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13Political Economy of Asia Pacific Region
Question: The Political Economy of countries are interdependent. They interact and influence each other and affect the level of economic well-being. Discuss this statement with regard to countries in the APBR.
Asia pacific region can be divided into three distinct regions, namely:
North-East Asia — Japan, Taiwan, Korea and China
South-East Asia — Singapore, Laos, Cambodia, Vietnam, Myanmar Malaysia, Brunei, Indonesia, Philippines, East Timor and Thailand.
Rest of the Asia-Pacific Region — Australia, New Zealand, Nepal, Bhutan, Bangladesh, Pakistan, India and Sri Lanka (Feinberg, 2006).
Countries in the Asia-Pacific Region exhibit a lot of diversity in terms of economic development as well as demographic, socio-cultural and religious dimensions. For instance, Japan, New Zealand and Australia are highly developed economies while China, South Korea and India are emerging global economic giants (Feinberg, 2006). On the other end of the continuum lie countries like Laos, Nepal, Bhutan and East Timor which are relatively poor in economically. Despite the apparent differences in economic progress, countries in Asia-Pacific have cultivated close economic ties with each other and with countries outside the region (Feinberg, 2006).
During the past two decades, the rapid expansion and integration of Pacific and Asian economies has continued to match forward. Today, Australia, China, Japan, India and New Zealand among other countries are engaged in numerous trade agreements. Some of these agreements have been designed to protect politically sensitive sectors of the economy such as agriculture and to provide a set of standards governing competition policies and bilateral trades. An obvious criticism of trade agreements between Asia-Pacific region countries is that many of them do not meet the standards for World Trade Organizations (WTO) and do not hold to the standards that the European Union or the United States impose in their bilateral trade agreements (Feinberg, 2006).
The rapid proliferation of trade agreements in the Asia-Pacific region following the Asian financial crisis of 1997-1998 has generated a growing concern of crisscrossing trade agreements between various countries in the region (Feinberg, 2006). These agreements exhibit unique rules of origin and have had significant effects on cross-border business activities. The potentials of trade diversions that can result from discriminatory trade agreements have in the worst case generated inferior welfare outcomes for countries than the case could have been if the agreements did not exist. In response to these problems, governments have found it necessary to look for means in which existing regional arrangements can be multi-lateralized, that is extended to non-current members for the purpose of creating region-wide free trade agreements.
Political Economy of the Asia-Pacific Region
To accurately define the political economy of the Asia-Pacific region, one has to know the political economy of policy making in each of the countries which comprise the region. For some countries in the region, sufficient and accurate information about their trade policies is lacking. For other countries, trade policies lack transparency and the policy making processes remain ill-defined. An obvious fact about this region is that unlike the European Union or North America, there is no single trade policy (Brander, 2005). In steady, the region is merely a conceptual group of regional economies which neither coordinate policies among themselves nor pursue a single common policy. There is no clear leading country among the various trading partners in the region unlike North America where the United States exerts strong influence over her trading partners. Consequently, the Asia-Pacific region cannot be expected to take a collective position on trade policies very often. The difficulty of developing a collective trading position is best supported by New Zealand’s failure to build support for creation of bilateral ties with the East Asian Economic Community, citing differences in economic policies and objectives (Mulgan, 2008).
With the exception of Australia and Japan, most countries in the Asia-Pacific region are all developing economies, in which the government has the responsibility to sustain rapid economic growth rate (Mulgan, 2008). In these economies, governments have been actively intervening in international trade to promote economic objectives. As a result, bureaucracy has grown quite high and commands pervasive powers in trade regulations. In countries such as Australia, Malaysia and Philippines, trade policies have been mercantilist rather than free-trade oriented.
The region’s strong preference for unilateral trade liberalization is clear evidence that the region is collectively in the developmental stage of trade liberalization. This is evidenced by a high level of protection to domestic producers in many of the countries in the region. Essentially, the same phenomenon is applicable to developed economies in the region such as Australia. Mulgan (2008) has noted that majority of countries in the Asia-Pacific region pursue aggressive trade policies with the hope to minimizing adjustment costs and to protect infant and politically problematic industries such as agriculture. Endless concerns about the balance of payment deficits have, however, resulted in gradual reduction of protectionist measures especially among the countries that have attained relative economic stability (Brander, 2005).
In addition, many governments in the Asia-Pacific region are eager to secure the maneuvering space to reverse some of their liberalization measures when necessity arises. For these reason, developing economies in the region prefer managed and gradual trade liberalizations tailored to domestic interests (Brander, 2005). Some of those needs are highly likely to conflict with those of trade partners, especially the developed economies which would naturally prefer complete and instantaneous trade liberalization. Consequently, reciprocity appears to be a serious constraint for policymakers in the developing economies of the region.
Contrary to the impression it has created, unilateral trade liberalization which has taken place in the Asia Pacific Region is not voluntary. Much of the liberalization has been as a result of pressure from established economies outside the region such as the United States for market opening. Brander (2005) has noted in his book that from early 1990s, the United States has threatened countries in the Asia Pacific region with aggressive unilateralism, under which retaliation is threatened for non-compliance in trade practices. It is well known that most of New Zealand, Japan, Singapore and Australia’s market opening measures have been taken as a result of pressure from the United States. Similarly, nearly all other Asia-Pacific economies have to some extent adopted market opening measures to avoid retaliation from the US and the European Union. This is to say that trade liberalization in the Asia-Pacific region has been a way of accommodating pressures from trading partners including those from outside the region.
According to Mansfield and Milner (2004) the Asia-Pacific region has a strong adherence to nondiscriminatory policies. This has become the region’s strategy for using export to boost rapid economic growth. However, the efficacy of this economic growth strategy depends to a great extent on the health of multilateral trading systems, which in turn depends on how effective the principle of non-discrimination is. As such, most members in the Asia-Pacific region will not discriminate against each other for fear of being discriminated themselves. But with the proliferation of preferential trade areas, nondiscrimination is no longer a significant principle that commands respect in the region (Mulgan, 2008). Most countries in the region still refuse to enter into certain preferential trade agreements mainly for political reasons. One of the reasons is that any meaningful preferential trade agreements have to include the giant economies of the region such as Australia, New Zealand, Japan and China but smaller other economies would not want such agreements for fear that giant economies would dominate them (Brander, 2005).
Another reason why countries in the region would not be willing to enter into certain common PTAs is that the agreements would require total removal of trade barriers. This would take away the benefits of the economies of unilateral trade liberalizations and could impact negatively on the economic prospects of less developed countries. From this perspective, it seems that the greatest disadvantage of Asia-Pacific preferential trade agreement is not necessarily its discriminatory nature but the burden of trade liberalization it imposes on member countries. This consideration underscores the fact that the Asia-Pacific region cannot be a leading force in global trade policy reforms as have been other economic regions such as North America and the European Union (Mulgan, 2008). Undoubtedly, substantial investment and trade barriers remain in many of the Asian pacific economies including Australia, Japan and China. These barriers have made the non-contestability of markets in many of the economies in the region to be a serious problem for their trading partners. The inability of governments in the region to take a collective position and also lack of intellectual preparation on multilateral trade policy issues makes the countries unable to play a leading role in internal trade discussions. Instead, these countries are likely to be followers on some of the internal trade issues (Mulgan, 2008).
Review of Selected Regional and Bilateral Trade Arrangements in the Asia and Pacific Region
Several regional trade agreements have been formed in the Asia pacific region. These include: Agreement on South Asian Association for Regional Cooperation (SAARC), the Association of Southeast Asian Nation (ASEAN), Preferential Trading Arrangement (SAPTA) the Asia Pacific Economic Cooperation (APEC) and the Australia-New Zealand Closer Economic Relation (CER) among other agreements (Yarbrough & Robert, 2002). ASEAN was formed in 1967 to promote peace and stability in the south East Asia and accelerate economic growth in the region. In 1992, the associated announced the creation of ASEAN Free Trade Area (AFTA). The main objective of AFTA was to eliminate trade tariffs and non-tariff barriers among member states with the view of integrating ASEAN economies into the global markets. In addition, AFTA has numerous trade facilitation measures which have helped harmonize and streamline custom procedures among member states (Yarbrough & Robert, 2002). To a greater extent, ASEAN has helped member countries achieve much of the association’s objectives and hence improve the economic and political relations among member states. However, the actual implementation of AFTA tariffs and custom rates appear to have been hindered. This is attributed to the high costs of administration and the long list of sensitive products not subject to preferential trade rates (Yarbrough & Robert, 2002).
SAARC was formed in 1985 to develop a platform for lowering tariffs on goods traded within the member states. The association’s member states are Bangladesh, Afghanistan, India, Bhutan, Pakistan, Nepal, Maldives and Sri Lanka. In 2002, member states signed South Asia Free Trade Agreement, which established a free trade zone for the region’s 1.4 billion people (Yarbrough & Robert, 2002). The free trade agreement has had remarkable impacts on trade proliferation among countries in the association.
The Asia Pacific Economic Cooperation Forum (APEC) is another important regional initiative that seeks to promote regional integration in line with continued multilateral and unilateral trade liberalization (Yarbrough & Robert, 2002). Since it was established, APEC has made substantial efforts to reduce trade barriers in the Asian-Pacific region. The initiative has also been the cornerstone of the wider efforts to deepen policy dialogue and economic and political cooperation among countries in the region.
Government Intervention in the Asia Pacific Trade
Economic systems in many countries in the Asia-Pacific region have been shaped by government attempts to enhance growth through a variety of domestic programs and foreign policies (Helpman & Krugman, 2001). Depending on the specific commodities involved in trade, regional governments have occasionally found it necessary intervene in trade in the form of trade protection, regulation, promotion and price and income support programs. This intervention not only affects production of commodities but also the volume of commodities that can be imported and exported between countries (Helpman & Krugman, 2001). The need to intervene in international trade practices has become part of standard economic practices in the Asia pacific region as is the case in other parts of the world. This has in turn impacted on the manner in which countries interact with each other and has led to formation of trade agreements and regulatory bodies such as ASEAN, APEC and SAARC.
The main political reasons for government intervention in trade include: protection of jobs; preservation of national security; response to other nations’ unfair trade policies and gaining influence over other countries and to monopolize some industries. Protection of infant industries and consumers and the need to pursue strategic economic policies are some of the economic reasons that have necessitated governments in the Asia-Pacific region to intervene in regional trade. Less developed economies in the region such as Cambodia, Pakistan and Malaysia have often intervened in trade to protect their infant industries against competition from established economies such as Japan and Australia. These governments impose restrictions in terms of import quotas or total ban on imports of certain commodities and technologies (Mansfield & Milner, 2004).
Some governments in the Asia pacific region have occasionally found it necessary to restrict trade on certain goods and services in order to attain cultural objectives such as protection of cultural identity. Unwanted cultural influence in a country can cause concern for the people, resulting in the government having to ban imports of certain commodities deemed as culturally offensive. More than any other nation, the United States is the greatest threat to the cultures of countries in the region. This is because of the United States’ strong economic and political influence in the global scale (Helpman & Krugman, 2001). Majority of Asia-Pacific governments offer subsidies to domestic industries in the form of cash payments, low interest loans, product price supports and tax breaks. These subsidies are intended to assist domestic companies fend off foreign competitors. Japan, New Zealand and Australia frequently offer export financing to their domestic firms. Other countries impose restrictions on the amount of specified goods that can enter or leave the domestic market during a certain period of time. These restrictions, called quotas help maintain adequate supplies in the domestic market or increase supply of a given product on the world market (Mansfield & Milner, 2004).
Benefits and Potential Risks of Regional Trade Integration Initiatives
Well designed and implemented trade agreements can expand trade opportunities and benefits of countries in the Asia-Pacific region. Regional trade agreements have served as a vehicle for coordination and dialogue on regional issues that are not part of the multilateral trade agenda (Brander, 2005). They have also been critical in strengthening political ties between countries in the region such as between Japan and South Korea, and Australia and New Zealand. There are, however, risks that regional trade agreements in the Asia-Pacific region can, over time, turn into closed economic blocs and turn resources away from multilateral trade liberalizations. This can be worse especially in the presence of limited administrative policies or when the agreements are incorrectly perceived as proxy for multilateral liberalizations. Political economy considerations in the Asia-Pacific region suggest that regional trade agreement can create incentives for regional countries to lobby against global reforms that may reduce the value of the region’s tariff preferences. This may in effect undermine the region’s prospects for future trade reforms (Mansfield & Milner, 2004).
Due to discriminatory policies, regional trade agreements in the Asia-Pacific have given rise to welfare losses to the member countries as well as third countries. Helpman and Krugman (2001) have explained that the presence of numerous preferential trade agreements in the Asia-Pacific region has facilitated diversion of resources from non-member sources where production costs are lower to member suppliers where production costs are higher. In such cases, cost differences have been borne by importing members. The risks trade diversion among member countries in the Asia pacific region have been difficult to minimize safe for failure of individual countries to agree on swift reduction on tariffs.
An important concern associated with the proliferation of trade agreements among countries in the Asia pacific region arises from potential difficulties associated with the lack of coherence among overlapping agreements. For instance, some member states of the Association of Southeast Asian Nations (ASEAN) have negotiated bilateral agreements with some non ASEAN countries even though ASEAN itself negotiates with those countries (Mansfield & Milner, 2004). Although the provisions of preferential agreements between countries may vary considerably, there has been little effort to effect regulatory harmonization and consistency among regional countries. As a consequence, inconsistent and restrictive rules of origin across different agreements have complicated outsourcing decisions by firms and have made the region’s trading system to be fragile. In addition, the outcomes of numerous trade disputes between individual member states have had the potential to result into conflicts between, which can in turn create problems for other trade relations in the region (Yarbrough & Robert, 2002).
A major risk in the Asia-Pacific region’s bilateral and multilateral trade systems is that unlike the European Union, the region lacks a regional dispute settling system. In the absence of such an important system, there are potential risks to disrupt intra-regional trade. The region’s fast differences in rules of origin are an important indicator among regional trade agreements. For instance, the ASEAN, New Zealand-Singapore free trade area use 40% value added criteria while ASEAN-India, India-Singapore and Singapore-Japan have included multiple-change-of-tariff-heading criteria. These apparent differences have made in difficulty to harmonize trade practices between countries in these trading systems besides jeopardizing development of a common, regional trade platform as is the case in North America or the European Union (Helpman & Krugman, 2001).
To minimize the risks that regional trade agreements entail, it is important that these trade agreements are implemented within a comprehensive and well-designed framework. Best practices in designing regional trade agreements for the Asia-Pacific countries include: limiting of external barriers; implementing symmetrical and simple rules of origin with consistent and transparent regulations; open access to membership; comprehensive coverage of goods with little or few exclusion and behind the border reforms to strengthen supply response and promote synergies (Yarbrough & Robert, 2002). It is also imperative that the region implements policies for enacting establishment of a common dispute settlement provisions to facilitate timely resolution of conflicts.
Moreover, trade agreements in the region have the potential to serve as a vehicle through which countries in the region can move collectively and individually towards greater economic reforms and integration. To comply with the WTO standards, regional trade agreements in the Asia-Pacific region will have to eliminate barriers on significantly all trade goods. Moreover, liberalization of trade in services will have to provide significant sectoral coverage to enhance opening up of markets. Individual countries will also have to liberalize investment regulations and adopt uniform and standardized provisions in such areas as custom procedures, standards, rules of origin and protection of intellectual property rights. According to Yarbrough & Robert (2002) any trade agreement signed between Asia-Pacific regions must take into account the ongoing role of the United States companies in the region’s economic growth, more especially when the countries negotiate preferential trade agreements that do not include the United States.
Brander J.A., (2005). “Strategic trade policy”, National Bureau of Economic Research Working Paper No. 5020.
Feinberg, R. (2006). “U.S. Trade Arrangements in the Asia-Pacific,” in V. K. Aggarwal and S. Urata (eds) Bilateral Trade Arrangements in the Asia-Pacific:Origins, Evolution, and Implications, New York: Routledge.
Helpman G and Krugman M., (2001). Trade Policy and Market Structure, The MIT Press, Cambridge, MA.
Mansfield, E. and H. Milner (2004). “The New Wave of Regionalism,” International Organization, 53(3), pp. 589-627.
Mulgan, A. G. (2008). Japan’s FTA politics and the problem of agricultural trade liberalisation.
Australian Journal of International Affairs, 62, 164-78.
Yarbrough, B. V. and Robert M. Y. (2002). Cooperation and Governance in International Trade, Princeton: Princeton University Press.
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