bergsten, who

has argued that such an arrangement would help control the proliferation of PTAs, prevent

the development of exclusive Asian trade arrangements, mitigate U.S.-China conflict,

bolster APEC as an institution, and help to increase the prospects of concluding the Doha

Development Round (DDR) (Bergsten 2007). By contrast, others (Aggarwal and Mukherji

2007; for a broader debate see Morrison and Pedrosa 2007) have argued that this

approach is unviable in the short-run. On the issue of U.S-China conflict, given the current

domestic political dynamics in the U.S. and concerns about the massive U.S. trade deficit,

free trade with China would be politically far-fetched, to say the least. Moreover, given that

APEC is insufficiently institutionalized, the notion that it could play a role that could foster

such an accord also seems unlikely. Indeed, attempting to transform APEC into a

negotiation forum would likely undermine its current contributions, however limited or

useful in the long-term. Finally, piecemeal or competitive liberalization, whether in the

guise of open sectoralism, bilateralism, or a transregional FTAAP is likely to undermine the

prospects of the Doha Round.

With efforts to promote FTAAP facing strong headwinds, the Bush Administration

changed tack, signaling its intent to join and negotiate TPP in September 2008. . But

TPP drifted into the background in the wake of the financial crisis, and American trade

policy remained essentially moribund. In December 2009, however, President Obama

revived American interest in TPP and USTR Ron Kirk formally notified Congress of the

administration’s intent to begin negotiations.

The Obama Administration’s effort to pursue TPP stemmed from a variety of

motivations. First was the proliferation of FTAs, rising from 53 in 2000 (proposed, under

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negotiation, or concluded) and dramatically increasing to 250 by 2011 (Asian Regional

Integration Center 2012). With such a diverse set of FTAs, varying in scope,

architecture, and objectives, conflicting standards imposed significant transaction costs

(Capling and Ravenhill 2011, 556).

Second, a bottom up approach to deeper integration could mitigate the economic

impact on import competing groups because the countries involved are already

relatively open and small. To the extent that the agreement is not a full-fledged

liberalization approach, it also might plausibly be argued (as Kirk asserted) that TPP will

“absolutely not” undermine DDR efforts, and “actually … might help bring Doha to a

close.”11

Third, the U.S. has emphasized TPP (as did the Bush Administration for FTAAP)

for security reasons. A commitment to this agreement signals a commitment to keep the

U.S. in Asia. As Secretary of State Hillary Clinton wrote:

In Asia, they ask whether we are really there to stay, whether we are likely to be distracted again by events elsewhere, whether we can make -- and keep -- credible economic and strategic commitments, and whether we can back those commitments with action. The answer is: “We can, and we will.”12

American efforts to reengage with Asia have been met with support by its allies.

Singapore’s former Prime Minister Lee Kuan Yew has warned of increasing Chinese

dominance and diminishing American relevance should the U.S. continue to disengage

in the Asia-Pacific (Bergsten and Schott 2010). American analysts also see TPP as a

way for U.S. engagement with the Asia-Pacific to serve as a stabilizing anchor in the

11 “Asia Pacific talks no threat to Doha: USTR Kirk,” Reuters, December 15, 2009. 12 “Clinton, Hillary, 2011, America’s Pacific Century,” Foreign Policy, November 2011.

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region, allowing countries like Japan, South Korea, and members of ASEAN to pursue

hedging strategies to balance between the U.S. and China (Bergsten and Schott 2010).

Lastly, negotiating TPP gives U.S. officials the opportunity to continue pushing

for high standards on labor, environment, and intellectual property in view of the

relatively like-minded states involved and their relatively small size that facilitates such

linkage efforts.

Still, TPP faces its own set of obstacles. Despite considerable talk about a “21st

century trade agreement,” USTR has refused to accept a unified market access

schedule.13 New Zealand, Australia, and Singapore have sought a plurilateral approach

with uniform concessions that would lead to a reopening of market access schedules for

already negotiated FTAs. This would have the benefit of making it increasingly difficult

to exclude sensitive sectors while crafting an agreement that is relatively simple that

new countries can more easily join.14 The American insistence on a “hybrid” approach of

bilateral and common offers15 stems from active efforts to appease various domestic

interest groups. Yet while opposition to TPP continues domestically in the U.S. and other

countries, negotiations are now nearly concluded after the 19th Round that took place in

Brunei. It remains to be seen if a final agreement can be inked by the end of 2013.

ASEAN and AFTA16

With the end of the Cold War, ASEAN members sought ways to expand its scope

beyond security issues. During this time, ASEAN members also became increasingly

13 “TPP Negotiators to Seek Market Access Structure Deal at August Meeting,” Inside U.S. Trade, June 25, 2010. 14 Lewis 2011, 48 15 Ferguson and Vaughn 2011, 7. 16 This discussion on AFTA draws heavily on Aggarwal and Chow 2010.

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concerned about the growing trend of regionalism in the rest of the world and the flow of

foreign investment into China (Elliott and Ikemoto 2004, 4). Moreover, ASEAN members

feared becoming isolated by the protectionist policies of other regional trade blocs while

simultaneously facing pressures from the WTO and the IMF to speed up their own

regional trade liberalization (Cuyvers et al. 2005, 3). To this end, the ASEAN states

agreed to the creation of AFTA in January 1992.

AFTA, consisting of relatively small members in terms of economic power, can

be classified as being relatively weak in strength, liberal in nature, and medium in terms

of scope. With respect to its nature, members sought to bring all intra-ASEAN tariff

levels for non-sensitive goods down to the 0-5% range within 10 years from 1994.

Members instituted a common effective preferential tariff (CEPT) that would make intra-

ASEAN exports less expensive and bolster integration. The regime remained weak,

with many product exceptions, a minor role of the Secretariat in monitoring compliance,

and lack of a very specific timetable for tariff reduction. In 1995, AFTA’s issue scope

widened to include services. The ASEAN Framework Agreement on Services (AFAS)

was envisioned to be a ‘GATS-plus’ regime in which liberalization would exceed the

standards set by the WTO General Agreement on Trade in Services (GATS). In

September 1995, the ASEAN economic ministers agreed to create a dispute settlement

mechanism, which was largely based on the WTO Dispute Settlement Understanding

although it lacked much of its power (Koesranti 2005, 238).

In December 1997, the ASEAN states adopted ASEAN Vision 2020, declaring

their intent to proceed with regional integration and liberalize trade in goods, services,

investments and capital. Faced with growing concern about the economic rise of China

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and India, and the new turn to bilateral preferential trade agreements at the turn of the

millennium, ASEAN members attempted to accelerate their integration (Ravenhill 2008).

These factors, combined with the unsettled security environment marked by the Bali

bombing of October 2002, generated a strong impetus for deeper integration (Smith

2004, 423). In 2003, ASEAN established the AEC with the 2003 Bali Concord II to

create a single market and production base for ASEAN with free movement of goods,

services, investment, and skilled labor by 2020.

In 2007, additional strengthening of ASEAN came about with the signing of the

ASEAN Charter at the 13th ASEAN Summit in Singapore. This charter created a rule-

based entity; called for the creation of enforceable rules in finance, trade and the

environment, as well as the establishment of a regional human rights body; and pushed

to accelerate the process towards full liberalization through the AEC blueprint from 2015

to 2020.

ASEAN plus 3 (APT) and RCEP

The efforts to create an ASEAN plus 3 grouping resembled the forum broached in 1990

by Prime Minister Mahathir of Malaysia—an East Asian Caucus—and one that was

strongly opposed by the U.S. Ironically, APT formation was given a push by the EU.

Singaporean Prime Minister Goh Chok Tong proposed a meeting of ASEAN with the

Europeans, leading to the first ASEM meeting in March 1996 (Stubbs 2002; Gilson

2004). This meeting brought twenty-five heads of state from Europe and East Asia

together. Most significantly, when ASEAN members asked that Japan, China and

South Korea join the meeting, the APT grouping began to take shape. The APT

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meeting also set in motion a trend toward cooperation among Japan, China and South

Korea, which has manifested itself more recently with talks of a Northeast Asian Free

Trade Agreement (NEAFTA) (Aggarwal, Koo, Lee and Moon 2008).

The Joint Statement on East Asia Cooperation in Manila at the 3rd APT Summit in

November 1999 solidified cooperation between ASEAN and the plus 3, endorsing the

Five Principles of Peaceful Co-existence17, the principles of the UN Charter, and the

ASEAN Treaty of Amity and Cooperation. This broad nesting of APT has continued to

this day. In addition, in terms of promoting expert consensus, the East Asia Vision

Group, launched by South Korean President Kim Dae-jung in 1999, contained

proposals to broaden East Asian cooperation, including establishing an East Asia Free

Trade Area and liberalizing trade. Yet while trade cooperation has not really flourished,

the countries have achieved cooperation in creating a currency swap arrangement in

2000 known as the Chiang Mai Initiative. Still, in terms of institutional strength, the APT

remained weak.

With respect to a broader grouping, the East Asia Summit (EAS) was launched in

Kuala Lumpur, Malaysia, following a 2004 decision to invite India, Australia and New

Zealand to attend the meeting. Whereas China passively resisted the presence of India,

its presence and that of Australia and New Zealand was seen as a mechanism to check

Chinese influence and dominance within the summit. The U.S. and Russia became

official members of the EAS during the 2011 Bali Summit, creating the ASEAN plus 8

agreement whose mandate remains primarily focused on non-trade issues.

17 The Five Principles of Peaceful Co-existence are a set of principles to govern relations between states. Their first formal codification in treaty form was in an agreement between China and India in 1954. This agreement stated the five principles as: (1) mutual respect for each other’s territorial integrity and sovereignty; (2) mutual non-aggression; (3) mutual non-interference in each other’s internal affairs; (4) equality and mutual benefit, and (5) peaceful co-existence.

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With the U.S. emphasizing development of TPP, China acceded to Japan’s

proposal to focus on ASEAN plus 6 rather than 3. The idea of creating such an accord,

RCEP, was first framed in February 2012 at the ASEAN Economic Ministers Retreat. It

was later formalized the following November at the East Asian Summit held in

Cambodia. Brunei hosted the first round of negotiations in May 2013 where officials

established working groups on the three issues they hoped to address: trade in goods,

trade in services, and trade in investment. At this point, negotiations are slated to

conclude by 2015, which may be an excessively ambitious goal. To this point, a second

meeting has been held in Australia (September 2013) and and third is to be held in

Malaysia in January 2014. As opposed to TPP, which bills itself as a very high standard

uniform agreement with few exceptions for individual countries, RCEP is considerably

more accomodating and is more traditionally focused on classic issues rather than the

host of behind the border issues being broached in TPP.

Shanghai Cooperation Organization (SCO)18

The SCO differs in many ways from the other trade organizations in Asia to the extent

that it started as a pure security organization. Nevertheless, it has served the broad

interest in creating a stable environment for economic development and has added an

explicit free trade agenda. Many experts note that the SCO illustrates a traditional

security organization expanding to the economic arena, which in turn affects the

security landscape. All the SCO member countries pursue economic integration with the

18 This discussion on AFTA draws heavily on Wan 2012 and Newland 2012.

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global market. Given that Central Asia is traditionally a volatile area, it is noticeable that

the region has shown stability since the formation of the SCO.19

Among others, China has been particularly active in promoting the SCO with

several goals, both strategic and economic.20 One of the most important incentives for

China to support the SCO is to create a friendly environment for economic

development. China has also been keen on energy security, and the SCO also serves

Chinese interests in dealing with domestic separatists and with cross-border crimes. In

addition, closer economic ties with Central Asia advances the Chinese government’s

strategy for developing the country’s western regions. Similar to China’s participation in

other regional trade institutions discussed in this chapter, China’s western provinces

and autonomous regions have been particularly interested in economic cooperation

through the SCO, seeing Central Asia as their outlet to the global market for economic

gains and policy performance.

It is no wonder that China’s share in Central Asian countries’ total trade has

grown from 4% in 1994 to 27% in 2010, replacing Russia as their traditionally largest

trade partner (IMF Direction of Trade Statistics). With the exception of China, the SCO

members now import more from fellow SCO members, as a share of total imports, than

they did before the organization came into existence. In the cases of Russia,

Kyrgyzstan, and Uzbekistan, the share of imports from SCO countries has risen

19 For more details about the formation of the SCO, see Wan 2012. 20 In contrast, Russia is often viewed as the main reason for the slow progress of economic cooperation. Russia is concerned that China will expand its influence through economic cooperation in a region Russia considers to be its traditional sphere of influence. In the meantime, the SCO faces a difficult membership issue. Before the 2011 SCO summit, admission of new members became a high-profile issue. Iran, Pakistan and India applied for membership and Afghanistan applied to become an observer state. China has been hesitant to admit India, arguing that the SCO is still too young to admit a large power like India. China is concerned that India’s admission would make the organization’s decision-making process much more complicated.

20

dramatically in the SCO period. In raw numbers, these increases are also significant:

total trade volume between the SCO members was $37.7 billion in 2006—more than

twice what it was when the organization was founded in 2001. Intra-SCO investment

has also grown dramatically. For instance, in 2006 China and Kazakhstan agreed to

establish a direct oil pipeline between the two countries; in 2009 Kazakhstan became

one of the top ten providers of oil to China, and the China National Petroleum

Corporation (a state oil company) is Kazakhstan’s largest corporate investor (Newland

2012, 6-7).

From South Asian Association for Regional Cooperation (SAARC) to South Asian Free Trade Asia (SAFTA) The evolution of regional trade cooperation in South Asia has been fraught with

overarching political constraints. Following the partition of India by the British in 1947,

which created a new Muslim state of Pakistan, these two countries have been at

loggerheads, having fought three wars and been on the verge of armed conflict on

more than one occasion. In addition to political and security factors, the pursuit of

import substitution by all of the countries in the region further impeded any interest in

liberalizing trade on a regional basis. In this context, efforts to promote economic

cooperation have clearly floundered, although recent efforts to liberalize trade in the

region have been moving forward, albeit slowly.

Although the idea of regional integration had been broached in the 1970s, intra-

regional trade liberalization failed to materialize. The South Asian Association for

Regional Cooperation (SAARC), created in 1985 after several years of discussion,

included Bangladesh, Bhutan, the Maldives, Nepal, India, Pakistan, and Sri Lanka

21

(Afghanistan joined in 2007). Yet despite a call for cooperation in economic (and many

other) areas, this organization did little to promote trade opening in the region, and intra-

regional trade as a proportion of total trade within the region dropped from 3.2% in 1980

to 2.4% in 1990 (Dash 2010). In 1995, the countries agreed to create a South Asian

Preferential Trade Agreement (SAPTA). The following year, SAARC members decided

that they would significantly liberalize trade through the creation of a South Asian Free

Trade Agreement (SAFTA) by 2000.

Political problems again intervened, with India and Pakistan testing nuclear

weapons in 1998, followed by conflict in Kashmir over Kargil that also led to great

pressure on the two countries by the major powers in view of the danger of conflict

escalation between nuclear armed rivals. After several years of negotiations that began

in 2002, SAFTA was implemented in July 2006, and is slated to take full effect by 2013

for its developed members and 2016 for less developed ones (Weerakoon 2010).

In terms of actor scope, there are few prospects for expanding SAFTA beyond

its current eight members, as the gegraphical focus remains on South Asia. There have

been efforts to expand its issue scope to encompass services and investment, but to

this day, most countries have a significant number of exceptions even in manufacturing

and agriculture. The agreement remains relatively underinstitutionalized, with

consensus-based decision making. In terms of intra-regional trade, little has changed.

Currently, SAARC members only make up 4.31% of trade in the region and this figure

has been growing at only a 2% rate on average over the last two decades (De 2011).

Currently, India appears to have little interest in making SAFTA the center of its

trade efforts. Instead, it has increasingly focused on the negotiation of bilateral trade

22

agreements with extra-regional countries in an effort to boost its trade presence in the

global economy in light of the stalled Doha Round of the WTO as well as RCEP

negotiations.

V. Conclusion

One of the most striking features of Asia-Pacific institutional design is the departure

over the past ten years from multilateralism toward a multidimensional trade strategy

focusing on bilateral FTAs on the one hand, and minilateral economic forums such as

ASEAN plus 3 and 6 on the other. Asian countries’ interest in a multidimensional trade

strategy reflects the growing demand for an insurance policy to liberalize trade beyond

goods and services. The new preferences for bilateralism and minilateralism in Asia

have been driven by their top political and bureaucratic elites, while other non-state

groups play a less significant role in institutional design at the external level. Although

the Asian countries’ pursuit of bilateralism and minilateralism does not necessarily mean

that they downplay the significance of the multilateral trading system, the policy

departure is obvious and important.

To understand the evolution of institutions, we presented an institutional

bargaining game. Based on some change in the external environment which may

generate externalities or affect the provision of various types of goods, actors respond

to this change through negotiations in an initial bargaining game. Their interests and

choices will be affected both by what I have termed their individual situations as well as

the presence or absence of institutions.

23

Subsequently, depending on the payoffs to actors generated by their interactions,

actors may respond to poor payoffs in the initial bargaining game possibly through

institutional innovation and the use of linkages. The central objective of this discussion

is to consider the nesting versus horizontal placement of institutions as well as the

dimension of substantive (knowledge) versus tactical (power) linkages.

As illustrated, an institutional bargaining game can be applied to look at ASEAN,

APEC, ASEAN plus 3 and 6, SAARC, and SCO. The U.S. has been focusing on TPP,

whereas China prefers to work through RCEP, although both countries have informally

discussed joining both accords.

As a tangle of regional and transregional institutions compete for attention and

resources, and as long as the ASEAN plus 6, TPP, APEC and other fora continue to

coexist, there is a danger of creating overlapping and possibly dysfunctional trade

groupings that do little to the noodle bowl of bilateral FTAs that have marked trade

negotiations over the last decade. At the core of effective Asian integration lies a close

and cooperative Sino-Japanese relationship, particularly during a time when the role of

the U.S. as a hegemonic broker between the two regional giants continues to wane. In

theory, the larger membership may expand both the security and economic interest of

the members. In practice, however, a consequent dilution of common purpose has

served no members thus far.

The essentially unresolved membership issues and the relationship of competing

minilateral forums indicate divergent views on China’s regional role and complex

economic-security implications for its neighbors. Given the prospective demographic

and economic distribution of power within the region, China’s neighboring countries

24

have strong incentives to bind extra-regional powers to East Asia. As such, many in the

region recognize that U.S. engagement is critical to this goal because no other country

or combination of countries can balance a growing China. The continuing importance of

the U.S. as a provider of security, as well as a vital economic partner in East Asia

underscores the defining feature of future East Asian regionalism, namely its

‘porousness’ (Katzenstein 2005, 21-30). However, the road towards U.S-led trans-

Pacific regionalism is likely to be a bumpy one. China has not taken a direct stand on

this issue, although generally expressing skepticism about U.S. intentions with TPP.

Also, as noted, for the U.S., an accord that promotes complete free trade with China

would be a political non-starter.

To conclude, the extent to which these trade-focused institutions will achieve

some type of nested arrangement or horizontal division of labor remains an open

question. How institutions will evolve in this light and how countries will maneuver to

achieve their goals will be a function of domestic and international politics, rather than a

matter of optimal economic trading zones.

25

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28

Table 1: Asia’s share of global trade (1980-2010) $ million

Year World Total Trade Intra-Asian Trade Asian Total Trade Asia/

World

Intra-Asia/Asia

Total Export Import Subtotal Export Import Subtotal Export Import Subtotal

1980 1,833,390 1,919,630 3,753,020 88,620 81,464 170,084 270,827 295,090 565,917 15% 30%

1981 1,915,660 2,001,680 3,917,340 89,450 87,732 177,182 302,326 313,923 616,249 16% 29%

1982 1,775,990 1,864,560 3,640,550 94,214 87,528 181,743 287,276 299,971 587,246 16% 31%

1983 1,730,570 1,809,020 3,539,590 98,221 87,968 186,190 300,875 299,352 600,228 17% 31%

1984 1,837,740 1,921,700 3,759,440 108,313 102,891 211,204 344,637 322,231 666,868 18% 32%

1985 1,875,890 1,976,560 3,852,450 118,313 101,082 219,395 351,167 327,341 678,507 18% 32%

1986 2,044,940 2,148,130 4,193,070 132,260 105,911 238,172 395,098 328,416 723,514 17% 33%

1987 2,417,600 2,510,620 4,928,220 167,399 142,105 309,504 468,566 393,885 862,451 18% 36%

1988 2,764,710 2,875,950 5,640,660 212,059 193,433 405,492 563,144 497,385 1,060,529 19% 38%

1989 2,987,440 3,111,150 6,098,590 236,229 244,096 480,325 609,308 563,733 1,173,041 19% 41%

1990 3,383,220 3,517,430 6,900,650 264,425 262,797 527,222 669,478 643,669 1,313,147 19% 40%

1991 3,494,030 3,635,730 7,129,760 305,763 283,121 588,884 751,580 702,475 1,454,055 20% 40%

1992 3,748,580 3,894,730 7,643,310 365,441 331,463 696,905 842,085 764,498 1,606,583 21% 43%

1993 3,723,390 3,796,130 7,519,520 434,330 377,503 811,833 921,985 844,584 1,766,568 23% 46%

1994 4,258,080 4,320,900 8,578,980 529,373 448,154 977,527 1,070,634 987,075 2,057,709 24% 48%

1995 5,083,240 5,145,810 10,229,050 648,885 539,229 1,188,114 1,269,801 1,223,870 2,493,671 24% 48%

1996 5,304,970 5,390,610 10,695,580 658,241 566,995 1,225,235 1,277,370 1,289,406 2,566,776 24% 48%

1997 5,530,010 5,598,080 11,128,090 665,857 595,664 1,261,521 1,340,474 1,291,298 2,631,772 24% 48%

1998 5,399,980 5,525,790 10,925,770 445,280 459,308 904,588 1,271,513 1,055,584 2,327,097 21% 39%

1999 5,666,850 5,821,370 11,488,220 472,887 488,406 961,293 1,356,031 1,159,213 2,515,244 22% 38%

2000 6,388,300 6,593,690 12,981,990 575,671 602,108 1,177,779 1,609,546 1,437,304 3,046,850 23% 39%

2001 6,137,690 6,367,160 12,504,850 536,456 566,183 1,102,640 1,477,562 1,363,047 2,840,609 23% 39%

2002 6,432,120 6,613,930 13,046,050 592,993 593,984 1,186,977 1,598,093 1,446,247 3,044,340 23% 39%

2003 7,517,020 7,728,390 15,245,410 725,430 688,439 1,413,869 1,907,493 1,727,384 3,634,877 24% 39%

2004 9,130,310 9,457,040 18,587,350 887,974 835,510 1,723,484 2,375,416 2,176,587 4,552,002 24% 38%

2005 10,396,600 10,781,800 21,178,400 1,007,782 949,947 1,957,729 2,750,355 2,542,647 5,293,002 25% 37%

2006 12,017,200 12,388,000 24,405,200 1,142,755 1,083,707 2,226,462 3,229,827 2,964,858 6,194,686 25% 36%

2007 13,880,600 14,301,500 28,182,100 1,313,584 1,215,123 2,528,707 3,760,393 3,431,171 7,191,563 26% 35%

2008 16,021,700 16,505,500 32,527,200 1,476,250 1,355,985 2,832,235 4,283,511 4,105,113 8,388,624 26% 34%

2009 12,353,100 12,693,400 25,046,500 1,281,729 1,130,252 2,411,980 3,543,350 3,352,147 6,895,497 28% 35%

2010 14,908,100 15,336,700 30,244,800 1,677,105 1,452,004 3,129,110 4,593,612 4,409,869 9,003,481 30% 35%

Source: International Monetary Fund (2012), Direction of Trade Statistics Yearbook (CD-ROM), Washington, D.C.: International Monetary Fund.

29

Table 2: Asia’s trade with the U.S. (1980, 2000, 2010) US$ million

1980 2000 2010

Exports Imports Exports Imports Exports Imports

Afghanistan 11 7 11 3 2,152 87

Bangladesh 292 100 240 2,529 577 4,541

Brunei 70 293 145 408 124 13

Cambodia 26 - 30 861 154 2,402

Hong Kong 2,688 5,029 14,567 11,861 26,569 4,450

China 3,755 1,164 15,964 106,215 91,878 382,983

India 1,689 1,210 3,653 11,034 19,223 30,707

Indonesia 1,545 5,539 2,479 11,097 6,943 17,392

Japan 20,790 32,973 64,538 149,520 60,545 123,556

Kazakhstan 127 420 737 1,935

Korea (South) 4,685 4,433 27,338 40,911 38,844 50,592

Kyrgyz 23 2 78 4

Laos 0 1 4 10 12 62

Malaysia 1,337 2,688 10,830 25,990 13,982 26,628

Mongolia - 2 17 121 115 13

Myanmar 29 9 17 487 10 -

Nepal 12 6 27 242 28 66

Pakistan 642 140 467 2,300 1,900 3,728

Philippines 1,999 1,913 8,677 14,216 7,376 8,303

Singapore 3,033 1,985 17,497 19,630 29,150 17,747

Sri Lanka 62 140 209 2,123 178 1,831

Tajikistan 14 12 57 1

Thailand 1,263 866 6,538 17,161 8,974 23,617

Turkmenistan 72 29 40 51

Uzbekistan 166 37 101 69

Vietnam 1 - 347 860 3,710 15,888

Subtotal 43,929 58,498 173,996 418,081 313,458 716,666 Asia Total 270,827 295,090 1,609,546 1,437,304 4,593,612 4,409,869

Share of the trade with the U.S. in Asia

Total

16% 20% 11% 29% 7% 16%

18% 19% 11%

Source: International Monetary Fund (2012), Direction of Trade Statistics Yearbook (CD-ROM), Washington, D.C.: International Monetary Fund.

30

Table 3: Evolution of Trade Agreements in Asia

Pre- and 1970s 1980s 1990s 2000s

GATT (1947) (ASEAN)* (1967)

GATT ASEAN APEC (1989) ANZCERTA (1983) SAARC (1985)

WTO (1994) ASEAN APEC ANZCERTA ASEAN/AFTA (1991) ASEM (1996) ASEAN plus 3 (1998) SAPTA (1995)

WTO ASEAN APEC ANZCERTA ASEAN/AFTA ASEM Shanghai Cooperation

Organization (2001) ASEAN plus 3 SAFTA (2006) Japan-Singapore FTA

(2001) Other bilateral FTAs

(2001- ) ASEAN plus 6 (2005)--

RCEP P4 (2006) and TPP

(2008) EAC (2009) ASEAN plus 8 (2010)

Notes: *While ASEAN was established in 1967, it did not actively focus on trade until later. ** SAPTA and SAFTA refer to the South Asian Preferential Trade Agreement and South Asian Free Trade Agreement. These accords have not yet resulted in complete free trade as all countries have large negative lists that exclude sensitive products and political relations have impeded intra-regional trade.

31

Figure 1: Asian countries’ trade with China (1980-2010)

Figure 2a: ASEAN GEOGRAPHY

INSTITUTIONALIZATION

NATURE

ISSUE SCOPEACTOR SCOPE

SIZE OFPARTNERS

Bilateral – Minilateral – Multilateral

Small – Mixed – LargeProtectionist – Liberal

Narrow – Broad

Low-High

RTR – TRR – No Sequence

i Origin corresponds to zero, but all scales will begin at the first tick mark for presentational purposes.

1

Figure 2b: ASEAN + 6 or RCEP (proposed)

INSTITUTIONALIZATIO

GEOGRAPHY

INSTITUTIONALIZATION

NATURE

ISSUE SCOPEACTOR SCOPE

SIZE OFPARTNERS

Bilateral – Minilateral – Multilateral

Small – Mixed – LargeProtectionist – Liberal

Narrow – Broad

Low – High

RTR – TRR – No Sequence

i Origin corresponds to zero, but all scales will begin at the first tick mark for presentational purposes.

2

Figure 2c:

APEC 1989

vs. APEC 2013

GEOGRAPHY

INSTITUTIONALIZATION

NATURE

ISSUE SCOPE

ACTOR SCOPE

SIZE OF PARTNERS

Bilateral – Minilateral – Multilateral

Small – Mixed – Large Protectionist – Liberal

Narrow – Broad

Low – High

RTR – TRR – No Sequence

APEC 1989

APEC 2013

3

Figure 2d:

TPP (prospective)

GEOGRAPHY

INSTITUTIONALIZATION

NATURE

ISSUE SCOPEACTOR SCOPE

SIZE OFPARTNERS

Bilateral –Minilateral –Multilateral

Small – Mixed –Large

Protectionist –Liberal

Narrow – Broad

Low – High

RegionalTransregional, TRR – No Sequence

4

Different national reactions based on capabilities, domestic coalitions, and beliefs

From changesin interactions,leads to call for institutionalchange

Figure 3: The Institutional Bargaining Game

GOODS:

Externalities andgoods ( public, CPR, patented,

and private)

EXISTING INSTITUTION

Modify existing institution

Institutionalcharacteristicschoices

Create newinstitution

Develop new ormodify existingInstitution oragreements

•Actor scope•Geography•Partner size•Issue scope•Nature•Strength

•Number of accords

•Sequencing of agreements

Countryspecificchoices

Impetus Institutions and goods

Individual situations

Institutional reconciliation

Adapted from Aggarwal, 1998.