European and American Regionalism: Effects on and Options for Asia

This paper addresses several questions of concern to economies excluded from the world's two major trading blocs the European Union (EU) and the North American Free Trade Association (NAFTA). First, is there evidence from the past that suggests the direct and indirect effects of regional integration agreements (RIAs) on trade and investment have been income-reducing for economies not included? Many would answer `yes', and some cite the increasing regionalization of world trade to support that view. We suggest that this conclusion is probably unwarranted. It is true that the share of world trade that is intra-regional has been increasing, but the proportion of GDP traded has also increased sufficiently rapidly for there also to be growth in trade with other regions, and in the share of GDP traded extra-regionally. Would enlargement of NAFTA and EU membership contribute to, or slow this past trend for increasing economic integration across regions as well as within regions. Not all the signs are positive and the net effect may indeed be negative, but the paper argues that on balance the concerns of excluded economies relating to trade and investment diversion are probably exaggerated. A broader systemic question that is more worrying for non-included small open economies is whether or not the proliferation of RIAs will erode the GATT rules-based multilateral trading system. We conclude that there is indeed cause for this systemic concern. The paper also considers how Asian and other non-included economies might respond to the economic integration initiatives in North America, Europe and elsewhere.