Does regionalization promote regionalism? Evidence from East Asia

ABSTRACT

Scholars generally agree that regionalization and regionalism are different phenomena; however, unresolved arguments remain as to whether there is a causal relationship between the two. In particular, whether or not regionalization promotes regionalism is a subject of debate. This paper aims to comprehensively clarify and explain the relationship between regionalization as embodied in trade and foreign direct investment (FDI) and regionalism as characterized by preferential trade agreements (PTAs) using event history analyses of East Asian economic data from 1985 to 2018. The paper concludes that although a positive and significant relationship exists between FDI and some types of PTAs, trade has no relationship with the latter. This conclusion challenges extant literature, which has argued that an increase in PTAs in East Asia (the outcome of regionalism) is the consequence of economic interdependence (regionalization). Moreover, these findings indicate that political factors such as territorial disputes and joint democracy negatively affect certain types of PTAs. This result is contrary to the conventional wisdom that predicts increased cooperation and lower tariffs between democracies and therefore suggests further investigations of the determinants of PTAs.

KEYWORDS:

• Regionalization
• regionalism
• preferential trade agreements
• foreign direct investment
• territorial dispute
• democracy

Acknowledgements

This study is a part of the research results of Social Science of Crisis Thinking, initiated by the Institute of Social Science, the University of Tokyo (https://web.iss.u-tokyo.ac.jp/crisis/en/). I wish to thank Professor Mie Oba and Momoko Nishimura for their helpful comments, and Matsuoka Tomoyuki and Yalezi Lee for research assistance.

Notes

¹ In this paper, “East Asia” refers to members of RCEP, namely, the ASEAN 10 countries (Brunei Darussalam (hereafter Brunei), Cambodia, Indonesia, Lao People’s Democratic Republic (hereafter Laos), Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) and Australia, the People’s Republic of China (hereafter China), India, Japan, the Republic of Korea (hereafter South Korea) and New Zealand.

² This definition is consistent with that of Mansfield and Milner, “The New Wave of Regionalism,” 592.

³ Fishlow and Haggard, The United States and the regionalization of the world economy; Haggard, “Comment”; Wyatt-Walter, “Regionalism, globalization, and world economic order”; Frankel, Regional Trading Blocs in the World Economic System; Kim, “Regionalization and Regionalism in East Asia”; Pempel, “Introduction: Emerging Webs of Regional Connectedness”; Söderbaum, Rethinking Regionalism; Börzel and Risse, The Oxford Handbook of Comparative Regionalism; and Acharya, “Asia is not one”.

⁴ Bernard, Mitchell and John Ravenhill, “Beyond Product Cycles and Flying Geese”; Hatch and Yamamura, Asia in Japan’s Embrace; Kim, “Regionalization and Regionalism in East Asia”; Green and Gill, Asia’s New Multilateralism; Ba, Kuik and Sudo, Institutionalizing East Asia ; and Yoshimatsu, Comparing Institution-building in East Asia, 41.

⁵ Aitken, “The Effect of the EEC and EFTA on European Trade”; Frankel Regional Trading Blocs; Winters and Wang, Eastern Europe’s International Trade; and Carrère, “Revisiting the Effects of Regional Trade Agreements.”

⁶ Baier and Bergstrand, “Do free trade agreements actually increase members’ international trade?”

⁷ Kawai and Wignaraja, “Asian FTAs: Trends and Challenges,” 19–20.

⁸ Büthe and Milner, “The Politics of Foreign Direct Investment into Developing Countries.”

⁹ Keohane, After Hegemony.

¹⁰ Ando, “Impacts of Japanese FTAs/EPAs”.

¹¹ Dent, East Asian Regionalism, 218.

¹² WTO, “Regional Trade Agreements Database.” Accessed July 14, 2019. http://www.wto.org/english/tratop_e/region_e/region_e.htm.

¹³ Kawai, “East Asian Economic Regionalism,” 30.

¹⁴ Munakata, Transforming East Asia, 29. See also Lim, “ASEAN: New modes of economic cooperation,” 21.

¹⁵ Lincoln, “Trade Links.”

¹⁶ Manger, Investing in Protection.

¹⁷ Manger, “Vertical Trade Specialization and the Formation of North-South PTAs,” 622–658.

¹⁸ Ravenhill, “The ‘new East Asian regionalism’,” 182.

¹⁹ Jetschke and Katada, “Asia,” 228; and Solís, “Global Economic Crisis,” 321. See also Searight, “Emerging Economic Architecture in Asia,” 205.

²⁰ Haggard, “Regionalism in Asia and the Americas,” 45.

²¹ Ravenhill “The ‘New East Asian Regionalism’,” 185.

²² Ravenhill appeared to accept the argument that PTAs are negotiated in response to the policy challenges posed by increasing interdependence. He pointed out that East Asian countries have concluded or are currently negotiating with states outside the region that have been experiencing growth in economic interactions with the East Asian countries. Ravenhill “The ‘New East Asian regionalism’,” 185.

²³ For example, Büthe and Milner, using a global data set and controlling endogeneity, demonstrated that PTAs cause an increase in FDI but not vice versa. Büthe and Milner, “The Politics of Foreign Direct Investment into Developing Countries”.

²⁴ Dent, East Asian Regionalism, 8.

²⁵ Other types include CU (custom unions); however, no country in East Asia has this type of PTA as of 2019.

²⁶ World Trade Organization (WTO), “Submission on Regional Trade Agreements: Paper by Japan, TN/RL/W190.”

²⁷ Tariffs among the AFTA members are currently moving toward zero; however, they were still high when AFTA was established in the early 1990s. Therefore, I estimated the two types of FTAs separately.

²⁸ Thus, East Asian PTAs have more variations than the distinction between these two types. Although an analysis that considers such subtle differences is desirable, it is beyond the scope of this paper. This topic will be the theme of further research.

²⁹ Tsebelis, Veto Players.

³⁰ Grossman and Helpman, Interest Groups and Trade Policy.

³¹ Saxer, “Foreign Policy as a Socially Divisive Issue.”

³² Jones, “Explaining the Failure of the ASEAN Economic Community.”

³³ In this regard, Katada and Solís (“Domestic Sources of Japanese Foreign Policy Activism”) argued that Japan’s export firms pushed hard for the Japanese government to conclude the Japan–Mexico PTA because otherwise they would have lost significant profits. Katada and Solís, “Domestic Sources of Japanese Foreign Policy Activism.”

³⁴ Manger, “Vertical Trade Specialization and the Formation of North-South PTAs.”

³⁵ Keidanren, “Kokusaitōshi rūru no kōchiku to kokunaitōshi kankyō no seibi wo motomeru (Requirement for establishing international investment rules and improving domestic investment environment),” July 16, 2012. Accessed August 12, 2019. http://www.keidanren.or.jp/japanese/policy/2002/042/honbun.html#s1.

³⁶ Nesadurai, Globalization, Domestic Politics and Regionalism.

³⁷ Mansfield, Milner, and Rosendorff, “Why Democracies Cooperate More”; Milner and Kubota, “Why the Move to Free Trade?”; and Mansfield and Milner, Votes, Vetoes, and The Political Economy of International Trade Agreements.

³⁸ Chase, Trading Blocs, States, Firms, and Regions in the World Economy.

³⁹ Baldwin, “A Domino Theory of Regionalism”; Baldwin and Jaimovich, “Are Free Trade-Agreements Contagious?”; and Baccini and Dür, “The New Regionalism and Policy Interdependence.”

⁴⁰ Vasquez and Henehan, “Territorial Disputes and the Probability of War, 1816–1992”; and Lektzian, Prins, and Souva, “Territory, River, and Maritime Claims in the Western Hemisphere.”

⁴¹ Fravel, “Territorial and Maritime Boundary Disputes in Asia.”

⁴² This method was also employed by Baccini and Dür. Baccini and Dür, “The New Regionalism and Policy Interdependence.”

⁴³ WTO, “Regional Trade Agreements Database.” Accessed July 16, 2019. http://www.wto.org/english/tratop_e/region_e/region_e.htm .

⁴⁴ When a country has a PTA with ASEAN, I counted one between that country and individual ASEAN countries. Since ASEAN-South Korea and India-South Korea PTAs were notified under GATT Article XXIV as well as the enabling clause, I counted one in both FTAs.

⁴⁵ (16 countries * 15 partners)/2 PTAs.

⁴⁶ Exceptions are Australia-India, China-India, China-Japan, Japan-South Korea, India-New Zealand.

⁴⁷ As mentioned above, regionalization refers to a general term that encompasses increased trade, FDI, and emigration within a specific region. Therefore, the amount of emigration should be incorporated into the independent variables. However, due to difficulties of data accessibility (Fitzgerald et al., Defying the Law of Gravity) particularly in the case of data for Southeast Asian nations, I used only trade and FDI data here. I will try to include emigration data in future research.

⁴⁸ As two countries’ data (export of country i to country j and import of j from i) normally do not correspond, I calculated this as follows.1/2 [1/2(Export + Import of country i to country j) + 1/2(Export + Import of country j to i)]. When data of country i do not exist or are counted as zero, I only use country j’s data.

⁴⁹ IMF, “Direction of Trade Statistics.” Accessed July 10, 2019. https://data.imf.org/regular.aspx?key=61013712.

⁵⁰ OECD, ”FDI statistics.” Accessed July 15, 2019. https://stats.oecd.org/. After 2012, compiling FDI statistics was shifted from the 3rd edition of the OECD Benchmark Definition of Foreign Direct Investment (BMD3) to BMD4. Therefore, data from 1985 to 2012 were derived from the BMD3 and data from 2013 (2014 for Japan) were gained from the BMD4.

⁵¹ These data are collected from the Department of Commerce (China), the Department of Industrial Policy & Promotion (India), the Bank of Indonesia, the Malaysian Industrial Development Authority (Central Bank of Malaya), the Central Statistical Organization (Myanmar), the Central Bank of the Philippines, the Board of Investment of Thailand (Bank of Thailand), and the Ministry of Planning and Investment (Vietnam).

⁵² Hatch and Yamamura, Asia in Japan’s Embrace.

⁵³ Fravel, “Territorial and Maritime Boundary Disputes in Asia.” I changed the data when the information was obviously incorrect (e.g., a dispute between Japan and the Philippines). Furthermore, because the data ends in 2012, I updated the data by referring to media sources.

⁵⁴ Center for Systemic Peace, “POLITY IV dataset.” Accessed July 29, 2019. http://www.systemicpeace.org/.

⁵⁵ Center d’Etudes Prospectives et d’Informations Internationales,”GeoDist.” Accessed February 13, 2012. http://www.cepii.fr/anglaisgraph/bdd/distances.htm.

⁵⁶ Baier and Bergstrand, “Do free trade agreements actually increase members’ international trade?”; Endo, “Quality of Governance and the Formation of Preferential Trade Agreements.”

⁵⁷ | GDPi – GDPj |.

⁵⁸ The World Bank. ”GDP data.” Accessed July 26, 2019. https://data.worldbank.org/. Data unit are constant 2010 US$.

⁵⁹ For instance, the average and median number of days that the Japanese government has spent on PTA negotiations are approximately 1,300 and 1,100 (as of November 2019), respectively, but these numbers will be much larger when the deadlocked negotiations with South Korea and RCEP are included. Moreover, Freund and McLaren have argued that trade increases before PTA formation. Thus, I also analyze the four-year and five-year lags as a robustness check, following Freund and McLaren (1999).

⁶⁰ Remmer, “Does Democracy Promote Interstate Cooperation?.”

Additional information

Funding

This work was supported by the Japan Society for the Promotion of Science [Grant-in-Aid for Scientific Research(A), 18H03625].