GEI Newsletter Issue No. 3

GEI Regionalism Meeting, London, 14 November 1995 - by David Evans

Also in this issue:

The World Bank at Fifty
by Christopher L Gilbert

GEI Regionalism Meeting, London, 14 November 1995

by David Evans

David Evans is a Senior Fellow at the Institute of Development Studies at Sussex University. This article reports on a workshop on Regionalism held at the Centre for Economic Policy Research on 14 November 1995. Together with Christopher Stevens (University of Sussex) he is directing a GEI project ‘The Institutional Framework for World Trade: Challenges from Regionalism and the East Asian NICs’. Contact: Institute of Development Studies, University of Sussex, Falmer, Brighton BN1 9RE, UK, tel: (44 1273) 678 280, fax: (44 1273) 621 202, email: h.d.vans@sussex.ac.uk.

1. Overview

The interest of the workshop came from the tension between well-rehearsed economic arguments on the costs and benefits of different types of regional association, and a political discourse on the basis of regional organizations. The economic arguments considered were those for Free Trade Areas, Customs Unions, and special enabling arrangements for developing countries. Whereas the economists tended to be pessimistic on the nature of the politics of regional organizations, the political scientists were both more optimistic and more pragmatic. If a consensus emerged by the end of the day, it was on an emerging view of regional organizations as a set of interlocking networks at both the economic and political level, combined with a strong view that a forceful WTO was necessary to ensure that multilateralism was strengthened as the dominant feature of the world economy.

One issue which could have been usefully discussed with political scientists was the contrast between economic theory, which by and large sees economic liberalization as gainful to countries, and governments, who see liberalization gains to outsiders to the region as a loss to the liberalization process.

2. Regional groups among developing countries

Sheila Page (ODI) presented a paper on this topic developing a framework analysis of their formation and effects. The nub of this paper revolved around the issue of regional versus country arguments as the basis for participation in the world economy. She argued that regional groups are typically formed for political rather than trade purposes, with the trade arguments often looking forced. Thus it follows that harnessing regions into a world economy is much more difficult than harnessing countries, the latter being difficult enough anyway. Provocatively, Page suggested that regional groups put together by chance are a nuisance! Questions and observations revolved around the following:

What should be included in the WTO’s sphere of competence? Where regional standards exist in practice, e.g. in Latin American factories for US or EU markets, there is a regional specificity to trade policy, such as on processing criteria. Similarly, in some sectors, there is regional regulation of production, e.g. in telecommunications. Sometimes, both regional and WTO intervention is required to pressurize countries to move to regional integration.

Regions in flux versus regions rigid. There were strong arguments put forward, particularly from the political scientists, that regions are always in flux.

Are regions just bigger nation states?

Does sharing information and learning go with the political links of regions, strengthening intra-regional trade?

In response to these main questions and observations, Page argued for a broadly-based WTO which included competencies relating to both services trade and labour standards. On the question of regions in flux versus awkward and rigid regions, which should be done away with, Page sounded just as qualified and conditional as her (mainly) political science questioners, especially when particular examples were discussed. On whether regional links provide opportunities for sharing information and for learning benefits, Page argued strongly that, on East Asian evidence, manufactured exports were important first to rich countries, and only secondly to destinations within the region. However, she conceded that this was an interesting research question for further work. The merit of Page’s paper was that it posed some hard and clear questions, which elicited a qualified and nuanced response to specific issues.

3. On regionalism and subsidiarity

Stephen Woolcock (CRUSA, LSE) presented a paper on this topic, and developed the hypothesis that the appropriate level for establishing of a system of rules and regulation is not based on efficiency, legitimacy nor accountability, but on the chance of history and the pressure of a strong coalition of interests on a key country. This argument was highly complementary with Sheila Page’s presentation. From this it followed that regional competence might develop, which is highly complementary with the WTO, and lower its burdens. Alternatively, regional organizations might be better aware of the need for multinational regulation. Thus, subsidiarity seen in a multilateral setting might see some organizational deepening which is channeled regionally (such as social policy in the EU, environmental policy in NFTA), and some regional developments which extend WTO (such as APEC). From this, a lively discussion ensued. Was the model behind this presentation hierarchical, with the WTO at its apex, or a model of overlapping networks of regions and agendas? Woolcock came out strongly in favour of the latter view, particularly because of the lack of a strong political process within the WTO, so that placing it at the head of an organizational apex made no sense. Regional organizations can overcome the apparent rigidity of formal hierarchical structures by talking to each other via caucuses rather than from a position dictated by formally-constituted political and legal authority transferred from the national level. This is consistent with the model of overlapping networks and agendas for regional organizations and global organizations.

4. On regionalism and multilateralism

Yorizumi Watanabe (Mission of Japan to the European Communities) gave a very useful paper on this topic. It was introduced to the agenda at the last minute, which was a pity since its contents were relatively undigested before discussion began. (His presentation replaced that planned by Gary Sampson on the same topic.) It began with a reminder that the definition of a regional agreement could most usefully be built on the GATT Article XXIV definitions of: (i) free trade areas, (ii) customs unions, (iii) interim agreements, and (iv) enabling clause for developing countries.

He argued that the critical questions for the trading principles in the world economy which arise from regionalism are:

to what extent do such regional agreements undermine the MFN principle?

if regional agreements are an increasingly dominant feature of the world economy, to what extent do they have adverse economic effects? The final act of the Uruguay Round provided an interpretation of regional agreements under Article XXIV. This interpretation should be seen against the background of the key multilateral aspects of the Uruguay Round, namely: the limiting of ‘procedural protectionism’, through such legal instruments as Section 301; extending GATT coverage to services, intellectual property rights and investment; and bringing agriculture and textiles into GATT.

Thus, regional agreements under Article XXIV covered by the Uruguay Round were:

trade weighted duties to be used in estimation of a ‘general incidence of duties’

an interim agreement should not generally be more than 10 years

contracting parties to a CU or an interim agreement are not obliged to provide compensatory adjustment or ‘reverse compensation’.

Watanabe then argued that, whilst it may be true that regional arrangements to date are, on balance, complementary with multilateralism and the strengthening of the WTO, the only way to prevent potential degradation of the world economic system is to strengthen the WTO. Otherwise, countries may ‘free ride’ on the trade liberalization of others through the MFN principle without their own liberalization. The discussion then moved to the key protectionist problems of existing regional agreements:

NAFTA rules of origin with restricted coverage

EU demands for reverse compensation with market enlargement

higher tariffs with enlargement in some areas

lack of uniformity with rules of origin.

The final conclusion was that regional agreements under Article XXIV must be liberal and open to the outside, and that regional integration should be added to the subject matter of the WTO Trade Policy Review Mechanism (TPRM). In the discussion which emerged, several participants asked why it was that the review of regional agreements under Article XXIV was not being taken seriously enough. No answer was forthcoming, but rather strong concern was registered. There was also a technical discussion of the choice of weights in estimating the general incidence of duties in regional arrangements. Import weights give a strong downward bias to the measurement of protective effects of duties – why then did opponents of particular customs unions, such as the EU, not argue for a more appropriate set of weights?

5. APEC and regionalism: A research agenda

David Vines (Balliol College, Oxford, Australian National University, and CEPR) presented his paper on the above title, billed as a ‘first stab at a research agenda on regionalism’. It ranged over a number of issues:

Open regionalism<R>First, he argued that the nature of the emerging regionalism in the Asia Pacific region is now settled: it will be ‘open regionalism’, not a regional trading block. In an ‘open regionalism arrangement’, members of the regional ‘club’ benefit from ‘internally reciprocal’ trade creation and also pass on benefits to non-members; this is because their liberalizations involve MFN reductions in barriers, and not just reductions in barriers among the countries of the region. The alternative, and rejected, vision is one of a trading bloc where the benefits of liberalization extend solely to members, with any passing on of these benefits to non-members dependant on a negotiated ‘externally reciprocal’ exchange of concessions. One critical question discussed was: ‘What is the “critical mass” of contemporaneous liberalization necessary to make open regionalism attractive, so that the benefits of trade creation within the region more than compensate the participants for the terms of trade loss which they suffer as a result of lowering their barriers against other countries outside the region?’.

Vines also discussed the appropriate form of trade policy and competition policy for an open region. Roughly speaking, one approach to promoting competition is to reduce barriers to entry in the domestic market by reducing barriers to entry. A second approach is to reduce domestic barriers to entry by promoting international competition by lowering protection. But ultimately, international competition policy will face the same set of issues as domestic competition policy. These arise because merely ‘freeing-up markets’ is not enough – regulation of the abuse of market power is also necessary. How can this be done in an ‘open region’?

Also, Vines asked what form of institutional structures are necessary for ‘open regionalism’? To what extent will transnational forms of governance and polity emerge (as in Europe) as trade integration progresses? Is Europe a reliable model for what will happen in the Asia Pacific region thirty years hence? Or will the emerging institutional structures be different? Are Article XXIV structures adequate, or is it necessary to form some sort of a club?

Neighbourhood effects<R>Two contrasting sets of relationships, between the ‘centre’ and the ‘periphery’, for regional groups were made: the EU has had a ‘trade curtain’ between old and new in the region; initially the Meds, now the FSU. In contrast, the Asia Pacific model links old and new industrializers through trade and investment. These models have different inward and outward tensions. What different effects are transmitted to neighbours by these models? What different welfare effects? What global geometry follows from these effects?

6. Regional integration

Richard Higgott (University of Warwick) presented ‘Regional integration, economic cooperation and economic policy coordination in the Asia Pacific: Unpacking APEC, EAEC and AFTA’ with the central theme being the contrast between the economic and political discourse. For example, the APEC discourse is almost entirely economic, with a goal to encourage liberalism throughout the region. But there is no politics, nor theory of politics, to sustain this. In contrast, the Malaysia-based EAEC has a political forum based on the attempt to play down US influence in the region, with an ambivalent view of Japan’s relationship. Lastly, both the EAEC and the AFTA are driven by recognition of production networks – in contrast to both ‘trade or investment models’ for regional integration, and the rational economic discourse of the APEC discussions. Higgott explicitly contrasted the relatively weak political discourse in APEC and AFTA with the very strong political dimension in ASEAN. The question, then, is how to link the political and economic discourses, and the particular characteristics of the Asia Pacific region, into a more viable and dynamic set of regional organizations. So far ASEAN has been relatively unsuccessful in moving from a political to an economic role. Making these emerging regional institutions WTO compatible is a continuing concern of the Japanese.

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