An Overview of the Evolving Global Economic Architecture

The aftermath of World War II hastened global economic integration, as the subsequent period of peace and reconstruction made it possible to increase economic activities. Foreign trade steadily climbed, and by 1960 the total ratio of foreign trade to gross domestic product (GDP) stood at 25%. Multilateral trade negotiations under the General Agreement on Tariffs and Trade (GATT) further quickened globalization, followed by the liberalization of trade and investments, improvements in infrastructure, and technological developments, which created a more conducive climate for foreign trade (Urata 2008b). Alongside this development was an increasing interest in regionalism, as countries that were considered to be natural trading partners coalesced and formed economic blocs. As of May 2009, 247 regional trading agreements (RTAs) from different parts of the globe were in force under the GATT/World Trade Organization (WTO) regime (Table 1 [ PDF 20.1KB | 1 page ]).

Much has been said about the risks of RTAs. The sheer number of RTAs alone result in an intricate web of overlapping arrangements and varying Rules of Origin (ROOs) that can complicate the global trading order (See Figure 1 [ PDF 78.3KB | 1 page ]). Moreover, RTAs foster preferential treatment and could become stumbling blocs to multilateralism.

It is significant to note that, at first, the architects of the global economic system did not find regionalism acceptable. Having experienced the collapse of the global financial system and trade under the protectionist regime of the Great Depression in the 1930s, regional blocs were viewed to be potentially harmful to multilateral trade, financial systems, and GATT's principle of non-discrimination. The major economies—the United States (US) and Japan, particularly—were skeptical about regionalism and wary of its impact on global trade. Having suffered from trade discrimination, Japan was not enthused by the growing popularity of regionalism.

Despite these risks, the trend in RTAs and regionalism has continued. From a political economy perspective, the explanation is that there are natural economic groups and strategic partners that gravitate toward each other because of geography, economic agenda, or political events.

The skepticism started to die down during the global economic architecture restructuring in the second half of the 20th century. The bipolar economy created by the US and Europe began to loosen, and by the 1970s a third bloc emerged—the East Asian economic bloc. The 1980s saw the rise of other economic blocs, such as the South American bloc made up of Argentina, Paraguay, Uruguay, and Brazil. Similarly, African trade gained strength as South Africa and its near neighbors, Malawi and Zimbabwe, increased trade with each other. By the 1990s, with the break up of the Soviet Union, trade started to gravitate toward Europe. Trading patterns and economic relations between and among the different blocs intensified and diversified. During this period, an important development was the establishment of East Asia as a solid economic bloc, an event that permanently changed the global economic landscape (Evans et al. 2004).

Evidence suggests that East Asia has had, and will continue to have, a fundamental stake in both regional and global integration (Asian Development Bank [ADB] 2008). The East Asian economic bloc later expanded its membership to include Australia, New Zealand, and other countries in the Pacific, thereby creating the Asia and Pacific region economic bloc and further increasing its total world trade share.

Regional cooperation in East Asia further intensified when the Asian financial crisis hit the region in 1997. In the absence of official measures to respond to the crisis, East Asia created a forum to work together and discuss the issues and solutions to the market failures, providing an even larger role for regional cooperation (ADB 2008).

Over time, regional cooperation has become an important instrument for providing solutions, opportunities, and institutions to address pressing economic and social issues that cannot be solved at the national level or are not addressed in an international forum. The table below shows the role and function undertaken by East Asia regional cooperation in solving economic, social, and environmental issues in the region. In the presence of the global financial and economic meltdown, regional cooperation has become an important measure in managing the impact of the crisis (Table 2 [ PDF 17.2KB | 1 page ]).

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