Endnotes

¹ As of 1994, all but 3 of the 128 members of the General Agreement on Trade and Tariffs were also members of at least one RTA (see Sampson 1996). Hong Kong, China; the People’s Republic of China; Japan; and the Republic of Korea were the exceptions, but the latter two have negotiated bilateral trade agreements since then. If the Asia-Pacific Economic Cooperation initiative is included as an RTA, then there are no exceptions.

² This occurs when the preferential arrangement is large enough to affect world prices, and outsiders as a whole are harmed because their terms of trade deteriorate as a result of trade diversion.

³ There has also been a sharp increase in the number of bilateral trading arrangements of late, most of which are quite formal and comprehensive and as such are treated here like any other regional FTA.

⁴ As Cooper and Massell (1965) have shown, a nondiscriminatory tariff reduction will enable a country to enjoy trade creation without any trade diversion. Furthermore, the extent of trade creation under multilateral liberalization would be either equal to or greater than that possible within a preferential trading arrangement. The extent of trade creation under multilateral liberalization would be greater than that possible with preferential liberalization if the lowest-cost producer lies outside the grouping and would be equal to it if the lowest-cost producer were a member.

⁵ For a recent analysis of the economic and social impacts of projects, see ADB (2005).

⁶ Sections III and IV draw freely upon Menon (2005).

⁷ For a recent review of regional public goods, see Estevadeordal et al. (2005).

⁸ In the agreement that lays the foundation for AEC’s establishment, ASEAN gave priority to integrating 11 industrial sectors: wood, rubber, automotive, textiles, electronics, agriculture, information technology, fisheries, health care, air travel, and tourism. Many of these sectors are important to the GMS economies.

⁹ Closer integration with the burgeoning economy of the PRC in particular, but also with India’s, is widely acknowledged not only to present opportunities but also to create challenges. The PRC and India have large reserve pools of labor and thus have cost advantages in labor-intensive activities. With the scheduled end of the Multi-Fiber Agreement in 2005, both countries may be in a position to increase exports of textiles and clothing. Some of this could be at the expense of GMS economies. The GMS economies must eventually face the reality that the world’s trading environment is changing in such a way that preferential treatment must eventually give way to comparative advantage. The challenge that this poses for the GMS is to restructure production to focus on activities in which they have a comparative cost advantage. The best trade policy environment to encourage specialization based on comparative advantage is one based on multilateralism.

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