Asia-Pacific economic cooperation: Structure of a common economic region

Asia-Pacific Economic Cooperation: Structure of a Common Economic Region M. DUlTA

people only accept change when they are faced with necessity. and only recognize necessity when a crisis is upon fhem-Monnet (1978, p. 105) The post-World War II bipolar economic grouping of the nations of the world into two blocs-the North and the South (rich nations in the Norm and poor ones in the South&can hardly be useful in the post-Cold War decades. The dynamics of the two sets of economic events-one in Europe (one common economic region of European Community), and another in Asia (Japan’s economic achievement plus economic growth in Asia-Pacific economies)-plus the liquidation of hostile political confrontation between the East and the West, warrant a search for a new international economic order. A new multi-polar arrangement of the economies of the world may now replace the North-South bipolar arrangement. A set of continent-based economic regions, relative to a structurai compact, should optimize global economic gains, satisfying the Pareto optimality condition of second best.

I. THE PERSPECTIVE The Cold War that plagued the world ever since World War II concluded has now come to an end. In the process, the two international arrangements that have dominated the political and economic dialogues over the past several decades have come to outlive their usefulness. The two super powers had their respective allies and nuclear arsenals in the two political clubs-the East and the West. At the summit meeting of the North Atlantic Treaty Organization (NATO) in June 1990 in London we happily witnessed the celebration of its total reordering. A new view of Europe from “the Atlantic to the Urals” is becoming increasingly real. The post-World War II bipolar economic grouping of the nations of the world into two blocs-the North and the South, that is, rich nations in the North and poor ones in the South-can hardly be useful in the post-Cold War decades. Historically, it did serve M. Dutta

. Professor of Economics, Rutgers University, New Bmnswick, NJ 089.53-5055.

Journal ofAsian Economics, ISSN: 1049-0078

Vol. 3, No. 1,1992, pp. I-27.

Copyright 0 1992 by JAI Press, Inc. Al1 rights of reproduction in any form reserved.

1

2

JOURNAL OF ASIAN ECONOMICS,

(3)1,1992

its purpose but it can no longer be an optimum framework for studies in international economics in the 1990s and beyond. If in 1957 the Treaty of Rome was seen as a feeble expression of Jean Monnet’s (Monnet, 1978) intellectual one-Europe concept, the European Community (EC) got a new momentum by the signing of the Single European Act in 1985, and in the 1990s the one-currency based EC is fast approaching a new realism. The other overriding economic fact is the industrialization of selected countries in Asia. Japan has for some years been an economic superpower, and has been a member of the North bloc. The fact, however, is that Japan is in Asia. Add to this the fast growing economies of the “new Japans” in East Asia-Korea, Taiwan, Hong Kong, and Singapore, and a new Asian economic awareness has become a reality. The prospect for rapid industrialization in the rest of Asia-ASEAN economies, India and the SAARC, and China-has been the subject of research by many. Asian industrialization, and structural changes in Asian economies, have recently been subject of much discussion (Dutta, 1985, 1987, 1988; Dutta and Tantum, 1988; Bradford and Branson, 1987). Australia and New Zealand have also taken their firm places in the Asia-Pacific economic community. The dynamics of the two sets of economic events-one in Europe, with the emergence of a single economic region, the EC, and another in Asia, with Japan’s economic achievement plus economic growth in Asia-Pacific economies-in the context of liquidation of hostile political confrontation between the East and the West, warrants a search for a new international economic order. A new multipolar arrangement of world economies may now replace the North-South bipolar arrangement (Dutta, 1987, 1990). Linder (1986) notes the emergence of the Pacific century and presents an AsiaPacific economic profile, comprising of the western regions of Canada and the United States, Japan, Asia’s newly industrialized economies (NIEs), plus China, ASEAN, Papua New Guinea, Australia, and New Zealand. He, however, limits his treatise on the Pacific economies by excluding China “because of the different economic system obtaining there,” as well as India and other South Asian economies. Given the historical progression of the Industrial Revolution and the economic potential of the megatechnologies of our time, the exclusivity of nation-state based economies merits reexamination. First, the scale of production has grown larger and larger, and it will grow even larger, as the full potentials of new technologies progressively broaden production frontiers of competing economies. Second, the world financial market has been electronically integrated in an unprecedented way. Third, given the superspeed communication modes, flows of capital, human and physical, have become truly global, contributing to the emergence of a new paradigm of industrialization, based on the concept of adaptive innovation. Fourth, with an increasing awareness of the new economic parameters of environment such as acid rain or global warming, the isolated nation-state based economy, even if it is as large as China or India (population), Canada or Soviet Union (land mass), United States, Japan or Germany (GDP), is fast becoming anachronistic.

Asia-Pacific Economic Cooperation

3

As the one-currency based European Economic Community inaugurates itself in the 199Os, the new order of regionalization will certainly replace the present ad hoc arrangement of the seven industrialized nations (G-7). The four European membersGermany, France, Italy, and England-will have become members of the EC, with its common currency (Ecu). The United States and Canada, the two members of the G-7 from North American regional entity, will have their own currency as their two dollars continue to relate to each other via a free float in the market. The seventh member of the G-7, Japan, will then emerge as the principal actor in Asia-Pacific economic region. However, the case has been made that the G-7 should now become the G-3 (Dobson, 1991; Dutta, 1990). The former Prime Minister of United Kingdom in the G-7 Economic Summit statement in Houston (July 1990) straightforwardly referred to the three regional economic power centers based on the DM, US$, and Y, respectively. Kojima (1990, pp. 19-34) makes an imaginative proposal that these three currencies plus gold be made the basis of a new international monetary system. One ventures to suggest that uniting “sovereign” nation-states in a regional economic union with one “key” currency for the region will be the new international economic order. Of course, the three strong currency economies will have to be able to make sure that they win and continue to enjoy the basic confidence of the member economies of their respective regions. At the same time each member economy must fulfil its responsibility to keep its vigil in an institutional form over the intraregional monetary management of its region. The issue is one of rational management of the region’s economy and its monetary system by a duly structured regional authority. Member “sovereign” states in the regional union will be free to engage in a two-track competition-intraregion and interregion. The choice of remaining “delinked’ is hardly a choice for an individual nation-state economy and an act of “de-linking” by itself does not ensure sound economic management and growth. The 25th anniversary symposium of the OECD Development Center in Paris in 1988 provided a forum for the debate on “One World or Several.” Noting that the new era will be one of “a growing impotence of purely national decision-making,” Louis Emmerij (1989, p. 25) spoke for “increasing economic globalization combined with growing multipolarity.” Okita (1989) at the same forum emphasized, “Globalism and regionalism are the two main currents in the world today” (p. 41). One can further argue that the regional grouping of economies of the world in the past was limited by considerations of defense strategies and security parameters, as dictated by the prevailing Cold War situation. It will now be very natural to look at the map of the world as is, and find the continents of (a) Europe, “from the Atlantic to the Urals”; (b) Asia, inclusive of China, India and South Asia, the Pacific Islands, Australia, and New Zealand; (c) Africa from its northern rim to the southern cape; and (d) the Americas, North and South. Specific regional affiliation of the former Soviet Union and East European countries, and of the countries in the Middle East shall remain to emerge over time. This continent-based regionalism may be constrained by subregional conflicts

4

JOURNAL OF ASIAN ECONOMICS, (3)1,1992

and/or other considerations. But the invi~~on to accept the continent region~ization should be general and should remain open for those countries who for one or another reason may fail to join a given regional market at its inception. Progressiveregionalization in Europe and the EC is one model. The principle of inclusion, not exclusion, will be the key to the success of the new order of continent-based regionalization. Each region should be a compact, defined as naturally as possible. China with its “different economic system” can and must coexist in the Asian Economic Community. Simultaneous admission of both China and Taiwan to the Pacific Economic Cooperation Conference (PECC) membership is a point to take note of in support of “intemational economic pluralism” (Drysdale, 1988). Similarly, for India and other South Asian countries, their belonging to Asia is a fact. With its rich endowment of human capital and their science and technology base, Walt Rostow (1985, p. 286) identifies India as a country ready “to bring about the partnership of scientists, engineers and entrepreneurs, the absorption of the Fourth Industrial Revolution requires.” It is instructive to note that at successive stages, Portugal, Spain, Italy, and Greece, once considered weaker sisters of Southern Europe, became full and effective members of the EC. The policy of “associate membership” for specific economies in a given economic region merits attention. One can be hopeful that, following the melting of superpower Cold War, before long one should be able to reidentify North Korea, Mongolia, Vietnam, Cambodia, Laos, and Myanmar on the map of Asia. Indeed, geographically belonging of these economies to the APEC regime can easily be appreciated. A.

Emerging American Hemispheric Economic Regionalization

For the Americas, the free trade pact between Canada and the United States may have initiated a historic process. On June 27,199O President Bush spoke for a free trade zone for the Americas-the North and the South. No longer intimidated by the “big brother” from its northern border, Mexico has sought to be a member of the free trade pact, and heads of governments of several South American nations have welcomed the Bush-i~tiative. The debate on North American Free Trade Area (NAFTA) has become substantive. One-currency based economic community of the Americas will be a natural corollary of the one-currency based EC. Indeed, the U.S. dollar, which has a free float with the Canadian dollar, has historically been the principal international currency for the Americas. Following the EC model, where the Ecu is the creative term for its common currency, centered on the German mark, in the Americas, the U.S. dollar may become the core of a Pan-American monetary system. There will soon be a well-structured Asian money (AM) anchored to the Japanese yen. The G-3 will have its natural birth.

5

Asia-Pacific Economic Cooperafion

II.

AN ECONOMIC CO~~UN~Y

IN ASIA-PACIFIC SCION

The concept of an economic community in the Asia-Pacific Region is not new and it has progressed in two historical phases (Drysdale, 1988, pp. 209-222, esp. fns. 42 and 45, pp. 224-225). Indeed, the concept seems to have its root in proposals for a counterregional economic grouping to the European economic union as it began to unfold after the signing of the Treaty of Rome on March 25, 1957. Economic rationale of the discussion continued to remain limited in this U.S-Pacific response to face the emerging threat of a “fortress Europe.” A.

Phase I: OPTAI)

The first two plans, using the acronym OPTAD, came from Kojima and Drysdale (Kojima, 1968). Kojima used the term for Organization for Pacific Trade and Development while Drysdale referred to Organization for Pacific Trade, Aid and Development. A series of Pacific Trade and Development Conferences (16 or more), beginning with the first one in Tokyo in January 1968, became a regular feature. In the 197Os, this concept of regionalism continued to receive growing attention in official circles both ‘inJapan and the United States. In July 1978, Drysdale and Patrick coauthored a position paper for the U.S. Congress (U.S. Congressional Research Service, 1979) discussing the economic ~gument for the Organization. During this period diverse subregional groupings in Northeast Asia, Southeast Asia (ASEAN in 1967) and New Zealand-Australia Free Trade Area (1965) also came into existence. B.

Phase II: PECWAPEC

A new Asia-Pacific Regional expression, the Pacific Economic Cooperation Conference (PECC) was an output of the Canberra seminar on the Pacific community in September 1980. The PECC now consists of 15 countries as full members-the six ASEAN economies, five Pacific industry coun~es (Australia, Canada, Japan, New Zealand, and United States}, South Korea, the Pacific Island countries, and China and Taiwan (both admitted to full participation at the fifth session of the PECC in Vancouver in 1986)-and is a new reality in the 1980s of an organized expression of Asia-Pacific economic regionalism. If the PECC was a nongovernmental forum, in 1989, the Asia-Pacific Economic Cooperation (APEC) became its elevation to an official standing at the “ministerial level” with provisions for regular intergovernmental meetings at the level of foreign ministers (not heads of governments as in the G-7). Following the successful initiative to include China, Taiwan, and Hong Kong in its membership at its meeting in November 1991, the APEC will have the full membership of PECC.

6

C.

JOURNAL OF ASIAN ECONOMICS, (3)1,1992

Japan and the United States in the Asia-Pacific Region

Both Japan and the United States are members of the Pacific economic community. Japan’s leading role in the Asian economic regimes is evident. Saburo Okita (1989, pp. 45-46) presents an outline of Japan’s multistage initiative in this regard. Referring to when Japan introduced its third stage around 1965: Economic co-operation agreements were concluded with Taiwan and the Republic of Korea . . . active part in the establishment of the Asian Development Bank. . . . The emphasis was clearly on development assistance for East and Southeast Asia. . . . Most of Japan’s assistance has gone to the Asian countries especially the ASEAN. Approximately 70% of Japan’s total disbursements went to Asia, including China and India, while Africa, Latin America and the Middle East received roughly 10% of the total each. . . . Considering Japan’s close relations with the other Asian countries and Japan’s responsibility to contribute to the economic stability of this region with its huge population and immense development needs, Asia will continue to receive the lion’s share of Japanese Official Development Assistance [ODA] (PP. 46-47).

Nowever, he reminds his readers that as an economic superpower, Japan will assume its share of responsibility in terms of economic assistance to the economies in other continents. His focus is to outline the Japanese official approach to the Asian economic community. Recent studies indicate that Japan has emerged as the dominant source of foreign capital in East Asia and the Pacific. Around 43 percent of all Japan’s capital exports to developing countries went to East Asia at the beginning of the 1980s. For the United States the figure was just over 12 percent. . . . The concentration of Japanese direct foreign investment within East Asia is exceptionally marked: East Asia ranks with North America as an outlet for Japanese direct foreign investment, each accounting forjust under 28 percent of all Japan’s direct foreign investment (Drysdale, 1988, pp. 191-192).

Japan’s development assistance and direct foreign investment have progressively extended to India and SAARC countries. The U.S. role in the Pacific economies recently came to a new focus as it crossed “a milestone” in 198 1, when the United States for the first time in its history did more trade on the trans-Pacific routes than on the trans-Atlantic (Dutta, 1987, pp. 93-100; especially Table 1). In 1981, U.S. trade with Europe was $115.1 billion as against its trade with Asia-Pacific, totaling $131.4 billion. In 1980, the Asia-Pacific total came to $117.4 billion, compared with the European total of $119.0 billion. The gap in favor of the Asia-Pacific trade continues to widen. The United States is a Pacific economy and its interaction with the Asia-Pacific market continues to grow (Dutta, 1990). Given its share of economic interaction across both the oceans, the United States is indeed at once an Atlantic and a Pacific economy. Its continental economy is robust and it is a market of great magnitude by any statistical measure.

Asia-Pacific Economic Cooperation

7

Lorenz (1991) notes “the USA appears to be pursuing a strategy facing in both directions at once Canada/Mexico plus East Asia/Pacific.” Some European economists may indeed wonder if the United States will join a U.S.-Pacific bloc, vis-g-vis the EC, effectively in a bipolar economic order, or a vertical hemispheric economic regionalization of the Americas (NAFTA), in a multipolar world economy. From an Asia-Pacific perspective, Park (1989) states, In 1987, the total volume of Pacific Basin exports to the U.S. was larger than the total value of the intra-regional trade in Pacific Asia. Japan purchased less than 10% of the total manufactured exports of the East Asian NIEs, ASEAN and China, while the United States absorbed more than 30%. U.S. imports from all of East Asian NIEs, ASEAN and China in 1987 . . . six times as large as the Japanese imports from these countries. . . . It is simply unrealistic to expect Japan to grow into an export market for other Pacific Asian economies large enough to supplant U.S. market in the near future, no matter what it does to transform its economic policies and lifestyle (p. 86).

Based on an extensive empirical study, comparing Japan’s exports of machinery and capital goods to a set of its neighboring economies and its imports of manufactured goods from them, Shinohara (1987, pp. 23-28) concludes that Japan has acted as “a growth pole” from the supply-side, not from the demand-side. Balassa (1987, pp. 49-68) reports a parallel finding to point to Japan’s limited imports of manufactures from developing countries. The role of the United States in absorbing exports from the Asia-Pacific economies, especially the NIEs and Japan, is the principal thesis. Gray (1989) examines the role of the United States as a “locomotive” economy. Klein (1990) reviews the Asia-Pacific perspective and questions if export-led growth can continue indefinitely. Certainly, any form of American hemispheric economic regionalization cannot be allowed to result in the closing of United States market to the East Asian NIEs or to any other economies/regions in a new international economic order, committed to the principle of “regionalism and globalism.” The United States is an open economy, and the scale of its economy, especially its consumer market ($3 Trillion plus of a $5 Trillion plus GNP in recent years), has been an attractive market for all continents. To study the United States as a Pacific economy is in no way to suggest that the Pacific economies will be closed to other continent-based regional blocs. In the Asia-Pacific Region, Japan, South Korea, and Taiwan have earned trade surpluses and have been exporting capital. Japan has greatly expanded its direct foreign investment (see Kojima, 1978, 1990). For the United States, its unipolar supremacy in the post-World War II global economic system has long ceased to exist.

D. Four Alternative Economic Regionalization Plans for Asia-Pacific Economies Four alternative regimes of Asia-Pacific economic regionalism, three as discussed above plus one, are:

JOURNAL OF ASIAN ECONOMICS, (3)1,1992

1. a compact of the five Pacific industrial economies---&e United States, Canada, Japan, Australia, and New Zealand-very much the OPTAD regime; 2. the Linder PACIFIC economy consisting of western states of the United States and western Canada, and Japan and the Pacific Basin; 3. the PECC regime of 15 full members in the Asia-Pacific Region, and its elevation to the APEC regime; and 4. yet another regime: if we look at the world from the North Pole, it is clear that there is a natural basis for an exposition of “regionalism and globalism.” It suggests that a common economic region should be a compact of “deep” integra~on, related to a given regional economic s~ct~e, rather than a pact based on a consideration for “strategic optimization,” when strategic rather than economic factors are allowed to be prime motivating factors for the fo~ation of an economic bloc.

III.

A.

ECONOMIC REGIONALISM AND THE EUROPEAN COMMUNITY: A NEW PARADIGM Beyond a Customs Union/a Free Trade Area

Jacob Viner’s pioneering work, Tire Customs ~~~~~ (1950), remains the classic treatise for discourses on economic regionalization. Removal of trade barriers, Viner argued, would add to the flow of trade among trading countries. In addition, free flow of trade would cont~bute to com~titive price mtionali%atio~ in all trading economies, much to the gain of consumers in all countries. No economic principle ever works without qualification. The question has been raised if Viner failed to adjust his simple model of customs union for “trade diversion” (Schott, 1989, pp. l-50), and/or for “trade repression” (Park and Yoo, 1989, pp. 14344). Notwiths~~ng the fact that a customs union and a free trade area are not identical expressions of regional grouping, Viner’s thesis on customs union has become the economic rationale for “Free Trade Areas (ITAs)” and its critiques question whether FIAs are basically superior to GATT (Wonnacott and Lutz, 1989), excepting the fact that the pace of negotiation in a FIA may be relatively fast, as it generally involves “like-ended’ ~oples/coun~es (Canada-U.S. PTA and U.S.-Israel FTA). A bilateral FTA, irrespective of the fact of “likemindedness” of the two parties to the agreement, is certainly not comparable to GATT negotiations where negotiations among its 96 members have been known to be painfully slow. Illuminating discourses on bilateral FIAs, U.S.-Japan (Makoto Kuroda), U.S.-Korea (Park and Yoo), U.S.Taiwan (Tsiang), U.S.-ASEAN (Ariff), U.S.-Mexico (Trigueros), U.S.-Australia (Snape), a Pacific FTA (Drysdale & G~aut~, point to the limited, if not dubious, merit of FTAs (Schott, 1989). Bilateral FI’As can work only in very exceptional situations. Others have made a strong case for GATT and multilateral trade negotiations under

Asia-PacificEconomicCooperation

9

GATT, should it ever be able to conclude its successive negotiating rounds (Krause, 1987). Currently, the United States is signatory to two FI’As and a brief comment on each of them is in order. First, the U.S.-Israel FTA (Rosen in Schott, 1989), signed in April 1985, “within the context of historically strong political, military, and economic ties between the United States and Israel,” was implemented on September 1, 1985. It calls for removal of all tariffs and most other forms of trade barriers between the two trading partners in 10 years. Rosen gives “high marks” to the performance to date of U.S.-Israel FTA, “a product of the special relationship” between the two countries. Second, U.S.-Canada mA (Lipsey and Smith in Schott 1989), effective early 1989, also calls for “a complete removal” of all tariffs and most nontariff trade barriers between Canada and the United States in a lo-year period. Lipsey and Smith note this special case, especially when GATT negotiations continue to remain held up. As noted earlier, a call for Canada-U.S.-Mexico FTA is progressing on a “fast track” toward the institutionalization of the North American FreeTrade Area (NAFTA) and it may set the pace for an American hemispheric economic union. B.

The Paradigm of European Regionalization

Reviewed

Economic regionalization in Western Europe cannot be studied within the Viner customs union paradigm. The European Community (EC) goes far beyond a customs union/a free trade area (European Commission, 1989, 1990). Extraeconomic issues, sociopolitical parameters inclusive of war and peace, noted to be important, shall, however, remain beyond the scope of the present study. It is indeed a paradigm of its own. Jean Monnet (1978) said it best: “We are not forming coalitions between States, but union among people.” In March 197 1, following the Werner Report in 1970, the EC member-states expressed “their political will to establish an economic and monetary union.” In 1979 the process of monetary integration was renewed with the creation of the European Monetary System (EMS) and the European Currency Unit (Ecu). The goal is the creation of a zone of increasing monetary stability with provisions for multilateral surveillance within the EC. It is a “minilateral,” intraregional, supranational monetary system with the Deutschmark as the anchor currency for participants’ monetary and intervention policies. It goes far beyond the concept of a region-based International Monetary Fund (IMF). At the center of the EMS is the Ecu, a reserve asset and a means of settlementfor EMS central banks (European Commission, 1989, 1990). The EMS, however, continues to function with its limitations, at least for three reasons the Commission Report (1990) adds: First, several EC countries have not yet joined the exchange rate mechanism and one member country enjoys the privilege of wider fluctuation margins. Second, absence of a higher order of convergence of fiscal policies remain a problem on the monetary policy toward exchange rate stabilization. Third, transition of the EMS to the European Monetary Union (EMU), the goal set in

JOURNAL OF ASIAN ECONOMICS,

10

(3)1,1!992

1978, remains to be completed (see also Lamfalussy, 1989; Ungerer et al., 1986; Allen, 1990). Adoption of the Single European Act of 1985 marked the first major revision of the Treaty of Rome (1957). It introduced four important changes: l

l

l

l

First, it greatly simplified the requirements of harmonizing national laws by limiting harmonization to the essential standards and by systematic adoption of mutual recognition of national norms and regulations. Second, it established a faster and more efficient decision-making process by extending the scope of qualified majority voting. Third, it gave the European Parliament a greater role in the legislative process. Fourth, it reaffirmed the need to strengthen EC’s economic and social cohesion.

Over the last three years, the Report (1989) continues, considerable progress has been made insofar as implementation of the internal market program is concerned. As many as eight member countries fully liberalized capital movements by July 1, 1990. Other EC members will join the process after a specified transition period. As of October 22, 1991, the EC has made substantive progress as its basic membership is in the process of being enlarged from the 12 to 16 member-nations with Sweden, Finland, Austria, and Switzerland joining the Community. Should Norway, Liechtenstein, and Iceland soon become members of the EC, a common economic region of Europe with 380 million people shall extend from the Arctic to the Mediterranean. However, the EC is yet to achieve its final stage of “deep” integration with one common currency and one regional central bank. Acutely aware of its difficulties, the Community continues to press its agenda toward progressive deepening of the process of integration of the members economies. The three necessary conditions for EC’s Monetary Union are stated to be: 1. 2. 3.

the assurance of total and irreversible convertibility of currencies; the complete liberalization of capital transactions and full integration banking and other financial markets; and the elimination of margins of fluctuation and the irrevocable locking exchange rate parities.

of of

The need for a new monetary institution, European System of Central Banks (ESCB), to coordinate the activities of the central banks of the member countries is recognized. The four basic elements of EC’s Economic Union are: 1.

the single market within which persons, goods, services, and capital can move freely;

As~-Pa~~c Economic C~perafion

11

2.

competition policy and other measures aimed at strengthening market mechanisms; 3. common policies aimed at structural change and regional development; and 4. macroeconomic policy coordination, including three binding rules for budgetary policies: A. imposition of effective upper limits on budget deficits of individual member countries in the Community; B. exclusion of access to direct central bank credit and other forms of monetary fin~c~g, while bailing open market o~mtions in gove~ent securities; and C. limiting recourse to external borrowing in non-Community countries. It is difficult to evaluate the ultimate success of European economic regionalization (Hufbauer, 1990). However, those of us who subscribe to a positive view of the EC paradigm remain optimistic. Commenting on the growing generalized trend towards regionalism, Lorenz (1989) rightly states that “if regionalism is understood not as a defensive or aggressive bloc building, as in the thirties, but as a regional grouping that is open towards the world economy, it appears to have something to offer as an alternative to the old intemation~ economic order.” Achievements as of this date encourage many to believe that economic regionalization in Europe is “deep” enough and thus goes far beyond Viner’s custom union or FTAs or any other alternative regionalization profile, based on the concept of “strategic” optimization.

IV.

PARETO OPTIMALITY CONDITION FOR THE ECONOMIC REGIONALISM PARADIGM

Regionalism without globalism, often referred to as “fortress regionalism” is an antithesis for maximizing global output, and therefore for global economic welfare. Each economic region must be fully and wholly open to international economic relations. The interregional free flow of outputs and inputs can and must operate to maximize global economic gains. If a given region can add to its economic gains without diminishing such gains for any otherregion the second best condition for Pareto Optimality will have been achieved. Indeed, based on the trade flow data, the EC has made economic gains for its members by way of augmenting the intraregional trade. At the same time its share of trade with other regions-North America, Asia-Pacific region, Africa, and elsewhere-has continued to increase. The inter-regional trade flows is a con~bution to globalism and adds to global economic welfare. Intra-community gains have not limited EC’s intercommunity economic activities. Of course, economic welfare is hardly a concept for unique measurement.

12

JOURNAL OF ASIAN ECONOMICS, (3)1,1992

V.

ASIA-PACIF’IC ECONOMIC REGIMES

Historical events once dictated economic ties of most Asia-Pacific economies: Korea and Taiwan to Japan; the Philippines to the United States; Indonesia to the Netherlands; Vietnam, Cambodia, and Laos to France; Singapore, Malaysia, Burma, Australia-New Zealand, and India-and-SAARC to the British Raj. World War II signalled the liquidation of the old economic regimes. The new economic era that followed was centered on the U.S. dollar, and then the demand pull of post-World War II U.S. economy sustained the new economic regime of export-led growth that progressed during 1960s through 1980s. Stability of this economic regime was made possible because the United States provided what Kindleberger calls “international public goods” in the form of monetary stability and international security. As early as early 197Os,a free flexible exchange rate, no longer defined by the fixed gold-value based U.S. dollar, came into operation. Automaticity of the operations of the international free market failed to correct the imbalances that continued to plague the stability of the global economic order. In September 1985, a new international regime of currency management by G-5, then G-7, was put in place. A new international economic order appears to be emerging and is likely to be in place in the 1990s. The new order is not anchored to one single currency, as was the ~st-World War II regime to U.S. dollar. Neither is the new order

Asia-Pacific Economic Cooperation

13

able to work with a free float of all currencies in an idealized competitive world economy of member economies of sovereign nation-states whose kings and queens and presidents are too keen to have their HEADS on their respective currencies. The international currency management by what we have called the G-3 may be the core of the new international economic order. We now return to the Asia-Pacific economic regimes. Indeed, there is a strong evidence for an emerging regionalization of the Asia-Pacific economies. Linder (1986) shows how Asia-Pacific economies’ share in world output, world trade (export and import) grew in 1960s and 1970s. The trend continued through the 1980s. Drysdale (1988, pp. 63-64) states three factors-( 1) Japan’s industrial might, (2) economic development of Asian NIEs and ASEAN, and (3) relative economic decline of the role of Western Europe-inviting global focus on Asia-Pacific economies and its regional economic cooperation. The first two factors are universally acknowledged, while the third must be re-read in its positive context. Indeed, economic regionalization in Western Europe is the working paradigm for Asia-Pacific regional economic cooperation. Drysdale studies intraregional Asia-Pacific trade by its disaggregation into two basic components: complementary and biased. Trade complementarity within the Pacific region, based on the theory of comparative advantage, “revealed” or otherwise, is shown to be “twice as large as might be expected from regional trade complementarities and world trade share” (p. 102). Regional trade “bias,” that is, “bias towards trade among the countries within the region” (p. 103) is noted (pp. 85-107, esp. Tables 4.2 and4.8). In the earlier econometric studies of international trade, distance oraproxy variable thereof was often used in specifying trade equations. “Familiarity with trading environments” or “like-mindedness” (Schott, 1988) has been known to be important. This complex factor warrants further investigation. We began this section with a brief reference to historical facts which distorted intraregional trade routes of most Asian economies. Much has been said about the basic homogeneity of member nations of the European Community. Heterogeneity amongst member economies in the Asia-Pacific Region is said to be too pronounced. History has witnessed how homogeneity in the European Community was put to test through the two world wars. There is certainly much to be said about the shared experiences of the horrors of deaths and economic devastation of those fateful wars. If there is now an effort to identify the basic unity of the structure of Europe’s continental economy, it must be welcome. A unique structure of a continental economy is as real for Asia, as it is for Europe and any other continent. Historic progression of the Industrial Revolution may have made sovereign nation-states with independent national currencies suboptimal economic units for the present international economic order. Regionalization in a continental framework may be the key to the economic order of the day. One global economic unit with one currency may still remain the order of tomorrow. Table 1 presents the pattern of trade flows of Asian NIEs and ASEAN in terms of regional distributions. In general, one-fifth to one-third of trade of these countries has

14

JOU~AL

OF ASIAN ECONOMICS, (3)1,1992

TABLE 1. Trade Flows of Asia-Pacific Economies. Export and Import Trade Share retribution United States

Japan

Asia4

ROTW

Korea Export 1970 1989 Import 1970 1989

47.1 33.6

28.2 21.6

4.4 10.9

20.3 33.8

29.4 25.7

41.0 28.6

9.3 11.2

20.3 34.5

Taiwan Export 1970 1989 Import 1970 1989

14.6 13.5

11.5

38.7

13.5

34.5 31.3

23.9 21.5

42.8 29.1

6.9 9.4

23.2 37.2

13.0

38.1

Hong Kong Export 1970 1989 Import 1970 1989

7.1 6.2

40.3

40.6 26.2

23.8 16.6

30*2 57.9

30.1 16.2

7.6 8.6

29.5 31.9

48.0 32.9

10.8

19.4

29.8

17.1

21.4

28.0

34.9 31.6

35.8 25.3 13.2 8.2

Singapore Export 1970 1989 Iinport 1970 1989

11.1 23.3

been with the rest of the world (ROTW). Their major trade is within the Asia-Pacific Region incfusive of United States and Japan. As the ith economy grew over time its share of intraregional trade concurrently expanded. The share of their trade, export phts import, within countries bordering on the Pacific is presented in Table 2. Data on intraregional trade shares of selected Asia-Pacific economies over the 1970-1989 period, in general, present a stable pattern. For Korea and Taiwan intraregional export trade shares remain stable while shares of import trade have declined. The two countries trade share with the United States on both exports and imports have declined. Hong Kong’s share in intraregional trade both exports and imports have greatly increased, while its trade shares with the United States have declined. For the ASEAN economies, intraregional trade shares have generahy grown or have remained reIatively stable, exceptions are export trade shares of Thailand and the

15

As~-Pffc~~c E~no~ic C~per~tion

United States

Japan

Ask4

ROTW

Thailand Export

1970 1989

14.9 21.2

26.6 16.5

24.2 20.8

33.6 39.3

11.6 11.1

34.6 30.7

8.4 24.6

42.6 31.3

Import

1970 1989

Philippines Export 1970 1989 Import 1970 1989

41.6 37.8

40.1 20.4

6.5 13.4

11.3 26.6

29.4 19.1

30.6 19.5

9.3 24.4

25.3 32.6

Indonesia Export 1970 1989 Import 1970 1989

13.0 15.8

40.8 42.2

23.7 20.9

19.0 19.1

17.8 13.5

29.4 23.3

15.7 24.2

34.3 32.8

Malaysia Export 1970 1989 Import

13.0 18.7

18.3 16.0

30.0 38.6

36.0 24.4

1970 1989

8.6 23.0

17.5 32.9

28.3 43.5

39.0 22.8

Now

Asia4 = ASEAN + SAARC + China + NIEs (excludes Japan, ANZ). Figures for Asia4 for Korea and Taiwan does not include China

Philippines.

Other than the Philippines, ASEAN economies have generally gained on their respective trade shares with the United States. The graphic presentation (see Graphs 1-8) of trade shares of Korea, Taiwan, Hong Kong, Singapore, Thailand, the Philippines, Indonesia, and Malaysia is revealing. The top panels illustrate the trade shares of the ith country by five regions: United States, Japan, AUSNZ, Asia4, and ROTW. The bottom panels illustrate the trade shares of the ith country by three regions: Asian NIEs, ASEANS, and SAARC4. In the bottom panels, China’s individual trade share with six countries, other than Korea and Taiwan, is presented. For the ith country, the related group definition for NIEs and/or ASEAN is appropriately corrected. Trade shares of the selected countries with the United States can be compared with

JOURNAL OF ASIAN ECONOMICS, (3)1,1992

TABLE 2.

Korea

Trade Shares in the Asia-Pacific Region = Asia4 + ANZ + JaDan Export Import

Taiwan

Export Import

Hong Kong

Export Import

Singapore

Export Import

Thailand

Export

1970

1989

32.8 (47.1) 5 1.1 (29.4)

34.4 (33.6) 44.0 (25.7)

27.5 (38.1) 52.8 (23.9)

30.0 (38.7) 41.3 (21.5)

23.6 (35.8) 56.6 (13.2)

48.5 (25.3) 75.7( 8.2)

40.9(11.1) 54.3 (10.8)

43.8 (23.3) 51.3 (17.1) 39.4 (21.2) 57.6 (1X.1)

Import

51.5 (14.9) 45.9(11.6)

Philippines

Export Import

47.1 (41.6) 45.2 (29.4)

35.6 (37.8) 48.3 (19.1)

Indonesia

Export Import

68.0 (13.0) 47.9 (17.8)

65.1 (15.8) 53.8 (13.5)

Export import

51.0f13.0) 52.4 ( 8.6)

57.1 (18.7) 82.6 (23.0)

Malaysia

NC&=: Figures in parentheses are.sharesof tradewith the United Stares.

the shares with Japan-Aus-NZ and Asia4. The total US-Pacific trade shares constitute a significant subtotal of their respective shares of total world trade. The three major trade regions would appear visibly dominant, if the trade data of the EC were disaggregated from the ROTW subtotal. If there is an argument for the G-3 concept, the world trade dis~ibutions may lend support to it. The three major trading areas are the United States, Japan and Asia-Pacific Region, and the rest of the world (RGTW), the major trading constituents in the group being the EC and Canada. It is important to restate that the continents of Africa and South America remain beyond the scope of this study. Each region shall remain “open,” and free trade in a competitive global market shall be the order. The concept of “fortress” Europe/Asi~Ame~cas cannot be the framework for the G-3 international exchange rate management. Free trade alone can maximize economic gains of international exchanges amongst competing economic regional units. As atomistic competition amongst nation-state economies failed to work, the G-7 framework was the pragmatic option. The G-3 is then the natural corollary, as economic regionalization in Europe pro~essively matures. It follows that the new international economic order will have to relate to this new reality.

17

P

c i;

-I

f “c

e

JUURNAL OF ASIAN ECONOMICS, (3)1,1992

f

-t

4

c I

~OU~AL

4

R

OF ASIAN ECONOMICS,

(3)1,3992

Asia-Pacific Economic Cooperation

23

r

Ctsnd0P4onlnl

NJ

‘da) slYaWl

7*101

JCWRNAL OF ASIAN ECONOMICS,

(3)1,1992

Asia-Pacific Economic Cooperation

25

V.

CONCLUSION

The present study limits itself to an analysis of intraregional trade of selected economies in the Asia-Pacific Region. It points out the trade distributions of economies on the far shore of the Pacific and the United States. Canada and economies in the American hemisphere south of the United States are grouped in the ROTW. If these economies are grouped together in a Pacific economic regime, it will be an invitation to a new bipolar order, challenging the EC. A tripolar economic regime may be the “second best” option for the new international economic order in the 1990s and beyond. The study is limited by the fact that it does not analyze investment flows, especially intraregional investment flows in the Asia-Pacific Region. Some references have, however, been made to the growing role of Japan in this regard. The United States does continue to play a role, even though at a reduced scale, Taiwan and Korea have become savings-surplus economies and have increasingly been engaged in direct foreign investments in the Region. Indeed, such investment flows constitute an economically optimal option for savings-surplus economies. Finally, we have presented a brief outline of the economic rationale of the EC, which must not be viewed as a traditional Customs Union or a flA. We have argued that the emerging paradigm of “deep” regional economic integration, as is the case with the EC, may satisfy the Pareto Optimality condition of second best. We have not analyzed its basic theoretical model. Indeed, a challenging task remains to be undertaken. If APEC is yet ready for “deep” economic integration remains to be further examined. We cannot predict how soon the new order of the international economy will materialize. The end of the East-West political confrontation has come about much faster than anyone might have predicted. The new economic order based on continentbased regionalization, replacing the bipolar North-South framework by a multipolar one, each region with its currency, regionally managed, may become a reality much sooner than we now believe.

Acknowledgments: The author serves as Director, American Committee on Asian Economic Studies (ACAES), an inter-university, not-for-profit program. The views expressed here are, of course, exclusively of the author. An earlier version of this paper was presented at The Fifth Biennial Conference on U.S.-Asia Economic Relations, held on June 20-22, 1991 at Tokai University, Tokyo, Japan. I remain indebted to Lawrence B. Krause, Marcus Noland, Iwao Maeshima, Robert J. Alexander, H. Peter Gray, Kazuo Sato, Chung H. Lee, George Rosen for their thoughtful comments. My special thanks are due to Edwin S. Milan and Amiya Sharma for their generous research assistance. I remain fully responsible for any and all errors.

REFERENCES Allen, Polly Reynolds. 1990. “The ECU and The Transition to European Monetary System,” paper presented at the University of Pennsylvania-Rutgers University Colloquium on “The European Regional Economic Integration of 1992,” November 15-16.

26

JOURNAL OF ASIAN ECONOMICS,

(3)1,1992

Ariff, Mohamed. 1989. “The US-ASEAN Free Trade Option: Scope and Implications,” in J.J. Schott, ed., Free Trade Areas and U.S. Trade Policy, pp. 201-216. W~hington, D.C.: Institute for Internation~ Economics. Balassa, Bela. 1987. “Japanese Trade Policies Toward Developing Countries,” in M. Dutta, ed., AsiaPacific Economies: Promises and Challenges, Part A, pp. 49-68. Greenwich, CT: JAI Press. Bradford, Colin I., Jr., and Branson, William H. eds. 1987. Trade and Structural Change in Pacific Asia. Chicago, IL: The University of Chicago Press. Dobson, Wendy. 1991, EconomicPolicy Coordination: RequiemorPrologue. Washington, D.C.: Institute for International Economics. Drysdale, Peter. 1968. “Pacific Economic Integration: An Australian View,” in K. Kojima, ed., Pacific Trade and Development. Tokyo: Japan Economic Research Center, Dry&ale, Peter. 1988. fnternational Economic Pluralism: Economic Policy in East Asia and the PuciJic. New York: Columbia University Press. Drysdale, Peter, and G~aut, Ross, 1989. “A Pacific Free Trade Area,” in J.J. Schott, ed., Free Trade Areas and U.S. Trade Policy, pp. 217-243. Washington, DC.: Institute for Internationai Economics. Drysdale, Peter, and Patrick, Hugh T. 1979. An Asian-Pacific Regional Economic Organization: An Exploratory Concept Paper. Washington, DC.: U.S. Congressional Research Service, U.S. Govemment Printing Office, July. Dutta, M., ed. 1985. Studies in United States-Asia Economic Relations, Durham, NC: The Acorn Press. Dutta, M., ed. 1987a. “Asia-Pacific Economies: Promises and Challenges. Greenwich, CT: JAI Press. Dutta, M. 1987b. “The Asia-Pacific Economic Community: Some Comments,” in M. Dutta, ed., Asia-Pacific Economies: Promises and Challenges, pp. 93-100. Greenwich, CT: JAI Press. Dutta, M., ed. 1988. Asian Industrialization: Changing Economic Structures. Greenwich, CT: JAI Press. Dutta, M. 1990. “The United States an Asian Economy: New Dimensions in U.S.-Asia Economic Relations.” Invited lecture at the 14th Intemation~ Sym~sium, Hosei University at Tama Campus, Tokyo, Japan, September 26-28. Dutta, M., and Tantum, Daniel T. 1988. “~dus~~ization of Japan and Selected East Asian Countries: The Structural Divergence Hypothesis,” in M. Dutta, ed., Asiun industriuliz~ltion: Changing Economic Structures, pp. 1746. Greenwich, CT: JAI Press. Emmerij, Louis, ed. 1989a. One World or Several? Paris: OECD, Development Center. Emmerij, Louis. 1989b. “One World or Several? An Introductory Statement,” in L. Emmerij, ed., One World or Several, pp. 25-30. Paris: OECD Development Center. European Commission (EC). 1989a. Committee for the Study of Economic and Monetary Union in the European Community. Brussels: EC. European Commission (EC). 1989b. Report on Economic and Monetary Union in the European Community. Delors Commission Report by the Committee for the Study of Economic and Monetary Union. Luxembo~g: EC. Gray, H. Peter. 1989. “The Mechanics of Intemational Economic ~omotion,” in Khosrow Fatemi, ed., Internat~nal Trade: Existing Problems and Prospective Solution, pp. 24-34. New York: Taylor & Francis. Hufbauer, Gary C., ed. 1990. Europe 1992: An American Perspective. Washington, D.C.: The Brookings Institution. Klein, Lawrence R. 1990. “Can Export-led Growth Continue Indefinitely? An Asia-Pacific Perspective.” Journal of Asian Economics, 1: 1-12. Kojima, Kiyoshi, ed. 1968. Pacific Trade and Development. Tokyo: Japan Economic Research Center. Kojima, Kiyoshi. 1971. Japan and a Pacific Free Trade Area. London: Macmillan. Kojima, Kiyoshi. 1978. Direct Foreign Investment: A Japanese Model of Multinational Business Operations. London: Croom-Helm. Kojima, Kiyoshi. 199Oa. “Proposal for a Multiple Key Currency Gold-Exchange Standard,” Journal of Asian Econo~nics 1: 19-33.

Asia-Pacific Economic Cooperation

27

Kojima, Kiyoshi. 1990b. Japanese Direct InvestmentAbroud. Tokyo: International Christian University Press. Krause, Lawrence B. 1987. “A Second-Best Strategy For Pacific Dynamism,” in M. Dutta, ed., AsiaPacific Economies: Promises and Challenges, pp. 1 l-22. Greenwich, CT: JAI Press. Lamfalussy, A. 1989. ‘The ECU Banking Market,” in Delors Commission Report, Report on Economic and Monetary Union in the European Community, pp. 201-207. Luxembourg: European Commission. Linder, Staffan Burenstam. 1986. The Pacific Century: Economic and Political Consequences of AsianPacific Dynamism. Stanford: Stanford University Press Linder, Staffan Burenstam. 1987. “Economic and Political Consequences of Asia-Pacific Dynamism,” in M. Dutta, ed., Asia-PaciJic Economies: Promises and Challenges, Part A, pp. 69-81. Greenwich, CT: JAI Press. Lipsey, Richard G., and Murray G. Smith. 1989. “The Canada-US Free Trade Area: Special Case or Wave of the Future,” in J.J. Schott, ed., Free TradeAreas and U.S. Trade Policy, pp. 317-336. Washington, D.C.: Institute for International Economics. Lorenz, Detlef. 1989. “Trends Towards Regionalism in the World Economy-A Contribution to a New International Economic Order?’ INTERECONOMICS, March/April: 64-70. Lorenz, Detlef. 1991. “Regionalization versus Regionalism-Problems of Change in the World Economy.” INTERECONOMICS, January/February:3-9. Monnet, Jean. 1978. Memoirs Garden City, NY: Doubleday. Okita, Saburo. 1989. “Policy Approaches to the Problem,” in L. Emmerij, ed., One World or Several?, pp. 41-50. Paris: OECD, Development Center. Park, Yung Chul. 1989. “Trade and Development in Pacific Asia,” in L. Emmerij, ed., One World or Several?, pp. 79-90. Paris: OECD, Development Center. Park, Yung Chul, and Jung Ho Yoo. 1989. “More Free Trade Areas: A Korean Perspective,” in J.J. Schott, ed., Free TradeAreasand U.S. Trade Policy,pp. 141-158. Washington, D.C.: Institute for International Economics. Rosen, Howard. 1989. ‘The US-Israel Free Trade Agreement: How Well is it Working and What Have We Learned?” in J.J. Schott, ed., Free Trade Areas and U.S. Trade Policy, pp. 97-l 20. Washington, D.C.: Institute for International Economics. Rostow, Walt W. 1985. “Is There Need for Economic Leadership? Japanese or U.S.?“American Economic Review, 75:285-291. Schott, Jeffrey J., ed. 1989. Free Trade Areas and U.S. Trade Policy. Washington, DC.: Institute for International Economics. Shinohara, Miyohei. 1987. “Patterns and Backgrounds of Dynamics in the Asia-Pacific Economies,” in M. Dutta, ed.,Asia-Pacific Economies: Promises and Challenges, Part A,. pp. 23-48. Greenwich, CT: JAI Press. Snape, Richard H. 1989. “A Free Trade Agreement with Australia,” in J.J. Schott, ed., Free Trade Areas and U.S. Trade Policy, pp. 167-196. Washington, DC.: Institute for International Economics. Trigueros, Ignacio. 1989. “A Free Trade Agreement Between Mexico and the United States,” in J.J. Schott, ed., Free Trade Areas and U.S. Trade Policy, pp. 255-267 . Washington, D.C.: Institute for International Economics. Tsiang, S. C. 1989. “Feasibility and Desirability of a US-Taiwan Free Trade Agreement,” in J.J. Schott, ed., Free Trade Areas and U.S. Trade Policy, pp. 159-166. Washington, DC.: Institute for International Economics. Ungerer, H., Evans, O., Mayer, T., and Young, P. 1986. The European Monetary System: Recent Development. Occasional Paper No. 48. Washington, D.C.: International Monetary Fund. December. Viner, Jacob. 1950. The Customs Union Issue. New York: Carnegie Endowment for International Peace. Wonnacott, Paul, and Lutz, Mark. 1989. “Is there a Case for Free Trade Areas?’ in J.J. Schott, ed., Free Trade Areasand U.S. Trade Policy,pp. 59-84. Washington, DC.: Institute for International Economics.

Received May 199 1; Revised October 199 1