European and American regionalism: effects on and options for Asia

Abstract

This paper addresses several questions of concern to economies excluded from the world's two major trading blocs. First, is there evidence from the past that suggests that the direct and indirect effects of 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. Section I of the present paper suggests that this conclusion is probably unwarranted. It is true that the share of world trade that is intraregional has been increasing. However, it is also true that the proportion of GDP traded has been increasing sufficiently rapidly for there to be growth, not only in trade with other regions but also in the share of GDP traded extraregionally. Section 2 then considers whether enlarging NAFTA and EU membership is likely to 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 probably are exaggerated. Section 3 focuses on the broader systemic question that is more worrisome for nonincluded small open economies; namely, will the proliferation of RIAs erode the GATT rules-based multilateral trading system? It concludes that there is indeed cause for this systemic concern. The final section of the paper looks at how Asian and other nonincluded economies might respond to the economic integration initiatives in North America, Europe, and elsewhere.