Multilateral versus Bilateral Trade Frameworks in an Open Region

Why the current rush for preferential, bilateral or small grouping trade agreements (PTAs)? Frequently cited reasons are: the changed geopolitical environment, growth of intra-regional business networks, success of regionalism in other parts of the world, or the legacy of the Asian financial crisis. We believe the most salient factor is pessimism surrounding the prospects for trade liberalization through the WTO.

As a result, hardheaded strategic calculations about cooperation in the region must be made by each state. Even Japan has had to move away from its long-cherished policy of multilateralism to try to pursue PTA initiatives with ASEAN countries. (Some see this as evidence of Japan’s growing concern over the decline of its regional economic dominance with the rise of the PRC.)

Asian regionalism needs to be understood not just in purely economic terms, but also through international power politics (witness the recent thaw between India and Pakistan).

However, the impact of regional integration is harder to analyze. Some experts, relying on simulation results, argue that the welfare effects of multilateral liberalization on countries are much larger than those of bilateral PTAs. Similarly, they think the current proliferation of PTAs or regional trade agreements may undermine the prospects for maintaining and expanding liberal, multilateral trading systems.

It seems to us, theoretically everyone can agree a multilateral liberalization system would be superior to restricted economic integration; but at the same time many accept restricted as the only realistic, albeit second best, approach. We expect the development of regional integration and a multilateral, liberal trade regime under the WTO will not be contradictory, as long as the principle of open regionalism is embraced.

Comment(s)

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1. Bala Bhaskaran
   (posted 21 April 2008 / 11:12:39 AM)
   
   The brief paper offers insight into the dynamics of currency apreciation and its impact on the economy. Can it not give references of research papers and case studies on the same subject? That will be a lot more useful to the researcher.