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Does Regionalism Lead to More Global Trade Integration in East Asia?

Lee, Jong-Wha and Shin, Kwanho (2005): Does Regionalism Lead to More Global Trade Integration in East Asia?

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Abstract

Since early 1999, global trade liberalization has moved to the wayside as regional preferentialtrade agreements have become the preferred choice in East Asia. Does this shift toward regional trade agreements (RTA) suggest that global trade and welfare levels will be raised? Regional preferential trade arrangements, in contrast to unilateral trade liberalization, may well cause both 'trade creation’ and ‘trade diversion’. If an RTA raises trade and welfare among its members but hurts the welfare of non-members, its net effect on global trade and welfare becomes ambiguous. The hypothesis of ‘natural trading partners’ suggests that RTAs comprising natural trading partners are more likely to create trade between member countries, and less likely to divert trade from non-member countries, and thus leading to large improvements of economic welfare. Based on the existing RTAs in the world, we find that if an RTA forms between geographically proximate countries (measured either by distance or border), trade significantly increases between member countries. At the same time, we find that geographical proximity also contributes to increasing trade between a member and the rest of the world. We apply our findings to East Asia and examine how the existing or proposed East Asian trading blocs affect intra-bloc and extra-bloc trade, and thereby global trade. We find the East Asian RTAs are likely to create more trade among members without diverting trade from non-members.

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